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Harvard Business Review
29-04-2025
- Entertainment
- Harvard Business Review
How Duolingo Aims to Diversify Beyond Language Learning
BRIAN KENNY: In my formative years, I had the good fortune to attend schools that required me to take a foreign language, which was not the norm in all schools. Over eight years of middle school and high school, I completed four years of French, four years of Spanish, and one year of Latin for good measure. And after dozens, perhaps even hundreds of hours, conjugating verbs and memorizing vocabulary, I can say with confidence that I hardly remember a thing. Mon Dieu, you say. Well, I'm in good company because less than 20% of people who learn a language in high school retain much of anything beyond five years. It's hard to learn a new language and even harder to maintain proficiency if you're not speaking it regularly. But what if it were fun? What if you actually looked forward to language lessons? Today on Cold Call we welcome Professor Jeffrey Rayport and Nicole Keller to discuss the case, 'Duolingo: On a Streak.' I'm your host Brian Kenny and you're listening to Cold Call on the HBR podcast network. Jeffrey Rayport's research focuses on growth stage technology ventures and how to scale them. He is an expert in e-commerce and is credited with coining the term 'viral marketing.' I didn't know that, Jeffrey, until I reread your bio today. That's pretty impressive. JEFFREY RAYPORT: Back in my misspent youth. What can I say? BRIAN KENNY: It's great to have you back on Cold Call . Nicole Keller is assistant director at Harvard Business School's California Research Center and a co-author of the case and Nicole is also a graduate of Harvard Business School. Great to have you back on the show as well. NICOLE KELLER: Thank you for having me back. I think the last time I was on Cold Call I was on the very back end of COVID and my voice was very raspy, so it's nice to be on again today with my real voice. BRIAN KENNY: I don't remember that. I just remember your very thoughtful insights that you shared with us that day. And that was about the Angel City Football Club, which was a really fun case to talk about. If people want to go look that one up, it's still available. And today is about something completely different but I think equally relatable. Duolingo is as hot as it gets in apps. They've been around for a while. They have built a tremendous reputation for themselves in the space of teaching people not just how to learn languages, but how to enjoy doing it. I downloaded the app. I have not yet attempted. I'm trying to figure out what language I want to learn. I'm not going to go for French or Spanish. Clearly those didn't work out for me. JEFFREY RAYPORT: And you weren't thinking about English. There's always the opportunity to brush up those skills. BRIAN KENNY: I hope you appreciated my 'mon dieu' because that was a pretty good French accent even though it's been a while. JEFFREY RAYPORT: Oh, it sounded excellent. I was going to say 'sacré bleu.' BRIAN KENNY: You should have. That would've been great. Okay, let's get started. Jeffrey, I'm going to ask you to start by telling us what the central issue is in the case and what your cold call is to start the discussion in class. JEFFREY RAYPORT: We start the class by asking students about growth. So this is a course called, 'Scaling Technology Ventures.' As you said, it's about growth stage in the tech sector. And of course this is a classic tech business. They do business by fielding a mobile app. Clearly businesses have a lot of ways to grow. They can span geographic footprint, but maybe the most commonplace one and common to our listeners is product or service line diversification. In this case, Duolingo, as you just said, is widely known for language learning. Duolingo can teach you more than 40 languages. And Brian, I must say that despite your educational history even you might be able to learn a language if you put this app to work. BRIAN KENNY: I'll put them to the test. JEFFREY RAYPORT: Absolutely. So we are asking about the specific moves that they're contemplating into subject matter adjacencies, one being math and the other being music. And asking the question, is this the way to grow? And implicit in that is the question of is there headroom to grow simply as a language learning app, is it necessary to move into adjacent academic subjects to do that? And how credible would moves like that be to their a hundred million monthly active users? BRIAN KENNY: Nicole, let me turn to you for a second. Duolingo has grown from a free language platform into a $15 billion company. They have a lot of different revenue streams. What are the key strategic decisions that allowed them to make these transformations? NICOLE KELLER: Well, I think first and foremost, Duolingo was an early adopter of analytical AI. Their AI system is called BirdBrain. Everything at Duolingo has a fun name or character to it. So this is BirdBrain. JEFFREY RAYPORT: I forgot to bring Duo. I was going to bring you a plush animal so we could have him as inspiration on the table. BRIAN KENNY: That would've been great. For a photo op too. NICOLE KELLER: Yes. Another time. BRIAN KENNY: I can still run back to my office. JEFFREY RAYPORT: It's all right. NICOLE KELLER: But their BirdBrain system knows exactly the words you got right yesterday and the grammar that you got right, and the grammar that you got wrong. So it would know that you got la leche right yesterday. It's not going to review that again with you tomorrow when you go back on the app. And it's going to know exactly how hard and how easy to make the exercises that you're given so that it's very motivating. So if it's too hard, you're going to be demotivated. If it's too easy, you're going to think it's boring. So their analytical AI allows them to just find that perfect sweet spot for your learning. So that's one thing. Another thing they've done super well is they've really leaned into gamification and they've really taken a page out of the gaming apps playbooks and they use experience points and they use leaderboards and they use hearts. You lose hearts if you get something wrong. So watch out for that Brian. And you can earn them back again through various things. But all of that makes the learning whole process very fun. And so that's another thing that they've done very differently and streaks are very important. BRIAN KENNY: Tell us about the streaks. NICOLE KELLER: So the streak means how many consecutive days you've been on the app. And people are very into their Duolingo streak, so much so that they post it on social media and they tell their friends about it. So streaks are a very big deal. And actually on Duolingo right now, 20% of their users have a streak of over 365 days. So that's seven million users who haven't missed a day on the app in 365 days. BRIAN KENNY: It reminds me of Wordle and Peloton and it's tapping into the competitiveness that most of us have if you tap deep enough. Do they have psychologists on staff? How do they understand the psychology of these things and how does it factor into the way that they retain people on the app? JEFFREY RAYPORT: The fascinating thing about Duolingo for Nicole and me is that this is of course the world's biggest ed tech app. We don't tend to think of it as ed tech because it's so incredibly entertaining and there's a lot of evidence that if you ask who does Duolingo compete with, it's not necessarily Coursera, Udemy and Khan Academy. It's TikTok and Instagram. Having said that, despite the fact that it's education and entertainment, this is a company run by two computer scientists, Luis von Ahn and his student, Severin Hacker no longer a student. They are now CEO and CTO. Are the co-founders of the company. So what's remarkable is that this issue of how to build engagement is something they have turned into a massive mathematical or quantitative exercise. They use something called a Markov model, which is a very interesting way of representing multiple variables that have dependencies on one another. But the model assumes that the present state is what it is. There's no need to worry about where it came from and how it got there. The question is how do you move forward? And on that basis, they're looking for these interesting high leverage relationships between variables. And it's that focus as technologists and as data analytics guys that they have managed to create this incredible level of engagement. In fact, Severin Hacker, whom we worked with to put together this case, referred to the app as a motivation engine. They have about 15 billion lessons a week that they are analyzing. So it's a massive amount of visibility into user behavior. And on that basis they can then fine tune it to create this habit formation, which is quite remarkable. NICOLE KELLER: And just to add to that, they even know what time you were on the app yesterday. So in terms of helping you build the streak, or maybe it's helping them build the streak, depending on which way you think about it, they will send you a notification right around the same time that you were on the app yesterday to remind you it's time. If you want to keep your streak up, let's go. So this AI system is all designed to keep you using the app. JEFFREY RAYPORT: And Brian, you mentioned the question of what role does psychology play? And what is fascinating is that of course they have psychologists and data scientists on staff. But again, it is so interesting because it's driven from these metrics that feed the AI. So just an example, depending on who you are and your personality profile and your behavior and whether you're on a streak or not on a streak, when you continue a lesson, you might get a button to click on that says continue as in go to the next lesson. But you also might get a button that says, commit to my mission. These are obviously two very different ways of influencing behavior. Duo of course is the famous green owl that is the mascot of Duolingo. And in some cases the motivating statement from Duo is that if you don't complete your lesson, Duo will be mad. Another one be if you don't complete your lesson, Duo will be sad. And in another one Duo is reminding you to come back tomorrow and keep doing your lessons. In that sense, it is a very sophisticated system that in a sense has automated the psychological understanding of the individual user across a hundred million users to create motivation and a regular steady drumbeat of engagement. BRIAN KENNY: Yeah. So it sounds like they are delivering on the promise that we've heard so much about AI, where AI is going to find ways to serve things to you before you even know you need them. And what you're describing, I think the case talks about micro-optimizations. Is that the same idea? JEFFREY RAYPORT: That's absolutely right. Absolutely right. And on every level. I think it's interesting that tech companies, when they talk about this micro-optimization, we hear always the phrase AB testing. We always think about it as the e-commerce platform, which has a buy button, and the buy button could be green or it could be red. Which color gets the higher conversion to purchase? In this case, it's so much more nuanced because it's not just about the attributes of a digital interface, it's about the nature of the messaging, the emotional tone, passive versus active, all these things that are attuned to a unique student's or user's personality. BRIAN KENNY: Super impressive. Nicole, I want to talk about their social media, the way that they approach their marketing. Describe a little bit how they go at that and how it allows them to compete on the same level as TikTok. NICOLE KELLER: Duolingo is known for its fun and quirky personality. So they've got the brightly colored graphics and they've got their cast of endearing characters and then they're known for peppering in these almost silly, ridiculous sentences into the exercises that you do. And they're so fun and silly that people will go ahead and repost those then to their social media account and that gets them visibility. And you know how effective that is when you realize that 80% of Duolingo's customer acquisition is organic. So you can only imagine the positive economics that come out of that. And then the other thing they've done really well is they've really leaned into TikTok, and that's a fun story. They had a social media coordinator who was just 23 years old when she started. Zaria Parvez. And at 23 she's probably using a lot of TikTok and she thought to herself, Duolingo should probably be on TikTok. Can I give it a try? And one thing we realized in the case is that Duolingo really has a nice culture, a really positive culture about allowing innovation to bubble up from within. And so they said, 'Sure. Give it a roll.' So she actually became the persona of Duo the Owl, and she has built Duolingo's TikTok's presence to almost 11 million followers. So pretty amazing that she was able to do that. And she continues, and Duolingo continues to do crazy social media antics. And actually the day that Jeffrey taught the case in February was the day that Duo, the owl died and it was posted on X that Duo, the owl has died. JEFFREY RAYPORT: This was very upsetting to us. It was of course devastating for the students. NICOLE KELLER: Yeah. And the reason that was posted at that time was that people hadn't continued their streak. And so Duo was disappointed and Duo died. So even on your phone when you opened it up around that time, Duo the owl had Xs over its eyes because it was dead. And then they took it a step further a few days later and they said that Duo had been hit by a Tesla cyber truck and anyone with information was meant to come forward. JEFFREY RAYPORT: This became even more upsetting because it wasn't just Duo the owl that died, but it turned out Luis Von Ahn recorded a video that was released, pushed through social media channels in which he delivered the sad news that not only the cyber truck killed Duo, all the other characters were dead too. And they're like a dozen of them. Just to make sure that we haven't upset the listeners of Cold Call all of them have come back to life starting with Duo. So it's all worth safe. BRIAN KENNY: Thank goodness. JEFFREY RAYPORT: Why is this company such a valuable public company? When you can acquire customers and 80% of your acquisition is word of mouth as a result of viral distribution that drives down your customer acquisition cost quite considerably. Our estimate from the case is it's about two and a half bucks. The average e-commerce site might pay 35 to 60 dollars to acquire a customer, and you have Duolingo acquiring for two and a half dollars for customers that ultimately have a significant amount of economic value to them. And it's partly because they not only join based on a referral with a higher level of conviction, but they stick around because that's what streaks are all about. And all these behavioral economics in effect that we're talking about built into the app. BRIAN KENNY: They're not the only firm that's doing this. There are other language education platforms out there. What are some of the differences? And I guess what I'm wondering is would the criticism maybe be that Duolingo is not taking this seriously enough. This is too gamified and you're really not going to learn much, but it's fun to engage with from time to time? JEFFREY RAYPORT: It's interesting that you say that. We encountered some limited skepticism in the classroom with the two sections at which we taught the case where a few students were saying, 'Listen, I've been on a streak.' The app is really fun. I learned a little bit, but it didn't teach me how to speak the language. And in that sense, my retort was for all of us and your story at the beginning of this podcast, a perfect illustration of it, all of us studied foreign languages in middle school and high school, and how many of us actually came out of those classrooms speaking? That's a very high bar, and we should talk about that because one of the ways in which they're using the new flavor of AI, meaning not analytical AI, but generative AI, is actually to cross that line into something that would actually create fluency and language proficiency in a way that I would argue would be very tough to do in a classroom or with conventional software-based learning. NICOLE KELLER: So they have Lily their video call. So when you finish a lesson and you've gotten … And I'm fairly early on in Spanish right now. But it offers up that Lily will do a video call with me, and so we can chat and we can speak in Spanish. And I think the idea there is to obviously really practice the language in a very low-risk way. I am more willing to practice with Lily on my phone than I am with a Spanish-speaking person because I don't want to mess up. But I'm okay messing up in front of Lily. It's a chatbot. BRIAN KENNY: Stakes are low. NICOLE KELLER: Stakes are low. I actually do think this will help them cross the chasm and help people get fluent. I think this new way of using AI will help them take their language learning to the next step. JEFFREY RAYPORT: It is worth saying that yes, there are absolute critics of Duolingo to your point, who say, 'Listen, if you're serious about language, you go off and study Rosetta. You do not use a lightweight mobile app that is so incredibly entertaining and even addictive.' I think we would argue as fans of the company that if you go all the way back to the mission that Luis and Severin articulated at the beginning of this story back in 2011 when the company was launched they set out to execute on the following mission, 'to develop the best education in the world and make it universally available.' We are looking at this and very impressed by the fact that maybe the future of education has a lot to do with gamification and as opposed to gamification, essentially indicting it for being too frivolous maybe in an attention scarce world where we're all dealing with too many information streams at any given time, including in classrooms, if students have digital devices. Maybe this is a very interesting human factors experiment on a hundred million humans on how actually to get education done for certain kinds of subjects in a completely modern way. BRIAN KENNY: Well, that's a good transition to where they're trying to go. So at the best education, you didn't say the best language education, you said education and the case talks about them thinking about pushing into some other areas, music being one, math being the other. If they could find a way to make math fun, I think that would be an enormous breakthrough. But talk a little bit about how do you extend the success that they've been able to have with the personality of Duolingo into other educational subjects? JEFFREY RAYPORT: Well, one thing that's interesting by way of a screen is in talking with Severin Hacker, one of our questions was could you teach history? Could you teach literature or could you teach somebody to become a neurosurgeon on an app? And he had what seemed like a very credible and persuasive response, which is, look, we set out to create something that went well beyond language instruction. So your point is exactly right, which was this is about creating a better kind of education. But they had no illusions about the idea that this would fit everything. So a couple key conditions. One is that you could learn it on a mobile app. So we talk about, say, learning how to do brain surgery. It's unlikely that you could do enough reps on a mobile app to figure out it. So clearly that would be impractical. But the other one was that this is fundamentally about subjects or academic areas where you can learn through interaction or learn by doing. And so rote repetition, series of exercises, stimulus response type educational processes. And so they believe that while history might be off the table as well as neurosurgery, that music and math actually fit those requirements quite well. BRIAN KENNY: I think there was actually a line in the case where he may have said that those are languages in some ways. I think that's a really interesting insight because people who are mathematicians have described it in the same way. JEFFREY RAYPORT: Absolutely. And they're like languages. They're skills acquisition. You Brian are a musician and they're doing things like note identification, ear training, site reading. For all of us who've spent time trying to learn musical instruments those are all core fundamental skills that you put together in order to create music. And they believe through rote repetition and interaction with the layer of motivation created by the elements of gamification that it can actually address a learning agenda in a quite serious and substantive way. NICOLE KELLER: And there's another language out there of coding. And a lot of people think, is that something that they could also move into? Because coding is very much like one of these subjects and you can probably learn it in a similar way. And so that's an exciting opportunity for them too. They haven't tried it yet but they might. JEFFREY RAYPORT: This is a fascinating company for us to have written this case about for one other big reason we haven't talked about, which is that many people worry that generative AI is some kind of death star that will crater a lot of businesses and especially ones that look like this, where they're teaching things where, for example, if Gen AI can do coding that then takes a beautiful, shiny new line of business, as Nicole just said, and puts a considerable cloud of doubt over it. But even go back to language. A lot of people have believed that because of the existence of Google Translate built into our smartphones, if you choose to deploy it, who needs to learn a foreign language again? And this is where it's interesting, which is that this is a company that has been fueled by generative AI rather than the opposite. I tend to think and share this with the students that to some extent, this is a very dramatic right now 'tale of two cities' in the capital markets. And what I mean is if you put Duolingo side by side with another ed tech platform called Chegg, which every one of our MBA students knows because Chegg helped them get through high school, college, maybe even business school with Chegg study and all those tutors and the database of a hundred million answers. It's a very interesting story. You have Duolingo that went public at a roughly three and a half, $4 billion valuation, and last time we checked prior to the recent market meltdown, it was 70,80, 90 billion. It doubled in value just during the time we were writing the case. Meanwhile, Chegg from the advent in November 2022 of ChatGPT the introduction from an open AI of GPT model 3.5, Chegg is down from its market high by 96%. BRIAN KENNY: Wow. JEFFREY RAYPORT: Why is it down? Because there was considerable concern that that database of a hundred million answers was now obsoleted by a Gen AI that could provide answers for everything. BRIAN KENNY: Yeah. Nicole, let me come back to you because the case references the super app approach that Duolingo is considering. Can you talk a little bit about that and how it factors in? NICOLE KELLER: Yeah. They did initially launch math as its own app, and then they ultimately decided that they were going to move to a super app model and this was a subject of a lot of debate in Jeffrey's classroom but ultimately I think they decided that one of the reasons they had to move to a super app was because of discoverability problems. There's 2.2 million apps on the Apple app store. There's three million apps on Google Play, so it's just hard. It's hard to break through that clutter even for a brand as well known as Duolingo. It's still hard. It was hard for them to break through that clutter. So that was one reason. Another reason was friction. When you get a new app, you have to download it, you have to set up your username and your password, and then you have to log in and all that takes time and time is friction on one of these mobile apps. If you're on the main app, those Duolingo users are already signed in ready to go, they can start using it right away. So they decided that was another reason to go with the super app idea. But then also from a cost standpoint. The whole idea was to replicate the gamification features like leaderboards and the streaks and the experience points. And so ultimately, is it better to just build that once and be able to apply that same model to all these different adjacent subjects, or do you want to have to pay for your engineers to keep building that over and over and over again? So from a cost standpoint, I think they decided they would get more economies of scale if they just kept it all in one super app. But I think we talked about in the case and in the class that there are some risks to the whole super app approach because these new subjects are new. It's taken them 12 years to get the languages to where they are today, and they're really good. They're really high quality, but math and music are new, and they will admit they're probably at that quality standard yet. And so what happens if you get a user who tries it out and then says, 'That's not really what I was expecting,' or, 'That's not up to Duolingo standards,' will they go back? So I think there are legitimate risks to the first time user experience that they'll have to navigate. BRIAN KENNY: Are there also brand risks here? How far can you really push? How far should you push? This is probably an existential question for entrepreneurs anyway, and you look at a lot of these ventures. What is reasonable for them to expect to be able to do, or should they just stay in their lane? JEFFREY RAYPORT: It's a great question because of course Duolingo has both second language and language built into it. That's the essence of the name. It reminds me a little bit of the brand constraint that TV guide had in the late '90s when they tried to become a guide to the internet, and the problem was their brand name was TV Guide . That was a problem and another existential risk. The flip side of that argument though is that in the same way that people will say, this is the Uber of X to talk about, say, a mobile-based sharing economy app, it is commonplace in the business world to talk about, I've got a great concept, it's the Duolingo of X. And that has become so widespread that Saturday Night Live even did a parody of Duolingo for talking to Children, which was one of their parodies and actually very funny skit. So it may well be that they built enough equity in the name that again, is associated not just about language, but about entertainment, about motivation, about improving yourself, and that has then become something that's transcended the underlying meanings of either Duo or lingo, And thus is not a brand constraint, and that's certainly what they're betting on. BRIAN KENNY: Nicole, you described as talking about the social media approach and the personality that they've developed. It sounds to me like the culture there must be very entrepreneurial, that they give people the freedom to experiment and do these things with the brand. At one point, does the AI perhaps become a tension there because the AI is doing its thing? Does it impede their ability to continue to shape the brand and make it funny and fun and personable? NICOLE KELLER: Yeah. I think that's a real challenge for Duolingo. In the past, all of Duolingo was built by experts in learning science and teaching and entertainment who really could ensure that Duolingo maintained its signature style while also being a very effective learning tool. So now that AI is going to be building a lot of the content, Duolingo is really going to have to train it and monitor it so that it retains Duolingo's voice. And they're confident that they can do that, but they are putting guardrails on it. If you're on Lily and you start to go astray and you're not talking about ordering your coffee at the local cafe, it is going to guide you right back and get you onto appropriate subjects if you are trying to take it somewhere, it shouldn't be going. You can't go rogue on Lily. And there's also a bridge too far. There are some AI features that Duolingo decided were just a bridge too far. One of them was that they were looking at a feature that would clone a user's voice to create audio of them speaking, and they finally decided that was just simply too creepy, and they decided not to do that. BRIAN KENNY: Yeah. Yeah. We've seen that done in other places, and it is creepy. JEFFREY RAYPORT: It is very creepy. BRIAN KENNY: It probably should be against the law. But Jeffrey, you mentioned Google Translate before. Why would anybody go to the effort to learn a language when the technology that allows you to translate is only going to get better and better? JEFFREY RAYPORT: There is a fascinating answer to that, which is that Duolingo may teach more than 40 languages on that app, but the primary benefit to acquiring a language is not about 40 languages, it's about English. It turns out that of the eight billion humans on earth, a solid two billion are acquiring a second language. And of that 25% of the human population on this planet, of that 1.4 billion, meaning 70% of them are acquiring English. It's interesting too. So why would so many people want to learn English? And one of the things that we uncovered in this process is that those who acquire English effectively as a second language increase their earning power by 30 to 50% over the next chapters of their career. If you think about what that really means, if I'm now English proficient in a way I wasn't three years ago, English proficiency is not showing up for a meeting with you, Brian, holding Google Translate operating on my smartphone. It's actually me talking. So what's interesting is that yes, all of these ways in which AI or generative AI could become a death star for the business seem to have done the opposite, which is that one of the benefits, in addition to what Nicole was describing with being able to have what seemed like natural language conversation with an avatar named Lily and take you beyond just rote classroom learning. Another part of it is that their ability to go into these adjacent subjects without massive cost in the development of content and materials is that they're using AI to do it. Including one of the concepts they had a few years ago was, gee, people would really do well learning a language if they could listen to a podcast in a language they're learning. People love podcasts. We know that because you have such a huge visitorship here at Cold Call . BRIAN KENNY: Did you hear that listeners? You love podcasts. JEFFREY RAYPORT: Absolutely. Humans are genetically engineered to love podcasts. So they thought, wouldn't it be great if you're studying French you'd have a podcast in French. The estimate for how long it would take to build that was about five years plus a very large amount of deployed capital. In the age of generative AI they could do that in a few months. And there's now something called Duo Radio, which is a podcast in all the languages Duolingo will offer within the app. So it is very interesting to think that some of it is about avatars and being able to do a bunch of very interactive things, but some of it is also back to this issue of how do you make a business organization filled with brilliant human talent even more productive than they already are? And it's very clear that some of their ability to explore new areas and develop new features is based on the productivity gains of putting Gen AI to work. BRIAN KENNY: We've heard about Khan Academy, we've talked about a lot of the competitors that are in the space today. Duolingo is going to have to continue to find ways to innovate, to differentiate themselves from these other groups. Adjacencies might be one of those ways. But did you talk with them at all about how they're thinking about the future and what that might look like? NICOLE KELLER: Yeah. If you look at the competitive ed tech landscape, it's very crowded and you have both subject matter experts like Prodigy for math, Musician for music, and then there's a whole host of other more general ed tech players, like you mentioned, Coursera and Khan Academy. So on one hand you can look at that and think it's pretty fragmented. No one's actually figured this out. Is this even a winnable market? But I think what we've talked about today is that Duolingo's secret sauce is its gamification, which makes learning fun and sticky. And most of the other competitors that we've looked at don't use gamification. The other players are emphasizing learning over fun. And I think Duolingo has this unique approach of focusing on the fun and you learn in the process. So that makes it unique. And I should also note, I think we mentioned it before, but they don't feel that it's competing against other language apps like Rosetta Stone. Duolingo really feels like it's competing for your free time that you spend on apps like Instagram or X. So in a way, they're not looking at the competition as being other ed tech players, but just other ways you spend your time on your phone. BRIAN KENNY: That's a great insight. In fact, we did the Candy Crush case a while back Jeffrey, if you remember. People spend an inordinate amount of time on their phones playing games and things, so this seems to play right into their hands. JEFFREY RAYPORT: Yes. And it's interesting that the psychological appeal of getting the same snackable, highly addictive entertainment, but for something that feels worthwhile. It's a very interesting differentiator for them. BRIAN KENNY: Yeah. So let me give you the final word in this, Jeffrey. As we think about the challenges and opportunities that lie ahead for Duolingo, what do you think some of the lessons are that other tech companies can take from what they've been able to do? JEFFREY RAYPORT: From my point of view that we've learned so much from this case, so I don't want to minimize it, but maybe it's two big things. One is as we talked about before, we live in an attention-scarce economy. And so I increasingly think that the challenge for every company that fields digital devices, apps, screens, every company is competing in a world where because attention is scarce, engagement is harder and harder to come by. We know that what creates valuable companies is customers who not only buy once, but come back over and over again. And it strikes me that there is a very profound lesson here about the power that goes beyond gamification of essentially using data, analytics, artificial intelligence, to figure out how to maintain connection with the user. And what Duolingo is demonstrating as laboratory for the world is, I would argue, valuable for any business that is thinking about competing again in any sector of the economy, which has too many competitors, too many offers, and too much choice. The other is that the other is something we haven't talked about is an angle on this question of why move into math and music to complement languages. Is of course what they're doing is they're creating not a singular educational offer, but a bundle. And it always reminds me of that famous quote from Jim Barksdale, the co-founder of Netscape, one of the early web browsers said, 'There are only two ways to make money in business. One is to bundle and the other is to unbundle.' And it's a very profound statement, which we could devote a separate podcast episode to. But clearly, one of the things that they're betting on is that this is what in the gaming world is referred to like king as a freemium model of our free to play model, meaning that all of us can use Duolingo without paying for it, but about 8% of their monthly active users choose to pay. The question is when somebody becomes a paying customer, that's a beautiful thing because that means eight million people are subsidizing 92 million people who get to use it for free, and they're accessing tiers of services and power tools and the kinds of AI applications we've been talking about. Clearly those are a lot of benefits. But the other benefit is it's a bundle. And so part of the logic here is that like Netflix, which has a super abundance of programming that comes into a household where on any given day, if there are four or five members of a family, four may have tuned out and maybe watching Hulu, but one of them is following a series on Netflix. And as long as there's one person in the household who still wants to stay connected, that subscription doesn't get canceled. And so one of the ways in which Severin Hacker talks about the new multi-subject Duolingo is that the aspiration or the ambition is that it becomes what he calls a forever app. That it is a utility like electricity, heat, whatever we have in our homes. This is a knowledge utility that is sufficiently engaging that actually gets the education job done, and it's a forever app because there's always something somewhere on this app that will appeal to someone who's on a streak living in any given household. BRIAN KENNY: That's great. That's a great vision. Nicole. Jeffrey, Merci beaucoup. JEFFREY RAYPORT: Merci bien, Brian. Is a pleasure to be here. NICOLE KELLER: Thank you so much. BRIAN KENNY: If you enjoy Cold Call , you might like our other podcasts, After Hours , Climate Rising , Deep Purpose , IdeaCast , Managing the Future of Work , Skydeck , Think Big, Buy Small , and Women at Work , find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we'd be grateful. If you have any suggestions or just want to say hello, we want to hear from you, email us at coldcall@ Thanks again for joining us, I'm your host Brian Kenny, and you've been listening to Cold Call , an official podcast of Harvard Business School and part of the HBR Podcast Network.
Harvard Business Review
15-04-2025
- Business
- Harvard Business Review
The Nuqul Group Works to Preserve Its Founder's Legacy
BRIAN KENNY: At Harvard Business School, we have a tradition dating back more than 20 years where we ask members of the graduating class to reflect on a question pose in the poem The Summer Day by Mary Oliver. The question is, 'What is it you plan to do with your one wild and precious life?' Put differently, that question might just as well be: what do you want your legacy to be? Without a prompt like that, most of us don't dwell from day-to-day on our legacy. It's not even something we give ourselves, but rather what we leave behind for others, through our actions, our values, and the relationships we form. About the best any of us could hope for is that we leave behind a legacy that others want to carry forward, that we've made a difference in the lives of others that's worth continuing. Today on Cold Call , we welcome Christina Wing to discuss the case, 'Ghassan Nuqul and The Nuqul Group: Preserving a Father's Legacy.' I'm your host Brian Kenny, and you're listening to Cold Call on the HBR Podcast Network. Christina Wing's research focuses primarily on topics surrounding families and business, including family dynamics, operating companies, family offices, and legacy opportunities. Christina is a three or four-peat customer here on Cold Call . Christina, it's great to have you back. CHRISTINA WING: Thank you. It's great to be here, Brian. BRIAN KENNY: These are always really fun conversations. We are really thrilled today to have our protagonist on the call, on the podcast as well. Ghassan Nuqul is the chairman of Fine Hygienic Holding and the protagonist in today's case. Ghassan, thanks for joining us. GHASSAN NUQUL: Thank you, Brian. Good to be here. BRIAN KENNY: I thought this case did a beautiful job of talking about that in the context of your family, Ghassan, and your company. We'll dive right in. Christina, I'm going to start with you and ask you to tell us what the central theme is of the case, and what your cold call is when you start the discussion in the classroom? CHRISTINA WING: The central theme of the case is about a family, a country, and a business that all have had extreme resiliency. My cold call is if the title of the case is 'Preserving Legacy,' how are we preserving legacy by selling and breaking up the company? BRIAN KENNY: That's a good one. That probably sparked great conversation right off the bat. How did you hear about Nuqul, and what inspired you to write a case about it? CHRISTINA WING: I had been following the family for a while. I have a fascination with the Middle East. Seeing the growth that they were able to achieve over 70 years in a country that's had a lot of hardship made me have to know the story because you can't just be good at business, you have to have a lot of heart to be able to keep doing these things for that long. That's why I wanted to go to Jordan and meet this wonderful family. BRIAN KENNY: Yeah. We'll talk more about the impact the business has had, which is really astounding as you look at it over the last several decades. Ghassan, let me turn to you for a minute and ask you, for our listeners, to describe Nuqul Group. What's the business that you're in? GHASSAN NUQUL: Sure. Thanks, Brian. We are a diversified family business started in Jordan in 1952 by my late father. Who was, as you know, a Palestinian refugee who came to Jordan, 1948, penniless without anything. He started trading in FMCG, fast-moving consumer goods. Then in 1958, was the first, if you will, industrial activity started producing hygienic paper. I joined him in 1985. We had four companies. We expanded the group between 1985 from four companies to 26 companies by 1996. Today the group has different activities. The core business is the paper business. We are the largest tissue producer in the Middle East, with five paper mills all over the Middle East and converting plants. We are basically producing diapers, adult diapers, tissues, toilet, kitchen napkins, wipes, and so forth. But we're also diversified, so we are in banking, insurance, edible oil, lifestyle, HR software, stationary, sleep solutions, real estate, and so forth. BRIAN KENNY: Okay. And you're into the third generation of the family, and we're going to talk about how that's working, too. That's really, a lot of that's at the heart of the case. But also, central to the case is your father's story, which almost read a little bit like a screenplay. I could picture it playing out in a movie. Really remarkable what he was able to achieve, given where he started. What does it mean to you to carry forward his legacy? Especially you're in the second generation, the leader of Nuqul Group. What does it mean to you to carry that forward? GHASSAN NUQUL: That's everything in my life. If you asked me, Brian, 'What's your story? What's your mission? What's your drive?' This is exactly it, frankly. It all revolves around this and the story of my father, as I mentioned. When I joined him, Brian, I felt I was fortunate. I was fortunate, given his story, that at one point in time and this is literally true, he had no food to eat. This is the essence and the power of this group, that we are resilient, we never give up, and every hit we receive, it makes us stronger. I said the least I could do is to evolve, to grow, to expand, to institutionalize, and to continue growing with this company, and at the same time preserving the legacy, the reputation, the values, the ethics, and what have you. BRIAN KENNY: Yeah. GHASSAN NUQUL: I wrote a mission statement that I still live with today. To make a difference in my family, my business, and my country. Believe me, Brian, believe me, every word of this statement lives with me and it is the thing that I commit to every single hour of every day. BRIAN KENNY: I love that. It ties right back to what we're talking about with the Portrait Project here. These are moments where you step back and actually think about, 'Where am I going and what does it mean for me to leave something behind for others?' That's great. Thank you for sharing that with us. Christina, I want to turn back to you for a minute. One of the things that you and I have talked about in the past with family businesses in particular is this challenge of balancing the legacy of the firm, the core values that the founders had in mind, with modernization and trying to keep those two things in balance with each other. How do you see this playing out in Ghassan and Nuqul Group's story? CHRISTINA WING: What's so interesting is people always think legacy means one thing and it stays there. The legacy can be, as Ghassan just said, taking care of the integrity and the kindness in which you do things, but that still means that you can change the business. Where people get stuck is when they think the legacy needs to be that we make toilet paper the exact same way we did 70 years ago today. That would just be ridiculous. You have to modernize where you do things, how you do things, and the entire supply chain. Where the confusion comes is when the founder isn't willing to accept change. Now in this case the founder, I think that these two had some tough conversations, but Ghassan was able to move his father into evolving the businesses but keeping the same principles of how we approach them. That's the art and the science here. BRIAN KENNY: Ghassan, the case does talk about some of the conversations, the frank discussions that you had to have with your father. And that maybe your children will be having with you at some point, as you think about continuing this legacy going forward. One of the things that you did was to spearhead the institutionalization of the business, as it's described in the case. Can you tell us why that was important? What it means, first of all, to do that, and what the steps were that you took to do it? GHASSAN NUQUL: Sure. Remember when I mentioned that when I joined, he had four companies. The minute he saw his son joining the business, we went to go from four companies to 26 between 1985 to 1996. It was a one-man show before I joined, and then it became a two-man show. With this, Brian, rapid expansion, not only in Jordan but elsewhere in the Middle East and the US as well because we invested in the US, plus in different industries. It's not one industry. We became the bottleneck. Our projects got delayed. I'll be honest with you, we made mistakes, we started making mistakes because we could not cope. Thirdly, I'll say something very, very personal; I'm very uninhibited on this. At times, I'd go home and I'd cry. I used to cry because I couldn't cope anymore. The last thing I want to do is to turn him down. Basically, it dawned on me that instead of crying and complaining to him, what am I going to do given the mission statement I shared with you earlier? BRIAN KENNY: Yeah. GHASSAN NUQUL: I started to think down, 'What are our issues? What are our struggles? What are our challenges?' It became obvious to me that the only solution, the only way forward, is to institutionalize the business, including the separation of management from ownership. It was in 2004. Yes, it was a tough battle with my father. Like Christina said, my late father was very accommodating in the sense that he believed in me. He trusted me, whether in college because I was doing very well in college, as well as the changes he saw in the business and allowed me to say it. The new leadership style I was bringing to the company, he trusted me. But remember that he had his own habits. He was a self-made man attending to every detail. Asking him not to talk to the foreman or an engineer, or what have you, just talk to the GM, it was unthinkable. But it took thorough perseverance, it took thorough cooperation from myself. I did something very important, and in my opinion, it was the pillar for this journey. Which what we call in the group, I made it with my own hands with the team around me, it's called the GSM, the Group Standard Manual, Brian. Because when you delegate, when you bring top people, when you give authorities, you need two things. You need to tell them what are the systems, and the ethos, and how we do things. And you need to give them authority, but with controls and monitoring because you want to make sure checks and balances. Here came, all of a sudden, something called governance, corporate governance, which I never knew it was called governance. But I did it and I realized it won confidence, a family business in Dubai that this is what's called corporate governance. I said to myself, 'Oh my God, but I just made it.' I didn't do it out of a fad or fashion. I did it out of business necessity. The last thing I will mention here is all of a sudden, Brian, the results, the profits started going up into different levels. BRIAN KENNY: Yeah. GHASSAN NUQUL: This gave me a lot of leverage with him that, 'See? It's working, we should have done it earlier.' BRIAN KENNY: Right. But what you're describing, Christina, I want to ask you about this. That sounds like one of the most difficult transitions to make in a family-owned business, is separating out the management from the ownership. And I guess making yourself vulnerable enough to accept that there might be people who you can bring into the organization that can help to improve it when you've always done it on your own. Can you talk a little bit about navigating that sort of transition, Christina? CHRISTINA WING: This transition is brutal because founders want to sweep in and micromanage. In order for this transition to happen, there has to be great respect for the founders and the family and what they've done. But the family has to also acknowledge that the business has outgrown the ability to be managed by a one- or two-man show. Those things have to happen, otherwise it never will work. Once those things happen, it still has a high chance of failure in the first two years because we have people, their business is their baby. You're asking them to stop tending to their baby- BRIAN KENNY: Yeah. CHRISTINA WING: … and let somebody else tend to their baby, and it requires a lot of trust. Once you get past the two-year mark, it tends to work. But in that two-year mark and the year preceding, there's a lot of tears. BRIAN KENNY: Yeah, yeah. CHRISTINA WING: It's very, very hard. BRIAN KENNY: I can also see, Ghassan mentioned, his father's used to picking up the phone and calling people that he's probably been working with for decades at this business. 'Why can't I just call this person who I know will get this thing done for me?' That's hard. We see that happen in every business where a new person comes in and they're supposed to be playing a leadership role, and people are working around them. How do you start to navigate those kinds of changes, when perhaps the founder is a bit of a cult of personality within the firm? CHRISTINA WING: Well, I think the hardest part is when you take away operations from a founder, they suddenly have a lot more time. BRIAN KENNY: Yeah. CHRISTINA WING: They need to feel relevant. Relevancy is what all of us want. If you have a founder who's used to working 7:00 to 9:00 at night, and then you take away the hundred emails and the phone calls, their identity slips. You need to find other ways for them to be relevant. Just because you go from being owner-operators to taking on a more investor-like role doesn't mean you're still not valuable. You need to get those people to move up in strategy, up in how they review things. But if you just cut them off cold turkey, many people actually die because their heart has been torn out. BRIAN KENNY: Yeah. Ghassan, does this sound familiar to you? GHASSAN NUQUL: Yeah. I'll mention one thing, Brian. Christina is spot-on. My father had more time and do you know what he did every time? A new project. Believe me, believe me. BRIAN KENNY: Yeah. GHASSAN NUQUL: He was always very ambitious until the very last day on the job. BRIAN KENNY: You also made another big decision, Ghassan, which was not just separating the operations from the ownership, or the management from the ownership, but you also brought in outside advisors in the form of private equity. Can you talk a little bit about that decision, what drove it, and what the results were? GHASSAN NUQUL: I am the son of the founder, I'm the new chairman, I am leading the organization. I'm very passionate about it, I had a great team. But at the end of the day, I did not work outside the family business, and this is a minus in my opinion. BRIAN KENNY: This gets into the importance of professionalizing the family business. Can you talk a little bit about what the best practices are in regard to that? CHRISTINA WING: I really dislike the word professionalizing the family business because I feel like it indicates that family businesses are only professional when they bring in outsiders. I do think that a business can be professional with family members, but I also think a business can be professional with non-family working in it. I think that's a point of clarity because it doesn't mean that all businesses can only be professional once family leaves. In this case, when we use the term professionalization, we really mean a great overhaul of all of the functions. And creating a business that can succeed without family because we employ so many people, and this business is very important to the country. BRIAN KENNY: Yeah. CHRISTINA WING: In doing this, you have to go slow to go fast. What Ghassan mentions about finding out about all the debt is something that happens in a lot of businesses. A lot of founders indirectly hide mistakes in a way, because they're confident that they can turn it around because they always have. Then when something like an illness comes in and you find out, 'Oh my goodness, there's this whole amount of debt I didn't know about,' you need to make a big decision. Are we going to sell this business, or are we going to turn it around? In Ghassan's case, he turned it around in the best way possible, which was by bringing in some outside capital, and then working very disciplined with the private equity firm to reduce costs and get everything else going up. But this is not an easy thing to do. BRIAN KENNY: Yeah. CHRISTINA WING: It is very hard to go from 100% ownership to not 100% ownership, and suddenly have other people having a stake in how you make decisions. Because in this case, Ghassan wanted to hold this business forever. A private equity firm needs to leave. BRIAN KENNY: Yeah. CHRISTINA WING: Which means you have a clock against how quickly you can make these changes. BRIAN KENNY: What you're describing to me sounds like it could cause a lot of tension within the family. Ghassan, I'm curious. As a frame of reference, some of us watched 'Succession' on television. We realize that's probably the worst-case scenario. But I would imagine that in any family enterprise of this magnitude, there's got to be disagreements and tensions that happen all the time. How do you navigate that? GHASSAN NUQUL: Sure. One of the things that I did proactively from learning through conferences on governance, family businesses, and advisors is the family constitution. I did that early on in 2008, 2009. It took us one-year-and-a-half with a top consultant. I involved my brother. What we would do, we would come every month with the consultant, he was out of Dubai, PWC, to Jordan to meet with the family to give them an update on the progress and share with them the tentative decisions so far, if they're aligned, so there was buy-in. Two things I would like to mention on the constitution. You are addressing all potential conflict areas today on behalf of the future, which means that there could be some friction and some issues. It was not an easy and smooth ride, I have to admit. But in my opinion, doing it then is much safer than waiting until things happen and then you need to address them. BRIAN KENNY: Now, as you think about engaging the next generation to bring them up the learning curve to be engaged in the business, that probably poses a new set of challenges. How are you engaging that next generation and bringing them along? GHASSAN NUQUL: I involved my sons, three sons, with all the issues and frictions I had with my siblings. The reason is for them to see and know what could happen, how do you address them, how do you sort them because whatever is happening today might happen between them in the future. That's one. The second point, we now finalized the draft of the new family constitution between myself, my wife, and my sons, already a family constitution. Thirdly, which is very important is the values and the ethos of the things that I learned from my father, and the mission and the journey we have to endure. When I say the journey we have to endure is even if the family members do you wrong, you don't reciprocate. You continue to do what is right, you follow your principles. I'll be honest with you, probably it is the toughest thing to do, but I learned it from my father. It comes from wisdom, age, experience, and endurance and good luck. But the good thing about all of it, I want to tell you, Brian, is my three sons have been absorbing all the story of my father so that they know today this was not easy to achieve. Make no mistake, there's no guarantee. You cannot guarantee there will not be issues. What you do today is you take as much as possible precautions, and I can give you more examples, so that you minimize this possibility. If things happen, how do you sort and address them? BRIAN KENNY: Right. That gets back to your point about resiliency. Obviously, this enterprise has been able to overcome all kinds of adversity over the years. Christina, it sounds to me like what Ghassan has done with the constitution and the other steps he's describing, is really taking a formalized approach to bringing in that next generation, to maybe giving it a better chance to succeed that way. Is this something you've encountered in other family businesses that you work with? CHRISTINA WING: A lot of family businesses create a family constitution. Very few know what the family constitution says. They create it, they sign it, they put it in a desk drawer, and they don't live by it. I think the difference here is that Ghassan has so much love for family and so much respect for what his father did that he lives the constitution, so there's no way to not know what's in it. By being so truthful with his children about the history and problems, and educating them, and allowing them to understand their responsibilities, many parents hide that. I think is a good sign that this family is going to last a little bit longer than most. BRIAN KENNY: Yeah. CHRISTINA WING: But they're living the constitution, they're not just signing it. BRIAN KENNY: Yeah, that makes perfect sense. Ghassan, let me ask you. At the heart of this, we're talking about legacy. You talked about how important it is for you to preserve your father's legacy. But what about yours? We all have a legacy. Like it or not, everybody has a legacy. How are you thinking about yours? In the context of what you've been able to do with the enterprise and taking it to the next level- CHRISTINA WING: Oh, Brian, I'm going to interrupt for a minute. BRIAN KENNY: Yeah. CHRISTINA WING: His legacy is being a grandpa now. He finally has a girl in the family. Three sons finally produced a girl! GHASSAN NUQUL: Christina, she's taking my heart, my soul, my mind, everything. BRIAN KENNY: Yeah. GHASSAN NUQUL: But I have good news. The second grandson, my first grandson, my second grandchild, will be coming in July. We're expecting Ghassan Jr. BRIAN KENNY: Congratulations. That's wonderful on both counts. GHASSAN NUQUL: Yeah. BRIAN KENNY: Yeah, yeah. GHASSAN NUQUL: It gives you more motives to work harder, believe me. BRIAN KENNY: But tell me a little bit, how do you think about your legacy? GHASSAN NUQUL: First, the sentence making a difference. In everything I do, trust me, in everything I behave with, my mind is set on making a difference. Today Nuqul Group has become in Jordan more than other, in the Middle East, as a reference for many modern family business, a symbol of private sector, in the corporate social responsibility, in many things. Even the quality of fabrics, quality of products. I'm not boasting, believe me. All I'm saying is that it was a result of the drive I had because of him. BRIAN KENNY: Christina, let me ask you a little bit, just in terms of if we think about the cultural, the regional context of Jordan, the history there that Ghassan alluded to earlier. Does that shape the governance and growth strategy of the family a little bit differently than it would if they were in a different geographic context, political context? CHRISTINA WING: Well, I think that context always matters, and different countries need different things. In this case, the culture of the people in this region is very much family first. There are, every Sunday, family dinners. Ghassan goes by and checks on his mom every day. There are expectations of certain family things that are really important to how they live. What's interesting about a place like Jordan is you have all that close family part, but then you have it's hard to do business there. You also want to be global. Where do you make your money, and how do you contribute money and contribute to the country? Being a leader in a place like this, doing philanthropic, giving scholarships, mentoring people, these aren't things that have been in Jordan for a long time. It all needs to come into context of, one, the success that's happened, but also how hard it is to keep it going. BRIAN KENNY: Yeah. CHRISTINA WING: This is hard. Jordan doesn't have a lot of natural goods. They have to import things in to make things. To be productive in this country, you have to work like this. And they're very proud of their country, as well as their business and their family. BRIAN KENNY: Yeah. CHRISTINA WING: It's complicated. BRIAN KENNY: And it gets back to resiliency, that theme keeps coming up. We haven't talked about your mother at all, Ghassan. Can you maybe describe the influence that she's had? Because she plays an important role in all of this as well. GHASSAN NUQUL: My mom brought, Brian, the soft side to the family. My mom came from a better to-do family. She went to a very important boarding school, and she brings that softness. She's a pianist. She's full of life. My father, because of his hardship, was more serious. She brought to the family the love, the affection. Although my father gave me a lot of love in different ways, a lot of love. This, to me, is the source of power. This love, this family spirit makes me want to protect this family, to take it to another level, to be the, if you will the guardian, et cetera. The energy I get from her is unbelievable. BRIAN KENNY: Tell us about the Nuqul Foundation. What are the kinds of things that you're focused on in the foundation? And how does that play into the legacy? GHASSAN NUQUL: Sure. Remember I mentioned making a difference, right? BRIAN KENNY: Yeah. GHASSAN NUQUL: And institutionalization. My father had smaller philanthropic activities. But they were not structured, they were not institutional. They didn't have budget. They didn't have a product impact assessment. It was about scholarships because he was deprived of higher education. My wife Tala, who is a special lady and had a great influence on me, I give her the credit. She was the one. She looked at me one day telling me, 'We're not doing enough.' And the business' corporate and social responsibility is different than the family philanthropy, so this is separate. This is family. We educate Jordanians from all of over walks of life, and make them employable, make them positive agents of society. Employability is 91% upon graduation. We work on their soft skills, entrepreneurship, leadership, personal finances, giving back to the community, networking and beyond. If you meet, Brian, our scholars today and when they first came, you will know exactly what I'm talking about. CHRISTINA WING: I was going to say this man makes time for everybody and he has no time. BRIAN KENNY: Yeah. CHRISTINA WING: On top of the scholarships, the mentoring, the encouraging them to learn English in very good ways, it's unbelievable. BRIAN KENNY: Yeah. CHRISTINA WING: I'm very impressed. BRIAN KENNY: It reminds me of a case that we talked about on this podcast not too long ago with another family business that was doing the same thing in Turkey, really trying to create a foundation for education. That's another way of carrying a legacy forward that's at a national scale. That's really impressive. GHASSAN NUQUL: Brian, can I say something personal with you, if you allow me? BRIAN KENNY: Yes. GHASSAN NUQUL: My father-in-law one day told me, 'You know what, Ghassan, I never told you this. But do you know that you are the only one I know of among the family businesses in Jordan who built on his father's reputation and legacy by starting the foundation and you named it after him?' This is what legacy he needs more than that when you are doing things and making a difference in the lives of younger deserving Jordanians. To me, Brian, this is the impact. I'm not doing it for public relations, believe me. Believe me, I'm not doing it. It's the impact, the changes that you see in the lives of these young Jordanians when I meet with them, when I mentor some of them. It's so rewarding, I can't even tell you. BRIAN KENNY: Yeah. No, I believe it. Thank you for sharing that. I'm sure that that's very true. Ghassan, as you look ahead, can you talk a little bit about what your vision is for Nuqul Group? Where do you see Nuqul Group five, 10 years down the road? GHASSAN NUQUL: I'm going to be very honest with you and realistic. One of the things I'm worried about is, frankly, I don't want for my sons to go through what I have been going through. It's been tough. Like Christina mentioned, there's nothing easy. I'm very proud of the success, I'm very proud of the achievements, but at the same time it all came at very, very high price. Now I'm very disciplined, I'm strong. I have my hobbies, I do my sports, I travel. Make no mistake, I enjoy my wealth, if you will. But at the same time, it comes at a very, very high price. Now the high price is not the hours. It's the frustrations, the disappointments. This is maybe way things are, this is nature of life in family businesses. I don't want it for them so I'm thinking very wisely, 'How can I eliminate that or reduce that?' This is one thing that I'm working on. The second thing, I want Nuqul Group to continue to be the beacon for family businesses in the region. BRIAN KENNY: Yeah. So continuing with the modernization and the march forward, I get it, I get it. Christina, let me give you the final word here then and tell our listeners, if there's one thing you'd like them to remember about the Nuqul case, what would it be? CHRISTINA WING: The one thing I want them to remember is that what was created 70 years ago should and is changing constantly. Legacy doesn't mean having to be in the same businesses the same way. The legacy can be the integrity and the love that you show for family and country. As it evolves, it enables generations to create their own legacy and still maintain and preserve the legacy before. You don't have to have the exact same thing that the people before you had in order to continue their legacy, but you have to create your own as well. I think this case is a perfect example of a family that put family first, and the family is going to stay together. The business is being split up a little bit, but we still have the family, and the legacy, and individual legacies. It's a beautiful story. But it is hard, and it takes dedication to the thing you care about the most. The thing they care about the most is family, and they put family first. Doing that has allowed them to be able to put country and business also as an important part, but you have to have a pillar. BRIAN KENNY: That's a perfect way to end the conversation. Christina, Ghassan, thank you so much for joining me on Cold Call . CHRISTINA WING: Thank you. GHASSAN NUQUL: Thank you. BRIAN KENNY: If you enjoy Cold Call , you might like our other podcasts, After Hours , Climate Rising , Deep Purpose , IdeaCast , Managing the Future of Work , Skydeck , Think Big, Buy Small , and Women at Work , find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we'd be grateful. If you have any suggestions or just want to say hello, we want to hear from you, email us at coldcall@ Thanks again for joining us, I'm your host Brian Kenny, and you've been listening to Cold Call , an official podcast of Harvard Business School and part of the HBR Podcast Network.
Harvard Business Review
09-04-2025
- Business
- Harvard Business Review
Bringing Innovation to an Underserved Market
HANNAH BATES: Welcome to HBR On Strategy —case studies and conversations with the world's top business and management experts, hand-selected to help you unlock new ways of doing business. The taboo around menstruation made it hard to innovate in the feminine hygiene market. It also made marketing these products difficult. But feminine hygiene brand Thinx turned that taboo into a strategic advantage with provocative marketing that generated buzz around their innovative product:. Harvard Business School Professor Rembrand Koning wrote a case about the brand's innovation and marketing strategies titled, 'Thinx, Inc. Breaking Barriers in Feminine Care.' He talked about it with Brian Kenny on Cold Call in 2021. BRIAN KENNY: Thinx is a really interesting study in innovation by a female entrepreneur. Can you start by telling us what your cold call is when you walk into the classroom? REMBRAND KONING: So the cold call for this one's fun. You walk into the classroom, look around, you've got 90 students there. And I generally like to lock eyes with a man in the class. Because this can be a little awkward to talk about. People are a little nervous. No matter your gender orientation, it can be something that's difficult. And I'll look at them and I'll say, 'Historically, why has there been so little innovation in the feminine hygiene market?' In general, the response I get, is a little bit of white comes over the face, you see the sweat bead come down the forehead. And a stutter. And they say, 'Well, there's tampons and there's pads.' And I pause and say, 'Hey, everyone, this subject can be hard to talk about,' and get a laugh out of the room, step back and say, 'I myself, don't have a lot of experience with it personally, but I've learned a lot from the case we are going to learn from the discussion.' And then we opened it up from there and explore exactly how taboos have really shaped the economics of this industry. I think we think of taboos and social norms, as something that sociologists study or something that's important for social movements. But it shapes a lot of economic action. And I think there's no better case than the feminine hygiene market. Where it's really shaped things like switching costs, right? If nobody wants to talk about it, it's very hard to learn about what the other options are. As you mentioned, there were no television ads until the 1970s. How are you going to get consumers to switch and do innovations and tell them about the innovations? And then a bunch of other factors start playing a role too. So you look at who runs companies like Procter & Gamble, it tends to be men. And so, are they just more likely to overlook the problem, maybe dismiss it? Perhaps. You think about entrepreneurs entering, we know female entrepreneurs were likely to see these problems, they have the experience, notice them, maybe less likely to overlook them. They have a hard time raising capital because essentially all venture capitalists are men up to the last decade. And so there's all these forces that compound, revolving around this idea of the social norms and the uncomfortableness that lead to a market where people are really sticky in their purchase patterns. You don't get a lot of innovation coming in. And you don't get much competition. And for companies like Kimberly-Clark or Procter & Gamble, it's an amazing place to be. I mean, their margins are like 50% on these products. It's a really big market. Something like a quarter of the world's population is your customer. It's a great place to be. And so that's where we start the conversation for the Thinx case. BRIAN KENNY: That's awesome. That's a great way to start it. So how did you hear about Thinx? How did you decide to write this case? How does it relate to the things you think about as a scholar? REMBRAND KONING: This one came from me looking around and being interested in how diversity impacts strategy. When we think strategy, we normally don't think diversity. We're like, 'Oh, that's something for organizational behavior or people studying HR.' And my contention, that's not the case. A lack of diversity isn't just a problem for who works at your firm, it's a problem for the strategies you develop. And in particular, for the products that end up in markets. So if we don't have women, if we don't have African-Americans inventing. They're often the people who are most likely to see opportunities to invent for people like themselves. And so I was looking for a case along this. And one of the coauthors on the case, Elie, had a friend who had gone to HBS, Maria Molland, who took over as the CEO of Thinx. And so we got connected to them and it just seemed like this amazing roller coaster of a story. We could probably do three or four classes just unpacking this case. And so that's where it really came from was, how can we take this idea of diversity, and explore it in the context of strategic decision making in terms of marketing, places where sometimes it gets overlooked. BRIAN KENNY: And we're going to talk more about Maria Molland, she's the protagonist in the case. So some great insights into her leadership and what she's been doing since she went to Thinx. And I should say for our listeners, by the way, Thinx is spelled T-H-I-N-X, even though it sounds like thinks, with a K-S. So let's talk a little bit… We've already teased a little bit about the size of the industry. 35 billion globally. You mentioned a third of the world is your potential customer base. Who are the big players in this space? And what does the market landscape look like? REMBRAND KONING: The market landscape is highly concentrated. So these are classic consumer goods. You've got your big players, your Proctors & Gambles, your Johnsons & Johnsons, your Kimberly-Clarks. And then a lot of really tiny firms. So it's super highly concentrated. And the way these firms compete is brilliant. It's not competing by trying to lower prices or out innovate the other person. It's a little bit about marketing. And in a lot of cases, it's a little bit about just getting your product on the shelf at a Target or at a Walmart or at a CVS. And people are going to come in, they're going to buy it. Historically, it's something people have felt awkward about buying, so they want to just pick the one on the shelf, put it in their bag, get out of the store as quickly as possible. There's some great history around this one. When pads were first invented, you'd go into the store in the 19th century, you wouldn't even say the name of the product. You'd walk in if you were a woman, you'd put your money in the slot, they would hand it under in a secret bag. And you'd walk out as if the transaction never happened. So that's the history that you're facing. And what these companies, right? Brilliantly from a business perspective, I'm not so sure from a societal perspective, right? Is that they were able to take the fact that when nobody wants to talk about something it's very hard to compete, it's very hard to steal customer share. And so they've been in this very happy equilibrium for a number of decades, up to around 2010, right? Printing money, not really have to worry about it. Doing minor process improvements, but nothing fundamentally disruptive. BRIAN KENNY: So I was going to ask if there's brand loyalty, but it doesn't sound like it's brand loyalty, as much as it's just too much trouble to change brands. I mean, you start with something and I would have guessed it's generational too. Moms recommend something to their daughters and so on. Is that safe to say? REMBRAND KONING: That's what, from talking to Thinx who comes in and starts innovating, that was the research that they did. Is that mom passes it down to daughter. There's a conversation that happens. And then the conversation never happens again. And so you stick with that brand you know. And to be clear, there are real risks of potentially trying new products. As soon as you get something that you trust and you know works, there's a lot of reticence to switch to a new products. BRIAN KENNY: Yeah. And the case does a good job of describing some of the dire consequences of this taboo, right? Because it's one thing to have it be kept on the down low in the transaction in the store, but there are some real serious implications in some cultures about the taboos surrounding menstruation. Can you talk a little bit about that? REMBRAND KONING: Oh, yeah. I mean, so if you look in India, for example, you see as soon as women start menstruating, what you find is that, they're 12, 13 years old, they're much more likely to stop going to school. They miss days of school, they'll just drop out of school. You see similar patterns in parts of West Africa and Sub-Saharan Africa. And you end up with the taboo fundamentally shaping people's opportunity even to go outside the home or get an education. So those are the most extreme cases that we see around the world. So this isn't just an issue of, 'I feel a little bit embarrassed,' but in a lot of cases, changes people's opportunity in life. And so, that's something that I think is lurking in the background here, when we think about these norms and taboos shaping the market. BRIAN KENNY: We're going to get to Thinx in a minute, but before we do that, I wonder if you could talk a little bit about the lack of innovation for decades, centuries, I don't know how long. It hasn't changed a whole lot going back for many, many years. Why is that? REMBRAND KONING: Yes. So, you see an explosion of innovation in the early 20th century. A combination of women's rights, changes in material science and technology, so you get more absorbent pads invented in the early late 19th century, really the early 20th century. The tampon comes on the scene out of innovations where nurses were treating wounds during both world wars. They see this super absorbent material, they put two and two together, the tampon gets invented. The big invention is the plastic applicator. After that, and then there's nothing. And I think that goes back to what we were talking about in terms of that cold call. Which is that you couldn't advertise. So if you invented something really cool and new, how do you tell people about it? People are uncomfortable talking about it. So word of mouth isn't going to solve your problem. Further, these firms are making really good money. This is classic innovator's dilemma. If I've got a product that's got 50% margins and people are buying on a monthly basis. And I know that thing is going to sell and get turns in the pharmacies where they're being sold. I have very little incentive to try to disrupt myself. I'm happy sitting on this stream of income that I know is going to be coming into the future. And so you essentially get no innovation for a long time. And then essentially when Thinx gets going in the 2000s, you start seeing an explosion of different products to address these sorts of issues. And suddenly the market becomes a lot more vibrant. BRIAN KENNY: Yeah. So what was the problem that Thinx was trying to solve? What makes them different? And how did they establish themselves in a market that is pretty much dominated by these huge players? REMBRAND KONING: So when you go back to the original founding story of Thinx it was, why are there so few options, a concern about the environment as well. So there's a lot of plastic that comes off tampons. They have to be thrown away. They can be uncomfortable, you have to replace them, you can't wear them for a long time. So the founder comes up with this idea for a period underwear. You can think of it as absorbent material, locked into this underwear, you put it on. You can wear it for a long period of time. It's absorbent. It's comfortable. You can sleep in it. You can move around in it. You can exercise in it. And so has this great idea, Thinx it's going to revolutionize women's empowerment, has trouble raising capital. So where's she go? Well to this new website called Kickstarter at the time. So I believe it's 2013. They go on Kickstarter raises $65,000, uses that to get a prototype of the product, get some funding from the manufacturer in Sri Lanka. And it's off to the races in terms of really intense grassroots interest, particularly in New York City, where they started. And so, they drive that interest by doing something that's super clever. And I think a really nice strategy, a really nice marketing tactic as well. When you're confronting these taboo or uncomfortable industries, is you turn it around and you break that taboo. You break those social norms deliberately to drive interest and show people, in some sense, how absurd they are. So they do this amazing campaign, I actually remember seeing this in the subways in New York City, and the MTA in New York City, the subway agency pulls the ads… And the controversy from the MTA pulling these ads, got them enough free to exposure in newspapers and discussion online that I think they're probably 10X, if not 100X the eyeballs they saw for the amount of money they spent. And so that was a great grace to get to that grassroots movement and show people that we're at the forefront of innovating, of changing the norms in this space. So that there'll be more innovation. So there'll be more entry. They do a similar thing. And this one blew my mind. They go to Selfridges in London, and Selfridges wouldn't let them use the word period in their display in the store. Boom! Gets covered by The London Press. Lots of great interest. Drives that growth. BRIAN KENNY: Let's talk about Maria Molland then. She comes in after Thinx has already been around for a few years. She's stepping into us to a difficult situation because the founder and CEO has left the company under shadowy circumstances. REMBRAND KONING: There's a sexual harassment allegation, things get complicated, the culture's coming off the wheels at the company, the founder leaves and Maria gets to come in. Graduate from Harvard Business School, worked at eBay, worked at Yahoo, has experience in consumer tech. And is really interested in working in women's health. And is a little nervous about coming into this company, it's around 30 some odd people at the time, and trying to right the ship. But decides to take on the challenge and come in as CEO. And there's a lot going on. They've got really strong loyal customers, but a lot of the rest of the company is a mess. There's some amazing talent there, but there's no process. And so she has to come in and work out, how are we going to build a company that can't just be a couple million dollars a year in revenue, but could potentially be half a billion dollars a year in revenue. She wants to grow to the next great consumer product here. And that's the challenge she faces when she enters and takes over things. BRIAN KENNY: So how do you even begin? It sounds daunting to even figure out where to start in a situation like that, where does she place her bets? REMBRAND KONING: So I think she does one thing just to start, that's 100% right and it's any turnaround situation, is like take a deep breath, right? Calm yourself down. And look around at what's working and what's not. And what she found is that they had an amazing product, that people… There was a lot of demand for. They had amazingly loyal customers. But internally, they weren't ready to scale. They had built a company around a purpose, and it was really very focused on changing the world and changing gender norms and thinking about a very liberal view of women's rights. And though she was very much for it and wanted to support these employees, she also knew that if this product was going to make a difference in the world, they couldn't just focus on the message and the purpose internally, they needed to make sure they put routines so that they can actually scale that innovation. Because otherwise the company would end there and you wouldn't see the Thinx product being used in places like Omaha or Canada or Japan. Would only be used in Greenwich Village in Brooklyn. That's not an outcome that really changes the world and makes women across the world better off. So she decides that she's going to really focus on the business needs of the company, along with the larger social purpose of the company. Puts in metrics to incentivize those business needs, makes sure that they're putting in a better cultural routines. Things like maternity leave. You wouldn't think of this, but the company had no maternity leave policy. Which is remarkable, right? Serving women, but it gets lost in the mission because they were so focused on one particular problem. And didn't think about it a little bit more holistically. And really sets up, from a strategic point of view, sets the groundwork so that they can think about how they're going to scale this innovation that they have, scale this product they have. And so it retreats from growth for a year or two, sets up the team, hires some really great talent, and after a year or two was then ready again, to think about how do we actually turn this into… Maintain and even grow our position as the market leader. BRIAN KENNY: The case also describes, if I'm not mistaken, that as she looked across the social purposes that were driving a lot of the company's activities, she had to pull back from some of those. They weren't all consistent with what Thinx needed to focus on. And she lost some people as a result of that. I mean, we're dealing with a millennial generation who cares very much about the purpose-driven aspects of the organizations that they work for. And here people might've signed up for something and then got soured on the fact that a new leader comes in and is turning away from those things. REMBRAND KONING: And I think this is one of the things where going back to this idea that we need diversity in our companies and the markets where we're serving. They were having trouble in terms of their employee base of thinking about how they could extend to the rest of the market. And so they had these two personas that I think is a really helpful way to think about this. Elena is their persona of the young 20 something, works in Brooklyn, probably doesn't have kids and is really excited about trying things like Thinx and other companies. And they do great job of tapping that market. But what they find when they do an analysis is that where their larger market is, is probably what they call Diane. Has two kids, has a high powered job, is thinking about how she might one day pass down her traditions and the product recommendations she has to her daughters. Is also thinking about what would be good for herself and make her life easier. And the issue was the company didn't have a lot of people could speak to that segment. And further, what they found is they were getting a lot of demand actually from places like Texas, or Florida, or Louisiana that are more right-leaning. And they were excited about those products, even if they didn't hold necessarily the same political views as the company. And this created a lot of tension. How do we adjust our message, to keep empowering women at the core, but make sure we aren't alienating people who might hold different sorts of views? And so this is where you get a lot of turnover in the company and they have to do a good job of diversifying who works for their firm and speaking to that broader audience. I think what Maria did here was just really brilliant in terms of saying, 'We can't solve every message and every problem.' When we talk about a strategy, it's as much about what you don't do is what you do. And in her case, she decides this company is going to be about empowering women to deal with their periods. To get the products and the help they need. Sometimes having to focus in terms of what your corporate purpose is, so that you can actually achieve it. BRIAN KENNY: So what is the strategy that they pursue as they move down this path? They've got their personas, they've made a push into retail, and there's been some bumps along the way in that, how does the strategy begin to unfold? REMBRAND KONING: Great question. So they've got this Elena character. She shops online. They've been selling direct to consumer like a Warby Parker or Casper. Everything's going straight to the consumer. They're exploring a little bit popups, physical locations. But what they realize is, where the vast majority of the sales are, where the Dianes are still shopping, are places like Target and Walmart. And so the core question: what channel do you sell through? And how do you sell through these different channels? Do you go on Amazon? Do you go on Target? Are you going to sell a lower price point? It's worth mentioning here that Thinx are more expensive, they're reusable. So over time they can actually be cheaper, but it's just a much more costly, upfront purchase. And so the decision is, for her, do we try to go omni-channel or do we stay focused just on the direct-to-consumer channel? BRIAN KENNY: The cost issue becomes relevant, and a decision has to be made about whether or not they're going to create a lower-cost version of the product. And if so, what does that do to the brand? Does that somehow chip away at the value of the original products? Talk a little bit about that. REMBRAND KONING: Yeah. And so, one of the things you see is that the original entry strategy to this firm was breaking the taboo down, right? Doing these provocative ads, telling people that this is comfortable to talk about, telling people that they can go find these alternatives to tampons and pads, if they're unhappy with what they have. The problem is, as soon as you start educating the customer, you're building a freeway that other competitors, other cars can drive on. You've done all this education telling people it's okay to talk about. But remember there was no innovation. And these companies were making so much money, Procter & Gamble, Kimberly-Clark were making so much money, because nobody wanted to talk about it and nobody was switching, right? So that reduced competition. Suddenly, Thinx is coming in and to get their customers they're breaking the taboo. And this is a classic entrepreneurial strategy problem. You've kicked open the door. But now you've got to work out a way to close the door behind you. And so this is where the cost really comes in. Do they stay very high price and premium and demand from a greater brand, or do they think that eventually people are going to be like, 'Oh, there's competitors that look similar. I'm just going to go with the cheaper option.' They're concerned as well, because if they want to compete, not just in the DTC channel, and they want to compete in retail, they need a lot of turns and they need a lot of customers to get people like Target or Walmart or CVS interested. Otherwise they're not going to want to carry these products. And so there's a real tension, that they've done this fantastic job of building out an entry strategy. And now Maria is at this point where she has to think about do we double down on entry strategy, but maybe that caps our growth, or do we shift our strategy to be broader based, maybe lower costs to try to find those cost efficiencies, the competitive advantage from scale, that in the long term would allow us to be the market leader in this space? BRIAN KENNY: So I'm just curious about, does any CEO ever say, 'We're going to stick with the status quo and cap our growth?' I mean, it seems like the answer is always, 'Yeah, we got to grow more.' Is that the wrong answer sometimes? REMBRAND KONING: It can be. I think it's a really interesting thing that comes down to the economics of the market, and it comes down to the ambition of the CEO. And I think one of the things that I often push back on here, is I think when we hear a Elon Musk or Jeff Bezos say, 'I'm going to the moon,' literally to the moon, which I think what they're both trying to do, everyone it's, 'Hey, maybe they shouldn't be that wealthy,' but it's applause for the ambition, right? And as soon as we moved to female CEOs. I see over and over again, we get these questions of, should they be quite so ambitious? Maybe they should stick with the regular strategy, right? And so, one of the things I pushed back here is, I think she's right, that we want to really go for scale here. Maybe there's an argument to stay really niche. But if we look at the history of consumer packaged goods. You need scale. These are things where there are scale economies in production. You need lots of turns in stores. I'll give you an example. That's similar science, like Thinx is at, is Spanx, right? They started niche very high luxury and then moved out to a much broader set of categories. I'm gunning for the big win here. I think the question though is how you do it? Right? Maybe there's a way to expand just on DTC. Maybe retail is the right option. How do you think about this in terms of timing too, is really important. Because you don't want to… If you're making these great margins, how long can you milk that before competition is going to come in and start driving down prices in this market? BRIAN KENNY: One thing we haven't talked about either is they did have an incontinence line of products as well, which with an aging population, globally, you would think that that would be an equally lucrative market to expand in. But it doesn't sound like that was an area that they saw as much promise in. REMBRAND KONING: So the technology is absorbent material. So cleverly, they work out that they could use this for incontinence as well. And exactly like you said, huge growing market, equally taboo to talk about. And they get really good traction initially with it. What they realized is just a little bit more complex to enter that market, particularly in terms of getting eyeballs to buy the product. So if we go back to Elena, who they were selling to initially, they got her through Instagram, they got her through Facebook, they were able to do the ads there. The older population is less likely to be super active on these social media platforms. And so you're talking television ads, people are still uncomfortable with that. And it was harder for them to educate. Because one of the things they do is, when you go through Instagram or when you go through Facebook, it takes them to the Thinx homepage and the page isn't just about selling. It really is about educating. So they have a bunch of tools to explain different sorts of products and what might work for you, to explain how to wash and handle the garment, all this stuff that might be a little bit uncomfortable and there's no one to ask in the store, right? They can educate online. And so without that online channel, they had a hard time gaining a little bit of initial success to scale up beyond that. BRIAN KENNY: So the original funding was a Kickstarter campaign and that worked when they were young and scrappy and trying to get started. Maria is entering at a different phase, but still, can't go it alone. So they do need funding. And this is where Kimberly-Clark comes into the picture. Can you talk a little bit about the dynamic of how she was able to make that happen, and how important it was to their strategy? REMBRAND KONING: Maria decides they need capital to expand. If they want to be this big company, they're going to need money for more advertising, to expand production, to hire a workforce who can really help the company grow. And goes on the road to raise money and ends up really hitting it off with the corporate venture capital arm with Kimberly-Clark. So they're a big incumbent in the space. They see these disruptors coming and they make an investment. Crucially, she makes sure she retains a lot of control over the product that she can compete independently. So they don't shut off that competition channel. But that money is huge. And beyond the money, the partnership is important because it potentially gives access to a whole global distribution network over the long term as they start thinking about scaling up. BRIAN KENNY: And I guess the benefit for Kimberly-Clark in this is that now they've got a foothold into this market as well, and you can be sure that their competitors are all moving down in this direction. I mean, the innovation that Thinx brought to the table is something that I would imagine the incumbents are trying to figure out how do we… REMBRAND KONING: It's something that incumbents have a hard time doing, I was listening to my colleague, Emily Truelove talk with you, Brian, about P&G, trying to do their own internal innovation teams and how difficult that change was. And one way to sidestep the difficulty of trying to change your organization to be more innovative, is to acknowledge that you're really good at being an incumbent. You can do the big media campaigns. You can optimize distribution, you can optimize manufacturing and say, 'Let's outsource,' right? 'Let's have other companies do that innovation and set up a corporate VC arm.' And that's what Kimberly-Clark does here, is they take the opposite model of instead of trying to come up with innovations in house, they're going to make investments in all these new sorts of consumer goods so that they can benefit from these new innovators entering the market. BRIAN KENNY: So can you describe a little bit about what the marketing campaign is and as they enter this mass retail market, how do they again, create a little bit controversy to draw attention to their product? REMBRAND KONING: Maria has got the new team assembled. I think they're roughly 1000 people and this is right before the pandemic hits. And they're considering do we stick to DTC? Do we move into selling through retail? I mean, how are we going to build awareness so that if we do go into the retail channel, that we can really get people interested. So they come up with this provocative ad campaign called MENstruation, M-E-N, all cap locks. And the idea is, what if we lived in a world where men had periods? And I encourage people to go Google these ads, I think they're clever and provocative and really get you to think of what if men had to go through this, how might power dynamics in the world be different? How might we treat menstruation very differently as a society? Fantastic ad, think they're building on all the controversies that come and they're waiting to see, will this ad be effective as the case closes. BRIAN KENNY: I hope there's a B case, because I'd love to hear how those ads play out. REMBRAND KONING: There is a B case. Which is fantastic. I can say, the ads don't go as effectively as you would hope, which is really interesting. There's a silver lining in the pandemic though, that I think is worth mentioning. Is that, they have a lot of troubles as many retailers and companies did, but with everybody being at home, they were more comfortable trying products like Thinx. BRIAN KENNY: Interesting. REMBRAND KONING: If you're not out and about and worried about a leak, you're so bored at home, let's try some new products. They got a surge of interest from that, which is, I think, a really fascinating one to think about how being at home actually allows you to do things that you wouldn't be comfortable to do in public and changes behavior, is fascinating to think about, for a host of different sorts of companies. BRIAN KENNY: Yeah. That's super interesting. REMBRAND KONING: As we move into this more digital mediated world. BRIAN KENNY: Rem, this has been a great conversation. I'll send you off with one last question, which is, if you would like people, our listeners, to remember one thing about this case, what would it be? REMBRAND KONING: I think the one thing they should take away from this case, is that diversity or lack of diversity isn't just a problem for your HR folks. Isn't just a problem internally in your company. It's a problem for innovation. It's a problem for strategy. It's a problem for who benefits from what businesses build, right? Not only do we see labor market bias, but that spills over into product market bias. We see too few innovations aimed at women, at African-Americans, of underrepresented communities of all sorts. And so, as you're thinking about building a strategy moving forward, I think one really exciting place to find opportunity is to see where there's been these biases, where there has been a taboo, where these norms have maybe prevented people from coming up with innovations and innovating for those communities. Because not only can, I think, you build a really successful company, you can do a lot of good in the world at the same time. BRIAN KENNY: Rem Koning, thanks for joining us to talk about Thinx. What a great case. Thanks for writing it. REMBRAND KONING: Thanks for having me, Brian. HANNAH BATES: That Harvard Business School Professor Rembrand Konig in conversation with Brian Kenny on Cold Call . We'll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books, and videos with the world's top business and management experts, find it all at This episode was produced by Robin Passias, Craig McDonald, and me—Hannah Bates. Curt Nickisch is our editor. Special thanks to Ian Fox, Maureen Hoch, Erica Truxler, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.
Harvard Business Review
01-04-2025
- Business
- Harvard Business Review
Calyx Global: Improving the Quality of Carbon Credits
BRIAN KENNY: Today on Cold Call , we'll talk about something we all have, but many of us have no clue what it is. I'm speaking of a carbon footprint. It's a term that helps to describe the total amount of greenhouse gases, primarily carbon dioxide, released into the atmosphere because of human activities that contribute to climate change. Your footprint includes emissions from things you do every day, like driving, heating your home, eating, and shopping. The average carbon footprint in the US is the equivalent of 16 metric tons of carbon dioxide, which is about three times the global average. The good news is that you can reduce your footprint by simply doing less of those things. But if that's not an option and you want to make a big reduction fast, you can turn to carbon credits. Global carbon markets are valued at nearly $1 trillion and growing fast. As organizations and nations race to comply with carbon reduction goals, it's a complicated and chaotic landscape. Today on Cold Call , we welcome Professor Mike Toffel and guest Duncan van Bergen to discuss the case, 'Calyx Global: Rating Carbon Credits.' I'm your host Brian Kenny, and you're listening to Cold Call on the HBR Podcast Network. Mike Toffel's research examines how companies are addressing climate change and other environmental and working condition issues. He's also a fellow podcaster as creator and host of HBS's Climate Rising . Mike, welcome. MIKE TOFFEL: Thanks so much, Brian. BRIAN KENNY: Haven't had you on the show in a while. It's great to have you back. MIKE TOFFEL: It's great to be here. BRIAN KENNY: And today we're really pleased to have the protagonist in our case, Duncan van Bergen, who is a co-founder at Calyx Global, who previously worked at Shell and McKinsey, and he is a graduate of Harvard Business School. Duncan, welcome. DUNCAN VAN BERGEN: Thank you. Thanks so much for having me. BRIAN KENNY: I felt like I had to explain carbon footprint at the outset because I don't understand it, and I'm going to assume a lot of our listeners don't either. I actually made an attempt to understand what my carbon footprint is, and I'm embarrassed to say that it's not 16. It's like 23.4, which to use a Boston slang term is wicked bad, I think. MIKE TOFFEL: Yeah, it's probably driven by flights, is my guess. BRIAN KENNY: So today we're going to talk about carbon credits and the carbon market, and Calyx is at the center of that discussion. It's complicated, right Duncan? DUNCAN VAN BERGEN: It can be a bit complicated, indeed. Yeah. BRIAN KENNY: We're going to get into some of the details of what makes it complicated, but Mike, I thought I would start with you. I always like to ask our faculty what inspires them to write a particular case and why they think it would make for a good discussion in the classroom. What was it about Calyx? MIKE TOFFEL: Yeah, that's a great question. The voluntary carbon markets is a really interesting space because when we think about the need for companies and countries to reduce their carbon footprint, we often will think about organizations making investments in-house to, for example, change their heating from natural gas to electrified heat pumps. And procuring renewable energy to power that, or other attempts like that. Those are certainly important. They also can take action in their products to make them more energy efficient, but at the same time, there's lots of expensive items after they get through the first few. And so what carbon credits do is they give you the opportunity to pay others who have cheaper methods of reducing their carbon footprint, and then you get to claim credit for it. There's a definite number of activists and other concerned people who don't view this as equivalent in the carbon space. And part of that reason is that there's been a number of scandals that have shown that those who are taking the action, whom you're paying to reduce emissions, are not necessarily doing the calculations correctly, they're exaggerating, or there's efforts to reverse. Sometimes there's a forest fire or there's subsequent development that might take out some trees that you'd planted, that they'd planted on your behalf. And so there's been some controversy around this. One of the interesting arbiters of this to enter the market to try and help buyers figure out which of these carbon credits are more legit than others are carbon credit rating agencies. Calyx Global is at the center of that, along with a few other companies. And I met Duncan a few years ago at a HBS reunion where he sat on a panel that I moderated about climate change. And that was the first I'd really heard of this market. And the first I'd met Duncan, and subsequently I've met him and his colleagues and it's a super interesting space. BRIAN KENNY: Yeah. Duncan, let me turn to you for a minute, and I'd love to hear more about Calyx, about why you were involved in founding it and what were some of the things you were trying to solve by getting involved in this space? DUNCAN VAN BERGEN: My co-founder, Donna Lee, and I basically came in our own very separate ways from a place of what I'd say is firsthand understanding of just how complicated it can be for a buyer of carbon credits. And a lot of the buyers are companies to know which credits actually deliver on the claims the credit makes. And just to get that out of the way, the core claim a carbon credit makes is that it stands for one metric ton, of removed or reduced emissions. Just like Mike explained, they buy this credit on the belief that, hey, it really stands for a ton, and I can compensate for a ton of my emissions for this one credit. And we knew firsthand, we had seen and lived firsthand, that it can be quite complicated to know which credits actually fulfill that claim and which don't. And we both come from a place where our core assumption is that buyers want to have real impact, that this is more than just window dressing, and that they want to be able to make the right choice. And the flip side of that is obviously also true, is that companies don't want to be called out for having bought junk credits and claims of greenwashing, follow that, et cetera, et cetera. But again, it can be a little bit complicated to separate the wheat from the chaff in this market. And that's where we come in with Calyx Global. We want to make it easy for companies to make a choice for more real impact with carbon credits. BRIAN KENNY: Yeah. Mike, maybe you can give our listeners a better understanding of, we've got the voluntary credits and then we've got the mandatory credits. How are those different and where does Calyx fit sort of in the landscape of the voluntary credit space? MIKE TOFFEL: Yeah, so the origin of carbon trading really comes from the regulatory space and the UN treaties that allowed countries to meet some of their goals by buying credits from other countries, whether that's within the EU for example, or globally across less developed countries, investing in projects, selling to more developed countries. So that was the origin. But then the diffusion and the spread of countries signing up for goals to which they would be held legally accountable in a somewhat weak international framework, really didn't take off beyond the EU and a few other countries. In response, a lot of countries and even cities and organizations like Harvard have said, 'We think this still needs to happen.' And so they've sort of filled in the breach with this voluntary carbon market. And so, you see net zero targets or science-based targets, a whole litany of voluntary commitments, other commitments just say, we want to reduce our carbon footprint by X percent by a given date. Harvard University has said that we want to reduce our fossil fuel emissions to zero eventually. And in the short term, we want to reduce our fossil fuel emissions. We want to neutralize them having net zero fossil fuel by 2026. That means not only reducing our carbon but also reducing the health impacts of fossil fuels. And so for that, we're trying to figure out what are the right actions internally and externally to figure out the package of activities to pursue. So, for example, and this is an area where I'm working with our university colleagues to try and help figure this out. We recently announced that we are investing in some new renewable capacity across the US to try and offset, we don't call it offset there, but we say neutralize, the power, the fossil fuels associated with the power production, the electricity that we purchase.` But then we have fossil fuels that we combust on campus for heating and for the buses and trucks that we operate. And we're trying to figure out how much of that and how rapidly do we decarbonize those shift to electric in most cases, versus thinking about `what type of carbon credits should we procure? And for that process having, we actually have a contract with Calyx, we're a subscriber to their service so that we can see their take on various carbon credits, and we have access to their experts. We've had many conversations with Donna, Duncan's colleague, about how to think about the market. So I'm not only writing a case about them, but I'm also getting a perspective from, yeah, the client perspective and from a team that's trying to figure out how do we meet these goals. BRIAN KENNY: Yeah, that's a great transition to a question I have for you, Duncan, which is, as you're thinking about the rating system, can you tell us what makes for a high-quality credit? What are the sort of biggest red flags that you see where it comes to low-quality credits? DUNCAN VAN BERGEN: For starters, let me perhaps emphasize that we look at three different dimensions of quality when we say we rate credits. The one that everybody thinks about is what we call greenhouse gas integrity. Does this credit really represent one ton? And that's definitely one area that we focus a lot on, but there's two others. One is what we call SDG impact. And SDG impact looks at when credits make claims of having impact on one or more of the UN sustainable development goals, is there substance behind that claim? And often people think, Hey, that's just a little layer of marketing on top of the credit, but we believe that it's possible to analyze that as well. And third, we look at something called environmental and social risk in terms of, does this credit in any way present a risk of harm to the community in which the project is operated or the environment where it takes place? But let me go back to that first one, which a lot of people ask about is okay, well, how do we assess greenhouse gas integrity? It's really a three-step process. First, we assess the carbon crediting program, so the set of the infrastructure, if you will, that is used to create credits. There are a number of standards that have been used for a decade or two like this around the world, and we rate these standards, if you wish, in terms of as a setup, as a structure, as an infrastructure. Do they actually work with enough transparency, with enough scientific content, et cetera to really be able to guarantee the delivery of good credits? The second step is we conduct a very in-depth review of the methodology used to create the carbon credits. So as you can imagine, credits from capturing methane coming off landfills are very different in nature than what Mike was talking about before, planting trees or some of the more advanced technology approaches like things like enhanced rock weathering or biochar production or things like that. They're all very different and each has their own methodology. So we review those methodologies. The third and final step is reviewing the actual individual projects that create carbon credits. So that individual project where methane escaping from a landfill, you can almost imagine it, is being captured and either flared into less heavy greenhouse gases or is captured to produce electricity from. And so we look at that project and we look at a whole series of risks. And these risks are fairly commonly accepted in the space. They include additionality: would this project have happened without carbon finance? Because the principle is if a project would have happened anyway, then you shouldn't get credits for it. Things like permanence. Mike was referring to it earlier, what type of mitigations are in place to make sure that if reversals happen, that those are properly accounted for? Things like linkage: are the emission savings or removals not just being displaced to another area when say we protect a piece of forest, how do we make sure that protecting this piece of forest doesn't lead to more deforestation a hundred miles to the east or west? There's a number of risks like that, and those are certainly some of the more well-known ones that we assess as part of this process. BRIAN KENNY: Yeah, and you're not the only ones doing this, right? The case talks about some other people in the space or organizations that are in the space. I'm wondering how alike or different are your ratings from theirs, and how does this sort of shape the impact of the market? DUNCAN VAN BERGEN: Yeah, you're right. There are a couple of other raters in the space, and I think it's a good thing that there's choice in this space. And I think it's an important point because sometimes I go to conferences and people try to challenge me and say, well, hang on. Not everybody even agrees on what quality means in carbon credits. And I'd say, 'I think that's wrong. I think everybody's pretty much aligned.' And I would point to the core carbon principles of the ICVCM, the Integrity Council for the Voluntary Carbon Market. As 10 really good principles that outline what a carbon credit must comply with or the standard that should be met. And I can say, I think all the ratings agencies approaches are plugged into those core carbon principles. I'd say beyond that, yes, there are some differences. Some of the risks that each of us assesses are we assess them a bit different, and that can lead to different ratings for a similar project. And it also means that say a double B in one rating system doesn't mean exactly the same as a double B in another system. It's a young industry. I expect that gradually there will be convergence as we all become more and more transparent about how we do it, and we get to benchmark our approaches. I'm sure there's going to be some learning going in all directions. BRIAN KENNY: And we know technology has a big impact, and the advent of AI is impacting pretty much everything. I'm wondering what you see as the future of technology in credit and carbon ratings. DUNCAN VAN BERGEN: I'm going to immediately lose every shred of credibility that I've built up in the last couple of minutes. I'm going to launch four or five buzzwords in one go and then defend that they all apply. And when I say digitization it's kind of an obvious one, but then I'm going to say remote sensing and geospatial, then I'm going to say blockchain, then I'm going to say AI is the cherry on top. But I think they all are relevant. And I'd start with digitization. I'd say this ecosystem is still in a process of digitization. Many parts of this chain that are being done with PDFs and some fairly basic methodologies. There is a very commonly used process for measuring the girth of trees. It's called measurement at chest height. And a lot of the documentation is being handed from one player in the ecosystem to another by using PDF documents that are uploaded and downloaded onto registries. That's obviously not the way it's going to be. This is going to become more digital. Every player is going to have the digital record out there, and we hope and look forward to being able to plug into a more digital version of this ecosystem. Remote sensing and geospatial is much talked about in the space, and the advances have been tremendous over the last couple of decades. And the availability, the ubiquity of geospatial data, has also just exploded. We use it extensively. We make the case that you can't do away with all aspects of quality analysis just by saying, 'Hey, I've got satellite data.' But we think it's a very useful tool, and both developers and ourselves make extensive use of it. And then you get to things like blockchain and AI. I'll just mention it because if you think about what blockchain is good at, it's about making sure there is a clear chain of custody along a whole series of players, and you need to be able to make sure that whatever changes are done, that there is a clean record of it. Now, I think that's kind of almost the textbook case for that type of distributed technology, and I haven't yet seen anybody really crack how it would play a role here, but I have to expect that that's going to be the case. And then finally, AI, I think is going to play a big role in terms of helping accelerate things like data ingestion and interpretation. And we are heavily experimenting with how we can deploy that smartly, both in our own kind of back-office process as well as for helping our customers. But I'll say one thing on that and then I'll stop my buzzword fun fair. BRIAN KENNY: I've enjoyed it. I've enjoyed the buzzword- MIKE TOFFEL: Buzzword Bingo. BRIAN KENNY: Yeah. DUNCAN VAN BERGEN: I wonder where I learned that, but I was listening to another podcast—not quite as good as this one— BRIAN KENNY: Thank you. DUNCAN VAN BERGEN: —of The Economist the other day, and it was about the importance of data in the whole AI revolution. They were saying there's three things, right? There's compute power that's increased tremendously. Algorithms and data. And what we find ourselves sitting on at Calyx Global is one of the biggest troves of deep insights into what makes certain methodologies work and not work, what makes certain project types work and not work. And so we're really focused on making sure we continue to curate that best and biggest set of information around how carbon credits work, how carbon crediting projects work, how quality works, how these different standards and methodologies work. And we think that's a key piece of how this technology landscape will shape up. BRIAN KENNY: Yeah, that all makes great sense. Mike, I want to come back to something you were alluding to earlier, and this is more about the central theme that runs through the case, really addresses the challenges to integrity. And maybe you can for our listeners lay out a little bit what some of the biggest risks are to integrity for firms like Calyx as they try to establish themselves in this place. MIKE TOFFEL: Well, I think one of the biggest risks to Calyx or any rating agency is their need to be viewed to be and to be viewed as fair arbiters of the analyses that they're conducting. And this is true for inspectors, that's some of the work I do is inspectors who are going to look into global supply chain factories to let the brands know how the factory is doing. They share a similar need for integrity. They need to be viewed as straight shooters who are going to tell the truth no matter who pays them. And there's some evidence in that space that who pays them actually influences their reports, which is problematic. In financial ratings of bonds, for example, it's usually the bond issuer who pays the financial rater, this Moody's or S&P or Pitch to do their rating. It's not great from an optics perspective that a municipality or a corporation is paying someone to assess the integrity and bankruptcy risk of their own entity. But that's the way the world works in financial ratings. Think about auditing, right? Financial auditing, same thing. Ostensibly the board hires the auditors, but usually with the assent of the corporate managers to audit the firm, you're like, that doesn't seem great, right? They're supposed to be working for the shareholder. So anyway, there's all this background of sort of potential conflicts of interest and enter the carbon credit rating space, a fairly new space, as Duncan mentioned, they're adding value to many players. They're adding value to buyers, whether it's Harvard or Microsoft or whomever who want to know which of these carbon credits have more integrity than others. They're also adding value really to developers of high-quality ratings. Because eventually, as these ratings get incorporated in pricing, developers who offer high-quality projects are going to get higher prices for their credits. And those that have lower quality projects will get lower prices. Like that's the way it's supposed to work. So you can imagine, well, one of the questions is if you're adding value to a variety of players, who should you try and sell to? Like who should you actually collect revenues from? And what's interesting in this space is just because you're creating value for a bunch of players doesn't mean it's the right thing to do to try and capture that value from those players. And what Duncan and Donna and Calyx have done so far, as I understand, is they're really very much focused on this and focused on earning revenues from buyers. That's their main play. They have a subscription model they say although we add value for developers too, we're going to focus on the buyer side. Now, some of the competitors are making different decisions because you can imagine when do you rate? In this case, they're rating after the carbon credits are issued, or at least technically perhaps once the project is registered and ready and available to sell credits. And so if Harvard University wants to decide to buy credits, we can look on Calyx's website through our subscription and see which projects are highly rated, which ones are poorly rated. So far as I understand, they're not selling to developers. Others in this space are selling to developers. And again, you can see why, because developers of high quality want to be able to advertise that. But then you're like, hmm, there might be a perception at least of a conflict of interest. And so I think that's a super interesting question that we'll debate in the classroom. This is what drew me in. I'm interested in the context, but I think what's going to be so interesting in the classroom besides talking about the attributes of carbon credits that make them more legitimate or more authentic and credible, is this question of business strategy and who do you sell to? What are the consequences? What's the upside? What's the potential downside? BRIAN KENNY: Yeah. Duncan, does this all ring true to you? I'm wondering how do you think about navigating the conflict of interest issue? Were there other models that you looked at? I mean, you're still a young firm. What were some of the things that you maybe thought, well, we don't want to do it that way, we want to do it this way? DUNCAN VAN BERGEN: Yeah, it absolutely resonates and is probably has been and continues to be a core topic of discussion between Donna and myself and others in the team. How do we make sure we fulfill our mission? Our mission as a company is to try and make carbon markets stronger, make them better, and have more impact both for the planet and for people. Donna and I both have been in this space for quite a while. I have been in carbon markets for coming on a decade. Donna has been in climate and carbon for over two decades, but we started the company in 2021 when carbon markets compared to today were absolutely booming. Demand was growing hand over fist, and Donna and I were both in a position where we had seen firsthand that there was actually a very big variability in quality in the market. There were junk credits and there were really high-quality credits. And we were also aware of some of the questions being raised by media and civil society around integrity and around some of these credits and the issues with them. I wouldn't quite go so far as that saying that we predicted this crisis of confidence that's been in the market for the last couple of years. But we definitely were aware of the problems. And when we looked at the core issues behind these problems, we saw a lack of transparency and misaligned incentives as key to why those problems existed. And Donna actually wrote an interesting blog on this topic not long ago. It's called, 'Carbon Credits as Credence Goods, Why That Matters.' And indeed, they are credence goods. You have this really big imbalance between what a developer knows about carbon credits and what the buyer knows. And that means you have to be more careful. And looking at these incentives, it's fair to say that a number of parties in the ecosystem, including the standards bodies, including the verification and validation bodies, the auditors that are paid in this space are paid for volume. They're paid for the number of carbon credits issued, and that makes the developers their customers. And I'll be the last one to say that any party in that exchange is trying to do the wrong thing, but it makes the developer your customer, it makes volume, your objective function. Yeah. More volume, more money for everybody. And we made a fundamental choice that we thought the role we wanted to play as that independent arbiter, that independent advisor, that we could best play that if we avoided that conflict altogether by not selling ratings to developers. So today, you cannot, as a developer, pay us to conduct a rating for you either before the credit's being issued or after the credit's being issued. We oriented our business model entirely to the buy side. So yeah, it's been a question that we've revisited a number of times, but every time we have believed that orienting ourselves to the buy side is indeed the viable model. And we believe still looking at the market today, that independent view on quality continues to be a value. And that as a matter of fact, beyond the quality question, there are plenty of other frictions in this market where we think we can provide, as an independent party a great service almost as an independent trusted gateway to the market. BRIAN KENNY: This really seems like a key theme throughout the case. In fact, the case references the Guardian article as sort of an indicator of the way the media has reacted to this. There's a lot of skepticism, perhaps understandably, because people don't really get it, they don't really understand it deeply enough to know whether or not it's valid know. How has Calyx, the role that they've played here trying to educate the market, how has that worked? MIKE TOFFEL: I would say the skepticism doesn't so much come from a lack of understanding. I think it comes from the fact that the industry is vulnerable to shaky-quality credits. And there's a number of efforts underway to try and kind of shake out of the market such credits, carbon rating agencies like Calyx is one of those plays. There's others, Duncan had mentioned the ICVCM, the Integrity Council for the Voluntary Carbon Market. That's a relatively recent nonprofit that's come out to try and make public its decisions about what necessary components are for the quality of credits and the programs that are also called standards or registries. These are companies like the Gold Standard and Verra and so on, who had been the sole arbiters really, of what qualifies for being called a credit and whose methodologies were attacked, for example, by that Guardian article. And by subsequent articles as well, they are also facing this pressure and tightening their belts and updating their methodologies and updating their oversight over the third parties they hire at the project level called verifiers and validators, third-party organizations that are involved with ensuring the projects meet these programs. So there's a lot of players here. So they're both trying to increase the stringency of their standards and their oversight of these verifiers. So there's a lot of movement right now afoot. What would be interesting to see as you look at snapshots over time from Calyx's ratings and from its competitors' ratings, is the distribution rising right? Are we seeing fewer low-quality credits on the market and more high-quality on the market? That would be sort of good evidence that actually this market's moving. I'd be interested in Duncan's perspective, but from my view of some recent reports by Calyx and by BeZero and others in this space, they're still showing very few high-quality and lots of low-quality carbon credits on the market. So there's lots of work to be done in my view. Although I do think we're moving in the right direction. I don't think we're a year or two away from this being resolved. But Duncan, can I cold call you to ask you your take? BRIAN KENNY: Yeah, you said you like cold calls. DUNCAN VAN BERGEN: I'm not sure you were supposed to tell everybody that, but look, it's the right question, Mike. Is the market improving? We recently launched a series of indices, we call it the Calyx Carbon Integrity Index. And we have two one on the issuance side, which is a bit of a leading indicator, and the other one on the retirement side, which is a lagging indicator. And really what it measures is the average quality of carbon credits being issued improving? And the short answer is if you look from, we have the index all the way back to 2021. Till the end of 2024, you see a significant improvement. The index has doubled. But this is where the detail, yes, Duncan, doubled from what to what? It's an index out of 10. And it was call it a round two, and it is now four plus out of 10, four out of 10, not yet great. But a doubling is very meaningful and we know where it's coming from. It's coming from less of certain very high volume, lower quality credits being retired, and at the proportionately more of the good stuff. So what I'm going to be watching very intently over the months to come, is that trend continuing? Are we going to go up to four, five, six and above? Because I think that is the key metric to follow to see whether the carbon markets are going to revive. Better average quality will lead to greater confidence in the market, will lead to some companies that are kind of watching this space thinking, Hey, yes, I would need it, but can I trust it? Is it on balance? Is it actually more dangerous than not for me? I think increasing that number of average issuance quality is going help a lot. Now the other thing that I find super fascinating is we launched the retirement index, by the way, is the one that is more of the lagging indicator that one's going up, but much more slowly, which is really evidence that the market is still digesting some of the old, and I'm just going to say the old junk that has been issued, and this is a call for me to the market to say, stop selling the junk. Stop buying the junk. The market will get better much faster. But the other one I wanted to mention is an index we developed together with a partner called Clear Blue Markets. And that's an integrity price index. And so it combines the elements of price and quality and it basically has three tiers. Tier one or R, AAA, AA, single A rated credits, tier two are the Bs, and tier three are C and D. And what we can see is that from the end of 2023, tier one credits have kind of broken away from the pack and trade now at about a one and a half to $2 premium over tier two and tier three, which is fantastic news because what happened is before 2023, those indices were all over the place, tier one, two, and three. As a matter of fact, you could get at that time tier one quality below the price of tier two and tier three. But what this suggests at least is that there's correlation between quality and price. Hopefully it also means that quality is being recognized in price discovery. So Mike, I agree there's road ahead of us. There's progress yet to be made, but I think these are some hopeful signs. BRIAN KENNY: Does that factor into the where to buy feature that you're considering launching? It sounds like that's a good sort of pathway to giving your customers advice on where to find high-quality credits. DUNCAN VAN BERGEN: Yeah, and look, this is the beauty of having a SaaS startup, right? You can listen to your customers and based on what they're saying, you can actually start inventing new products. And what we had is a number of customers, and I dare say that perhaps Harvard was one of those. MIKE TOFFEL: I was one of them. Absolutely. DUNCAN VAN BERGEN: Who said, 'Hey, it's really cool that you have this rating system and you guys seem to be technically and scientifically quite on the ball.' But now we want to find where we can buy those highly rated credits, those A-rated credits. And it's not so easy. Because what you have to bear in mind in this market, it's not as if every market intermediary carries the whole market inventory. Everybody kind of has their 10 or their 15, or in some cases there are 50 or so projects, but there are thousands of them out there. What we started doing in the beginning is we just kept a PDF of, hey, these people carry a number of these highly rated credits, and that caught on. And so we decided to make a page on our platform out of it, and that's going to evolve a bit more, but it did cause questions on that very important topic of neutrality, independence, and transparency. And so we set it up as a directory of sellers. We don't charge the seller to be on there. BRIAN KENNY: Yeah. And if their placement on that list ties back to the science and the data and the rating structure, then it should, that in and of itself should give people confidence. MIKE TOFFEL: Calyx had evaluated all this information from the registries, and in some cases I presumed knew either through their contacts or their contacts of contacts, like how one might get their hands on purchasing these, or at least had a headstart. But they were so careful about not wanting to be perceived as an on-ramp to developers that they were quiet about that for a long time and now they're moving in a different direction where they're saying, 'Okay, if we provide that information without getting any revenues from it, without charging any fees, without favor,' then that actually is mission aligned with their goals, as Duncan said, of trying to strengthen the carbon market. Because at the end of the day, the way that happens is by buyers leaning in to favor higher quality projects. And if it turns out that Calyx was impeding the ability for purchasers to make that choice, then we're like, well, okay, there's sort of a conflict in our policies here and which way do we want to go? But that's my interpretation. BRIAN KENNY: This has been a great conversation as I knew it would be, and I feel like I'm much smarter about carbon credits than I was before we started talking. We've got time for one more question for each of you, and I'll start with you Duncan, because I always give the case writer the last word in these conversations. But let's look ahead a little bit. As you look at how the market itself evolves, how do you see Calyx's role in the industry and how do you see both Calyx and the industry changing over the next five years or so? DUNCAN VAN BERGEN: Yeah, looking ahead, I think for us, and it won't surprise you probably after this conversation, that for us, credibility and independence is going to continue to be crucial. It's going to continue to be at the very core of what we do, and we think it's also going to be core to how this market evolves. Will it grow to a really strong and impactful piece of the puzzle for all of us in society, for corporations, for governments and others in doing something about climate change? Yeah. Credibility will be crucial to that. I think our role as a company, we're going to continue down the path of being a friction reducer. It has been too complicated for companies to find and buy carbon credits and especially to find and buy carbon credits with good information about whether these credits are going to have impact or not. And I think if you take a five, ten-year look, I think we're headed towards a world where companies will have that dual P&L and balance sheet, one around finance and one around impact on climate, impact on some other dimensions as well. And I think what we are working on is going to play a role in putting a value on that balance sheet on both the asset and the liability side, but that's for the medium term. BRIAN KENNY: Yeah, we've even seen some firms that are in their annual reports that are starting to really include this as an indicator of the company's health. DUNCAN VAN BERGEN: Yes. I wouldn't be surprised if we saw more and more of that. I think that's a long-term trend that notwithstanding any near-term volatility is bound to only get bigger. BRIAN KENNY: Yes, yes. So Mike, let me turn to you for the last question. I always ask, you know, what's one big idea you want our listeners to take away from the case? And here, you know, I feel like we've talked so much about integrity and trust and transparency. That's certainly one of the things you want people to think about. But how do you think about it in the context of this and the broader space itself? MIKE TOFFEL: Yeah, I guess I would say two things here. One is, I think that's a really interesting space for thinking through how do you add value and to whom? Just do a whole stakeholder analysis. We've talked really only about two players so far, the buyers and the developers. But there's also investors in, for example, in carbon credits. So you're adding, if I were going to invest a million dollars in a carbon-credit project, whether it be a new technology or an existing technology in whatever country, I wouldn't mind having a little third-party due diligence do some work based on their expertise to help me figure out with some predictive accuracy, how good will this project be rated if the developers do everything they say they're going to do? Where does that fall in Calyx's sense of ensuring integrity of their own reputation? Is that an area that they might pursue? That's different in two regards. One is it's a different stakeholder and also it's different timing because what I described is like before the project even gets started, whereas they're focusing on buyers after the project's completed. One of the things I'm really looking forward to in teaching this case is I think students are going to come up with a whole host of ideas of areas that they might add value. That's the first part. And then the second part is where should they try and capture that value? Where does the gains of that not have this negative spillover that will cannibalize markets, for example, in their buyer side? And I think that's going to be super fun. I guess the last thing I'll say is I love organizations like this whose, if you think long term, if they're super successful, they'll probably be out of business. Because what I would define as, sorry, Duncan, what I would define as super successful is that you get this almost grading like eggs, right? Like you go to the supermarket, it's right on the package. Is this double A, triple A size? Is it grass fed? Is it organic? Eggs are a good analogy because- BRIAN KENNY: I don't know if they're good because I get confused when I go to the grocery store to buy eggs. MIKE TOFFEL: Yeah, but more A's is better than fewer A's, right? I mean, you have that basic idea. So you know, on the one hand, eggs are a commodity, but not really. That doesn't mean that they're all interchangeable. There's a gradation system that is right there on the package that's government regulated and government enforced. And by my way of thinking, like that's what success would look like. And you can't sell eggs below a certain quality because we just regulate them out of existence. And maybe that's where this is all heading. And if so, then you know there's no market for private ratings of eggs because the government does it for you. And so I want to get students' perspective on that as well. BRIAN KENNY: Sounds like there might be a B case down the road. I don't know. MIKE TOFFEL: For sure. BRIAN KENNY: Yeah. Mike, Duncan, thank you so much for joining me on Cold Call . MIKE TOFFEL: Thanks for having us. DUNCAN VAN BERGEN: Thank you so much. BRIAN KENNY: If you enjoy Cold Call , you might like our other podcasts, After Hours , Climate Rising , Deep Purpose , IdeaCast, Managing the Future of Work , Skydeck , Think Big, Buy Small , and Women at Work , find them on Apple, Spotify, or wherever you listen. And if you could take a minute to rate and review us, we'd be grateful. If you have any suggestions or just want to say hello, we want to hear from you, email us at . Thanks again for joining us, I'm your host Brian Kenny, and you've been listening to Cold Call , an official podcast of Harvard Business School and part of the HBR Podcast Network.
