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March 2012

Corporate Social Responsibility

Michael Porter made headlines early last year when he co-authored an article in the January-February 2011 issue of Harvard Business Review with the grand title on the magazine cover: “How to fix capitalism and unleash a new wave of growth”.

It turns out that Porter – along with his co-author Mark Kramer – had been advocating a link between competitive advantage and corporate social responsibility as early as December 2006, also in HBR, and innovation guru Clayton Christensen (with Heiner Baumann, Rudy Ruggles and Thomas Sadtler) was writing about disruptive innovation for social change in the same issue.

Porter’s more recent writings on corporate social responsibility (CSR) seem to have attracted a lot more attention in the media, including a Schumpeter column in The Economist that expressed doubts on his acumen (“Oh, Mr Porter: The new big idea from business’s greatest living guru seems a bit undercooked”, March 12th, 2011). I find it interesting that Porter’s and Kramer’s idea predates significantly the moment where concepts such as sustainability became fashionable in business. In fact, the two pioneered the CSR movement years ahead of their time, which might be what they are repeating their idea now. They seem to be finding a more receptive audience.

In the 2006 article, Porter and Kramer argue that “the prevailing approaches to CSR are so disconnected from strategy as to obscure many great opportunities… CSR can be much more than a cost, a constraint, or a charitable deed – it can be a potent source of innovation and competitive advantage.” They recommend considering:

  • Value-chain social impacts (“social issues that are significantly affected by a company’s activities in the ordinary course of business”). This is explained in further detail in the diagram Looking Inside Out: Mapping the Social Impact of the Value Chain.
  • Social dimensions of competitive context (“social issues in the external environment that significantly affect the underlying drivers of a company’s competitiveness in the locations where it operates”). This is explained in further detail in the diagram Looking Outside In: Social Influences on Competitiveness.

They also define responsive vs strategic CSR, the latter “mov[ing] beyond good corporate citizenship and mitigating harmful value chain impacts to mount a small number of initiatives whose social and business benefits are large and distinctive.” Examples include Toyota’s Prius and Whole Foods Market. As another example, “Nestlé… works directly with small farmers in developing countries to source the basic commodities such as milk, coffee and cocoa, on which much of its global business depends.”

The 2006 article by Christensen defines the concept of catalytic innovators as follows:

  1. “they create social change through scaling and replication.”
  2. “they meet a need that is either overserved (that is, the existing solution is more complex than necessary for many people) or not served at all.”
  3. “the products and services they offer are simpler and cheaper than alternatives, but recipients view them as good enough.”
  4. “they bring in resources in ways that initially seem unattractive to incumbents.:
  5. “they are often ignored… by existing organizations, which don’t see the catalytic innovators’ solution as viable.”

The article provides several examples, such as Minneapolis-based MinuteClinic, which provides “fast, affordable walk-in diagnosis and treatment for common health problems as well as vaccinations” and the New York-area Freelancers Union, which provides “low-cost health insurance and other services to independently employed contractors, consultants… and other workers… who wouldn’t otherwise be able to afford insurance.” Health care is not the only sector where catalytic innovation is taking place: education is another one, especially through online education and community colleges as well as micro-lending.

In the 2011 HBR article, shared value is defined as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.” Porter and Kramer argue that companies can create shared value opportunities in one of three ways: “reconceiving products and markets”, “redefining productivity in the value chain” and “enabling local cluster development.”

I found the connection between sustainability (through low greenhouse gases) and optimized logistics particularly interesting, especially in the context of Wal-Mart, which has been able to “cut 100 million miles from its delivery routes in 2009, saving $200 million even as it shipped more products” and Marks & Spencer, whose “ambitious overhaul of its supply chain… is expected to save the retailer £175 million annually by fiscal 2016.” Porter and Kramer further argue that the idea that “location no longer matters” is a myth because of “the rising costs of energy and carbon emissions but also by a greater recognition of the productivity cost of highly dispersed production systems and the hidden costs of distant procurement.” They again discuss the example of Nestlé (which they had already covered in 2006), among others.  

Schumpeter (that is not the real name of the column writer, but it is more convenient to call him Schumpeter) comments that this idea sounds close to Jed Emerson’s concept of blended value and apparently overlaps with Stuart Hart’s 2005 book “Capitalism at the crossroads.” He also points out that political environments need to be taken into consideration, for instance in the case of “advising a ravaged country on how to cut poverty at the risk of bolstering its dictatorship.” Schumpeter also pointedly comments that Porter “has not had the equivalent of a number-one hit since “The Competitive Advantage of Nations” 20 years ago.”

But as I described in my previous blog post, there is a lot of interest, independently from Porter’s opinion on the topic, in companies that do more than maximizing shareholder value. My guess is that CSR and shared value will play a significant role in cementing Porter’s legacy.


Manufacturing and more in HBR report: "Reinventing America"

This post discusses the rest of the Harvard Business Review report on "Reinventing America", following my post last week on the article "Choosing the United States" by Michael Porter and Jan Rivkin.

GE's CEO on Manufacturing and Outsourcing

In this month's "How we did it", Jeffrey Immelt, CEO of General Electric, writes on "sparking an American manufacturing renewal." I found his account of GE's move to outsource to low-cost countries 30 years ago, followed by (more recently) the progressive realization that this business model was becoming outdated, particularly fascinating.

Here are a few reasons that influenced his reasoning: "shipping and materials costs were rising; wages were increasing in China and elsewhere; and we didn't have control of the supply chain." Also, "at a time when speed to market is everything, separating design and development from manufacturing didn't make sense."

Immelt describes what he calls "human innovation", which consists of three parts: (1) "building in-house innovation capability", (2) "lean manufacturing", and (3) "a new model for labor relations." This new thinking has led to the revival of the GE Appliance Park in Louisville, KY. Immelt also gives the example of a GE Aviation plant in Ellisville, MS.

A High-Level View

In the same issue, Thomas Kochan writes about "A Jobs Compact for America's Future", in which he asserts America faces a human capital paradox because it is not developing a "well-trained, well-paid, continuously improving workforce" and "yet at all levels of the economy, we behave as if we don't believe that."

The article covers a lot of ground, mentioning the behavior of companies, union, public schools and business schools, but as a result I found it a bit vague, and had a hard time isolating concrete action steps in spite of the "call to action".

For instance, I find the following suggested high-level ideas perfectly reasonable but wish the article had included more specifics: (1) "start more apprenticeship programs", (2) "encourage the development of regional clusters", and (3) "reinvent business schools." Of course each of these ideas deserves its own article, so maybe the specifics will be provided in a follow-up piece for HBR.

Recommended Read: Manufacturing and the Modularity-Maturity Matrix

Later in the magazine, Pisano and Shih ask the provocative question: "Does America really need manufacturing?" They do answer yes, "when production is closely tied to innovation", and add: "managers often don't appreciate how important manufacturing is to the product-development process" and thus "make sourcing and factory-investment decisions largely on the basis of financial criteria that focus too much on cost."

The article provides a modularity-maturity matrix (p.96) that will hopefully "help managers understand when R&D and manufacturing are integral to innovation and should be located near each other." I enjoyed reading about the concept of modularity again because it is a concept covered by Clayton Christensen in his great book co-authored with Michael Raynor "The Innovator's Solution" (not to be confused with his best-selling "The Innovator's Dilemma", which I don't like nearly as much. I will write a review of "The Innovator's Solution" in a blog post in a few weeks.)

The matrix uses the concepts of maturity, i.e., the degree to which the process has evolved, and modularity, i.e., the degree to which information about product design can be separated from the manufacturing process.

Each square of the matrix represents a different type of innovation: process-embedded innovation, process-driven innovation, pure product innovation and pure process innovation. The matrix is currently available for free on the HBR website; you will find it by going to this page and clicking on "The Modularity-Maturity Matrix" halfway through the post.

I will close this post with an excerpt toward the end of the article, which I believe nails the problem on the head: "Government policy makers have a mind-set that manufacturing is a good sector for people with less education and less training. As a result, the United States - unlike, say, Germany - spends little on training people in the specialized skills needed in manufacturing. This has to change."


American Competitiveness

The March issue of Harvard Business Review has an outstanding special report on "Reinventing America", with many thought-provoking articles. The Economist's "Schumpeter" column provides a one-page summary of the report here.

For today, I want to focus on "Choosing the United States" by Michael Porter and Jan Rivkin, who state: "Considerable evidence, including new data we unveil below, suggests that the U.S. is not winning enough of the location decisions [where to build a factory and the like] that support healthy job growth and rising wages."

Porter and Rivkin offer the following two reasons for this situation:

  1. poor policies from the U.S. government, which is "failing to tackle weaknesses in the business environment that are making the country a less attractive place to invest."
  2. a tendency from U.S. companies "in the rush to globalize" to "overlook current and latent advantages of a U.S. location".

The weaknesses referred to in #1 are listed as: "a complex tax code, an ineffective political system, a weak public education system, poor macroeconomic policies, convoluted regulations, deteriorating infrastructure and lack of skilled labor."

The authors expand on #2 above as follows: "Many benefits of locating elsewhere, such as low wages or taxes, are visible and immediate, whereas the drawbacks are frequently subtle and apparent only over the long term. Also, companies often mistakenly view circumstances in U.S. locations as fixed, failing to consider how they might upgrade the productivity of existing U.S. sites or find more appropriate sites within America."

Porter and Rivkin surveyed almost 10,000 Harvard Business School alumni "about their experiences with location decisions involving the United States" and conclude that "survey participants were six times more likely to have considered moving activities out of rather than into the U.S. (even thought U.S. respondents were only twice as numerous as non-U.S. respondents)." The article has many more fascinating statistics from that survey, which paints a rather gloomy picture of the American ability to compete with the rest of the world. Or, in the authors' understated words: "Overall, our findings are sobering."

They discuss the hidden costs of offshoring at length, and in a very convincing manner, on pp.86-87 of the magazine. ("56% of companies moving production offshore experienced an increase in total landed costs, contrary to their expectations of cost savings." You'll have to read the magazine to learn what they typically overlook in making their decisions.)

Porter and Rivkin advocate "Improve, don't move", pointing out that "productivity improvements are often rooted in investments in individuals, innovation teams, and infrastructure as well as in long-term relationships with local suppliers and supporting institutions." They also argue that "activing individually and collectively, firms in a locale can improve the economics of undertaking activities here." They give the examples of Corning in the town that bears its name in upstate New York, and of executives in the Minneapolis-St. Paul region who have created an "employer-led civic alliance" called the Itasca Project.

The article ends with an agenda for policy makers that expands on the following points:

  • address U.S. business environment weaknesses,
  • protect core U.S. strengths,
  • eliminate trade and investment distortions that unfairly disadvantage the U.S.,
  • avoid the subsidy trap,
  • work collaboratively to enhance local competitiveness,

and an agenda for business leaders:

  • capitalize on changes in business conditions that favor the U.S.,
  • near-shore instead of offshore,
  • avoid the subsidy trap,
  • upgrade U.S. communities,
  • improve the quality of location decision-making processes.

The article is clearly a must-read for anyone interested in maintaining or strengthening American competitiveness.


Nonprofits, For Profits and In-Between (B-Corps)

I recently came across an old Harvard Business Review (the June 2011 issue) and, re-reading a few pages, enjoyed the “Crucible” feature on Kathy Giusti, “The Reluctant Social Entrepreneur”. Giusti was a Harvard Business School graduate on the fast track at a large pharmaceutical company when she was diagnosed in 1996 with multiple myeloma, a deadly blood cancer and “orphan disease” [only 60,000 people in the United States currently have it, thus representing a small market for drug companies more interested in blockbusters] for which there is no cure. She then launched the Multiple Myeloma Research Foundation to help spur research on the topic.

The foundation has raised $165 million to date, a remarkable accomplishment in the nonprofit world. Giusti is a highly analytical person who “requires the foundation and the [research] consortium [16 medical centers and community hospitals] to use metrics, benchmarking and scorecards.” Her disease became active in 2005 and she underwent a stem-cell transplant in 2006; the cancer has been in remission since. Giusti’s success is imputed to her drive, her determination to reject the status quo (in her case, physicians had told her at age 37 she should not expect to live more than 3-4 years; she is now 52) and her implementation of rigorous business concepts to the nonprofit world. Giusti was named to the “TIME 100” list of influential people in 2011 and gave the Class Day Speech at Harvard Business School in May.

Staying on the topic of non-profits for this post, and going through old Schumpeter columns I saved (see my earlier post for additional Schumpeter columns I liked), I’ll point out the July 2010 column by Schumpeter, on “Profiting from non-profits”, with the subtitle: “Charities are often told they should learn from business. The reverse is also true.” According to Nancy Lublin, the author of “Zilch: The Power of Zero in Business”, successful not-for-profits (her preferred term) excel at motivating workers in spite of low salaries – a valuable skill for any company to have in this economy – and at marketing.  Lublin steers clear of the theory that “businesses should all embark on missions to build a better world” but they should have a clear and well-articulated purpose to attract employees. They should also be willing to give new hires real responsibility quickly and build long-term relationships with their customers. It is too easy, Schumpeter argues, to dismiss “the whole lot as hopelessly inefficient.”

Also interesting is “A new alliance for global change”, a September 2010 Harvard Business Review article on how “corporations and social entrepreneurs can reshape industries and solve the world’s toughest problems” by working together and forming “hybrid value chains” (HVCs). The authors (the CEO of Ashoka and the founder/chief entrepreneur of its Full Economic Citizenship initiative) reckon that “businesses offer scale, expertise in operations and financing” while “social entrepreneurs offer lower costs, strong social networks and a deeper understanding of customers and communities.” The article provides several examples, from the low-income market for ceramics and home products in Colombia to the housing market in India for “informal” members of the workforce (with steady income but lacking proof of stability and so ineligible for mortgages) to drip irrigation systems in Mexico. Key markets for HVCs are: agricultural products and food, energy, low-cost housing and health care, for a total market size valued at $6 trillion in 2005.

To finish with a recent article, The Economist mentions in its January 7 2012 print issue “a new sort of caring, sharing company” called B-Corp (for Benefit Corporation) and now gathering momentum. The article focuses on Patagonia, an outdoor-clothing firm, which became on January 3 “the first firm to take advantage of a new California law designed to give businesses greater freedom to pursue strategies which they believe benefit society as a whole rather than having to concentrate on maximizing profits for the next financial quarter.”

The article also describes the requirements to qualify as a B Corp, which seem rather moderate: “an explicit social and environmental mission”, “a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders” and “independently verified reports on its social and environmental impact”. The push for B Corps is due to the nonprofit B Lab in the Philadelphia area; 6 states including California now recognize this new type of corporation. There are now apparently several hundred B-Corps in the US (517, according to bcorporation.net, totalling $2.9 billion in revenue over 60 industries).

A new law also took effect in California, creating the “flexible purpose company” (FlexC), which has a more specific social goal than B Corps. “Another option in America is the low-profit limited-liability (L3C) company”. The motivation for hybrid legal structures comes from the belief shared by many that “existing laws governing corporations and charities are too restrictive.” It will be interesting to see whether B-Corps and the like become prevalent in the business world or remain a tiny minority.

More on the topic of social corporate responsibility in next week’s post!


Favorite Schumpeter columns, Part 2

(I wanted to post this yesterday but I didn't find the time to write the post until now, sorry.)

The tussle for talent: the best companies are obsessed by the "vital few". (January 8, 2011) This article mentions cyclical vs structural attempts to recruit the best and brightest and discusses the book "The Talent Masters" by Bill Conaty and Ram Charan, which "provides a nice mix of portraits of well-known talent factories, such as GE and Procter & Gamble (P&G), along with sketches of more recent converts to the cause," all "proud of their elitism". High-flyers are selected for special training but also on-the-job stretch assignments. Also, "Successful companies make sure that senior managers are involved with “talent development”" and "integrate talent development with their broader strategy."

Built to last: Jim Collins has stayed at the top by practicing what he preaches. (November 26, 2011) Schumpeter applies the principles of management guru Collins to... Collins himself and his remarkable longevity in the management consulting world. Schumpeter comes up with the following reasons: (1) timing, (2) lots of data analysis (and buzzwords). "His central message... is admirably humdrum... After decades of minute observation, he concludes that hard work and perseverance matter more than genius." In his most recent book, "Great by choice", co-authored by Morten Hansen, he argues that turbulent times do not necessarily call for "bold and risk-loving leaders" and innovation is not "the only virtue that counts." But Schumpeter wonders whether his conclusions are really more than "clever hunches".

University challenge: Slim down, focus and embrace technology: American universities need to be more business like. (December 10, 2011) This is a fantastic article and I highly recommend to read it in its entirety. "[E]x-students have debts approaching $1 trillion... [but] America’s universities suffer from many maladies besides cost." Schumpeter includes as factors that have led to the current situation, universities' "inability to say no" (to "more courses for undergraduates, more research students for professors and more rock walls for everybody") and "Ivy League envy."

Here comes my favorite part: "Ivy League envy leads to an obsession with research. This can be a problem even in the best universities: students feel short-changed by professors fixated on crawling along the frontiers of knowledge with a magnifying glass. At lower-level universities it causes dysfunction. American professors of literature crank out 70,000 scholarly publications a year, compared with 13,757 in 1959. Most of these simply moulder: Mark Bauerlein of Emory University points out that, of the 16 research papers produced in 2004 by the University of Vermont’s literature department, a fairly representative institution, 11 have since received between zero and two citations. The time wasted writing articles that will never be read cannot be spent teaching."

The end of the article briefly mentions some institutions' efforts to address these issues.

How to make college cheaper: Better management would allow American universities to do more with less. (July 9, 2011) This is another excellent article that I highly recommend. Here is the lead paragraph: "Derek Bok a former president of Harvard, once observed that “universities share one characteristic with compulsive gamblers and exiled royalty: there is never enough money to satisfy their desires.” This is a bit hard on compulsive gamblers and exiled royals. America’s universities have raised their fees five times as fast as inflation over the past 30 years. Student debt in America exceeds credit-card debt. Yet still the universities keep sending begging letters to alumni and philanthropists."

Please read the full article for a discussion of the experiment of someone named Vance Fried at Oklahoma State University, who asked: "Is it possible to provide a first-class undergraduate education for $6,700 a year rather than the $25,900 charged by public research universities or the $51,500 charged by their private peers?" and his answer, as well as the cost-cutting strategies he proposes.

Building with big data: The data revolution is changing the landscape of business. (May 28, 2011) Excerpt: "Companies are assembling more detailed pictures of their customers than ever before. Tesco, a British retailer, collects 1.5 billion nuggets of data every month and uses them to adjust prices and promotions... Amazon, an online retailer, has claimed that 30% of its sales are generated by its recommendation engine (“you may also like”)." The McKinsey Global Institute argues that "[p]roperly used, big data could save the American health-care system $300 billion a year and the European public sector €250 billion." But Schumpeter also asks: "Will big companies and big governments use big data to trample on the little man? And is this mountain of data really as useful as MGI’s data-heads think?"