Adding Coherence to Capitalism

This post is inspired by my two favorite business readings of 2010: (1) “Creating Shared Value” by Michael Porter and Mark Kramer (Harvard Business School), and (2) “The Essential Advantage: How to Win with a Capabilities-Driven Strategy” by Paul Leinwand and Cesare Mainardi (Booz and Company).

I’ll risk doing a huge injustice to both of these contributions to the literature on business strategy and development and attempt to boil down the crux of each as follows.  The essence of “Creating Shared Value” is that “Companies can create economic value by creating societal value” in three key ways: reconceiving their products and services, redefining productivity along the value chain, and building supportive industry clusters at each of the company’s locations.  In other words, we need to move beyond giving lip service to calls for corporate social responsibility, adopt a long-term perspective, and pursue the real returns on investment in the community.

The essence of “The Essential Advantage” is that companies succeed, “not because of what they own or how big they are or because they are positioned in the right industries.  Their advantage lies in what they do and how everything fits together to create value. They succeed because they are coherent.” High relative coherence is what gives a firm the “right to win” in a given market, and coherence refers specifically to the “resolute, clear-minded focus in a company on three critical elements”, i.e. its unique value proposition, its system of distinctive capabilities, and its lineup of products and services.

The arguments articulated in “Creating Shared Value” and “The Essential Advantage” overlap and complement one another in several key respects.  First, both are about building virtuous circles of value creation whereby improving value in one area gives rise to opportunities in the others.  Second, both posit that a firm can create the most value, for both shareholders and society, by doing what it does best, that is leverage its most distinctive capabilities. Charitable monetary donations, for example, are a weak contribution to social welfare in comparison to the deployment of a firm’s core competences for the same purpose.  Third, Porter, Kramer, Leinwand and Mainardi have composed complementary pieces in that the former two authors offer an inspiring new sense of purpose for businesses, and the latter two authors offer a practical framework for setting priorities and coherently reflecting that purpose in a firm’s capabilities, product and service portfolio, and day-to-day operations.

Now to the point of this post: after these two readings, I was left wondering how, more generally, any firm’s value proposition might reflect both its contribution to social welfare as well as its distinctive capabilities. I wondered how, specifically, a firm might position itself vis-a-vis other firms or institutions as the champion of one discrete approach to shared value creation or another or as the champion of some combination of approaches. Porter and Kramer offer some examples of paths toward shared value creation — i.e. improving water and electricity efficiency, enhancing employee skills, health and safety, and promoting supplier access and viability — but I see these and other stated examples as less than fully representative of the full array of paths.  Reconceiving products and services, redefining productivity, and building supportive industry clusters are three, but they are among others, and “building supportive industry clusters” is awfully broad as it encompasses everything from public-private partnerships to shared infrastructure. Likewise, after reading “The Essential Advantage”, I was left wondering what is the list of most commonly used approaches for creating shared value that would supplement what Leinwand and Mainardi identify as 15 mutually exclusive value propositions that they see companies combining most frequently to compete and win (in the traditional sense of turning a profit).

An hour and three cups of coffee later, I came up with a list of seven mutually exclusive “shared value propositions” — or what Leinwand and Mainardi would call “puretone ways to play” (and I would be delighted to highlight others that anyone might suggest).  I phrase each in terms of the basic approach to creating shared value in a particular market, in a way that differentiates the company.

(1) Human capital developer. These companies invest in and advocate for local education, health services and social diversity (e.g. gender equality) to enhance labor market conditions, for their own benefit and for all.  3M, for example, actively contributes to the University of Minnesota’s highly competitive chemistry program.

(2) Resource steward. These companies maximize the productivity of their resources, ensuring minimum environmental impact and maximum health of their employees and their families, thereby minimizing resource costs and employee absences and lost productivity.  They also advocate for the protection and enhancement of these resources in general for the sake of national economic competitiveness and well-being.  Paperless companies save trees and money.

(3) Infrastructure provider.  These companies invest in infrastructure (I mean this in the broadest sense to include networking platforms, electricity and water utilities, transport infrastructure, etc.) that unlocks growth in their supportive industry cluster and the local economy in general.  De Beers has made significant contributions to utilities and transport infrastructure in some parts of Africa where both the firm requires that infrastructure for diamond mining and the community requires infrastructure in general.

(4) Alliance coordinator. These companies orchestrate partnerships between firms and institutions of government and civil society for the sake of correcting “coordination failures” (in the market failure sense). Specifically, these firms improve their own coherence through sharing of market, technology and resource access among strategic allies (i.e., other organizations in their supportive industry cluster). The strategic alliance between General Motors (GM) and Shanghai Automotive Industry Corp (SAIC) in 1997 involved substantial knowledge transfer to local Chinese employees and market access for GM.

(5) Policy influencer.  These companies know how to navigate regulations and transparently advocate for policy changes that create value for both the firm and for society.  A good example is Google’s success in influencing ICT sector deregulation in North Africa by drawing attention to implications for poverty reduction and development. These firms are essentially capable of “changing the game” by affecting change in the business climate itself.

(6) Consumer educator.  These companies view their current and potential customers as partners in collaborative product and service improvement.  Open-source software development (i.e. crowdsourcing) is one great example of the way in which these companies succeed.

(7) Social value player.  These companies motivate customers to embrace products and services that create societal benefits, like healthier food or environmentally friendly products.  These companies also serve disadvantaged communities and developing countries — customers at the bottom of the pyramid — that have not been recognized as viable markets; to do so, they redesign their products, services or distribution methods, offering them at very low or even zero cost.  Also, by learning-by-doing these companies thereby trigger capability improvements that often have application in traditional markets.

After producing this list, I realized that several could be captured under the large umbrella of “building supportive industry clusters”, but I find it more helpful to disaggregate the notions of alliance coordinator and infrastructure provider, for example, as they tend to reflect very different capabilities.  I also include areas concerning factor conditions (human capital developer), government (policy influencer), and demand conditions (consumer educator) because they help to reflect the ways in which a firm can strengthen what Professor Porter himself coined as the “Diamond of National Advantage”, and because they, again, reflect very different capabilities.

With due consideration and incorporation of the above seven Shared Value Propositions, and while guided by the roadmap articulated in “The Essential Advantage”, a firm can learn to build and leverage its unique system of distinctive capabilities to achieve a sustainable edge over the competition and simultaneously serve the basic needs of society.  As firms increasingly do so, we will see the emergence of a more coherent form of capitalism, in which the basic aim of businesses is to mobilize people around solving our shared social, environmental, and economic problems, and to do so as productively as possible.

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4 responses to “Adding Coherence to Capitalism

  1. Great blog dude ! Congrats ! Regards from Skopje, Macedonia !

  2. Katherine Shamraj

    Jordan – excellent blog as always. It raises two interesting questions:
    1 – Let’s assume we’re looking at things from a shareholder’s perspective. While there is plenty of low-hanging fruit where shared value can be created alongside bottom line savings, what arguments can you make to shareholders for going after higher hanging fruit where bottom line benefits may either be long-term or not immediately quantifiable? Where does creating shared value for today’s bottom line end and creating shared value out of “trust” or “belief” that it will improve tomorrow’s bottom line begin? Is there a case for advancing a shared value agenda within a firm if the results cannot be estimated before an investment is made?
    2 – A related issue is where does shared value creation and public value creation begin? At some point there will be a limit to how much a firm or consortium of firms/ngos etc can push shared value creation within their operating space — some things are going to have to remain either public goods or government regulated. It would be interesting to develop a framework/filtering process for determining which goods/services currently considered public goods (or currently regulated) could be absorbed by ‘coherent capitalism’ and which ones will always remain in the public space (national security, public health, environmental pollution).
    Thanks for the thought provoking and inspiring piece!

  3. Jordan I have few notes that I would like to share as I am skeptical that the dynamics of “business value” could ever be formalized because of the different values within the system of value creation. Beyond profits, economic value added, and shareholder value, the business may face other types of values, i.e., employee value, customer value, supplier value, alliance and partnership value, managerial value and societal value. The clusters of values within the firm may come in contradiction to each other and the balance may tilt towards one or the other. In essence this will compromise its initial good-will to be a public servant if it ever was one.
    Another question: is there a specific organizational structure that guides strategic planning within the firm to a balanced-value outcome? Most academics believe that decision-making is guided by economic profits and shareholder value. This makes me question your thesis and ask the question that Katherine has posted, where does shared value creation and public value creation begin and end? If anything, values generated by each are in contradiction in their fundamental nature an outcome that is not subject to reconciliation! Firm’s private value may and may not lead to public value however public good almost always provide the opportunity of private value to increase. When the US government invested billions of today’s dollars in the 60’s and 70’s to build the backbone of Internet, the benefits of this public spending is and will be reaped for generations to come. Firms don’t build roads and bridges, nor do they build sewer system and utilities, airports and ports, it is the public expenditure that that facilitated the spur of innovative solution and uses of these amenities. It is the result of highway constructions that we see businesses pop out along its stretch.
    Under the rule of Laissez faire the benefits of economic and political benefits are multitudes but capitalism has a fair share of criticism. Opponents of corporate capitalism (i.e., environmentalists) have argued the capitalism requires continual economic growth and that it will inevitably deplete the finite resource of the Earth. A good reading is The Cancer Stage of Capitalism by John McMurtry (a quick link: http://www.islandnet.com/plethora/mai/cancer.html). We can save trees by using fewer papers however this may be counteracted by a massive oil spill in the Gulf of Mexico?
    Besides the drawback mentioned by the tree huggers, capitalism has a fundamental flaw; it inherently leads to market failure in the absence of government intervention. Let us forget about all market pitfalls and examine one that led us to the collapse of financial markets last year: market power concentration. Regulation and law guards have been under assault for the past two and half decades which facilitated conglomerations and rising giants to push greed value to the edge of the system tolerance. I am standing here thinking where is the Social Value Player” in this equation? Financial advisors and mathematician managed to create a market in their spare time by playing poker (for years now) on the risk of debt in any given market and leveraging the gamble in order to take out loans to put back in the system to play again?
    Instead of focusing on the value self-interest (individual or corporate entity) and self-organizing as goals, one has to look for alternative, if not a substitute, to a doomed ideology. One school of thinking that cropped out in recent years is the capability-focused value. Self-interest value is emphasized as an outcome in this new ideal and not as corner stone of its conduct. Amartya Sen emphasized capability appraoch constructed in terms of substantive freedoms people have reason to value instead of maximizing utility subject to budget constraint. The value of freedom is not measured in terms social or economic status, nor it is measured in terms of position or rank, rather it is and emphasis on individuals’ ability to pursuit of the totality of their considered goals and objectives. It is an ideal that refers to an individual’s role as a member of firm, society and the public with the ability to participate in economic, social and/or political actions. It is about examining and evaluating the economic, social, and/or political barriers the impede individuals’ ability to function and be productive. Instead of a team building exercise in order to increase productivity, it is about examining how the management at firm/cooperation is aspiring individuals to be better in order to perform better. Practices like investing health and safety and human capital (lifelong learning, empowerment of employees, better information throughout the firm, better balance between work, family and leisure, greater workforce diversity, equal pay and carry prospects for women, profit sharing and concern for employability as well as job security) contributors to healthier work environment. Shared value among individuals will be inevitable outcome to the managements’ recognition and genuine support.
    From this basic principle, strategic planning can be extended and expanded to deliver the firm’s dynamic capability. A dynamic capability is the ability to integrate, build and reconfigure internal and external competencies to address rapid changing environment. Instead of emphasizing on the bottom-line or focusing on resource based views of the firm, the dynamic capability emphasizes two aspects. First, it refers to shifting character of the environment and second it emphasizes on the key strategic management in appropriately adapting functional competencies toward changing environment. If the management mastered these then the firm will have the competitive advantage in the industry.
    We do not need management textbooks to tell the story, it is “nature” that continues to speak to us. Quoting from Charles Darwin “it is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

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