Michael Porter
The Man: Is the Bishop William Lawrence University Professor, Harvard Business School. Porter is every B-School student’s staple diet; gave the term ‘competitive advantage’ and several frameworks—Five Forces, Cost / Differentiation—to think about management problems; founder of Monitor, a consultancy that Rahul Gandhi started his career in. He tells us how to get business and society to work together.
The Oeuvre: Has written widely on management strategy and economics. His most recent framework—Shared Values—promises to raise the level of debate around corporate responsibility.
X-Factor: Ability to generate ideas—that are as insightful and novel in the latest issues of Harvard Business Review—as they were in the dog-eared text books decades ago.
The Message: Our traditional management theories were too simple, too narrow, and didn’t recognise new ways of working with society.
The Hypothesis
Is there more that a business needs to do besides simply make a profit? The starting point of this question is that what a company should do is be philanthropic. The trouble with this approach is that there’s not enough money. You can give all you want, but there’s not enough money to give.
So What?
The best way to understand how a business can have an impact is to see the business as a business, which is able to innovate and find ways of developing products that meet the needs of the community it serves. The measures of business performances will not change. What will change are the tools and techniques by which we generate returns, growth and productivity. Any company, for the next 20 years, that is not exquisitely efficient in the use of energy will be in trouble. Analysts will be looking at use of energy, water and resources. They will look at how companies penetrate non-traditional markets and look at customers’ needs that allow the business to grow.
There is a lot that businesses can do simply by being businesses in the traditional sense of the word. The act of making a profit is how wealth is created in the society. Only businesses can create wealth; governments can’t. A business creates wealth while making a product or a service and selling it for a profit and that allows it to hire people. These people can purchase goods and services in the local economy and businesses can reinvest those profits in new things.
All of that is good but the question is, is there more that a business needs to do besides simply make a profit? This is the question we have been grappling with for many years. I think a starting point of this is the thought that what a company should do is be philanthropic. That’s what many businesses do and I think in India, businesses have a long tradition of companies and business leaders being philanthropic and that’s good. We want to encourage people to share their wealth with others who have needs.
The trouble with this approach is that there’s not enough money. You can give all you want, but there’s not enough money to give. Take the pharmaceutical industry for instance. Many people don’t have access to drugs and medicine. One of the solutions is that pharmaceuticals should give away a lot of drugs for free. They tried and gave away billions of dollars worth of drugs, but they didn’t make even a tiny dent in the problem. Giving is good, but to solve these problems in a meaningful way, companies have to use the power of their business. Not their charitable ways, but the power of the business itself. If we can address health or financial services or nutrition through a business model and capitalism, we have a tremendous benefit of making it sustainable and profitable and not having to rely on the support of philanthropic donors.
I think there is a rising awareness among business leaders about this and frankly a hunger among them to get their companies to have a higher purpose. They want to have an impact that their employees can be proud of. This is not at the cost of business performance. A company’s purpose of life is to maximise shareholder value and give return on capital. This is an effective goal and we want businesses to worry about that. This is where the ‘Shared Value’ framework is useful. The notion of shared value says that if we pursue the goal of efficient companies we can make that quest better and stronger. We have to recognise that there are opportunities around us in society that can maximise that goal. In India, you have companies like Jain Irrigation, which have been able to meet the needs of poor people, underserved communities and poor farmers through this approach.
This approach will make businesses stronger, penetrate markets, gain market share and show profitability in the long run. Not all profits are equal. With the concept of shared value you can make profits while working on societal issues. Many companies haven’t even considered how businesses can impact societal issues and that is a missed opportunity.
This message is coming at the right time. It’s clear that government is not going to be the one that can solve these problems. NGOs and civil society have done great work, but they don’t have the scalability or resources or charitable money to solve the problem. Businesses have come to understand that this is the way to evolve. The best way to see this is not to see a business as a charitable donor. The best way to understand how a business can have an impact on the most profound issues of society is to see the business as a business which is able to innovate and find ways of developing products that meet the needs of the community it serves. It improves environmental performance or reaches out to people who have been left out.
We are opening up to a new way in which we manage a company. Our traditional management theories were too simple, too narrow, and didn’t recognise the opportunity in society or around the business, nor did they recognise new ways of operating the business in the value chain or of working and collaborating with society. I think there is an interesting dialogue around the world: In Korea, Japan, Colombia or Peru, there’s a tremendous readiness in the business community to move in this direction.
The first hurdle is mindset. CEOs say it is very hard to get unstuck from the traditional way of serving customers traditional types of products through traditional types of value chains. In businesses we have learned how to optimise a certain playbook. For example, outsourcing of the supply chain or manufacturing in far flung factories across the world. Now, businesses are waking up to the fact that this may not be the best way. It could be that we cluster our factories more and save on logistical costs and then there won’t be as much of energy usage. It will take some time to get over the mindset of two or three decades of managerial concepts that have been too simple and didn’t recognise the kind of external and broader connections between the community and the company.
One big challenge in achieving this change is that the investment community is not patient enough. We can’t do this if the investment community is not with us. So we are beginning an intensive set of discussion with leading investors in the world. And they are starting to understand that they are in a trap. They are demanding short term profits and businesses may not be able to grow and develop in the same way. There is a growing awareness in the investor community that the old playbook needs to be revised. So the most important issue that I see: How do we break out of the traditional mindset and how do we tackle this issue of dealing with the financial markets and the investment community?
The investor community is not viewing this approach properly. They have to understand what will make companies succeed in the future. These companies will understand how to use energy, minimise water, use resources, how to reach lower income communities and grow market opportunities. If we appeal to investors to be socially responsible we will get nowhere. We can help investors understand the enormous opportunities for businesses to grow and prosper as businesses. The investors will then be really quick to jump on board.
As soon as investors start to understand that good investment analysis involves shared value thinking that’s when we would have actually won the war. At UBS, in the research reports, they are now starting to include these analyses and they are pioneers. There are also some hedge funds and investment funds that do this kind of analysis. The investment community is going to come around and we need to share with them these results.
We have to start demonstrating the business impact of doing the right thing. Today, a company’s annual report has its financial results in great detail. And often in the same report or in another CSR report they report all the wonderful things they do for society. But you notice that they never connect the two. They never say that water saves money. They never show that opening a market in India for low cost healthcare is creating a new opportunity that is why this company is investing in this business.
We have to get businesses comfortable with the idea that their highest impact will be by dealing with proper usage of water—recycling and using it well—and not by charity. There is another mental barrier that businesses have. They are very reluctant to talk about business opportunities in serving low income customers. They think they’ll be criticised for being greedy. That’s the opposite of what society should want. If businesses can address these issues, then the problems would be solved.
On one level there’s the moral of behaving in a certain way and following the community standards and that’s something that businesses have slowly and surely learned to do. On another level there is a higher and more profound opportunity for businesses to understand that it itself is a powerful instrument to solve society’s problems. It has great power of marketplace and capitalism that nothing else can match. We have to understand morality and businesses on those two levels.
It is important to understand that the measures of business performances will not change. I think what will change is the tools and techniques by which we generate returns, growth and productivity. Any company, for the next 20 years, that is not exquisitely efficient in the use of energy will be in trouble. Analysts will be looking at use of energy, water and resources. Analysts are going to be looking at how companies will be penetrating non-traditional markets and looking at customers’ needs that will allow the business to grow.
In the pharmaceutical industry, for example, all the growth opportunities in the world are no longer in the traditional markets. The companies that are going to be successful will be the ones who can get to the growth in India, China, Thailand and Brazil. The measures of success are going to be the same on the financial side, but the tools to achieve that are going to be on the shared value dimension.
We also need to start to show businesses in a different way. Many people in society have come to see businesses in a narrow way. They see it as; about greed, making a profit to benefit themselves. The public has lost sight of how a business is the one that’s solving most problems in society. The image of businesses needs repair. One of the jobs that people like Mark [Kramer] and me need to do is to get people and businesses both to see businesses differently. This is exhilarating for businesses. When they start to see themselves differently it gives them a sense of purpose. We can affect people, we can affect communities. It excites me to see the energy that businesses can unleash.
(As told to Shishir Prasad)
Reading List
1. Philanthrocapitalism - Matthew Bishop
2. Capitalism at the Crossroads: Aligning Business, Earth, and Humanity - Stuart Hart
3. The Fortune at the Bottom of the Pyramid - CK Prahalad
4. Profits with Principles - Ira Jackson
5. Business and Society Harvard Business Review - Michael Porter and Mark Kramer
6. The Competitive Advantage of Corporate Philanthropy Harvard Business Review - Michael Porter and Mark Kramer
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