Milton Friedman
Last night I listened to Michael Porter on NPR discuss his concept of "shared value". I first wrote about "shared value" here. Today in the email McKinsey announced that Dominic Barton has an article in the March issue of HBR entitled Capitalism for the Long Term. In the article he argues that leading corporations need to restore the public confidence in capitalism by in part taking a longer term view and by focusing on all the stakeholders in a corporation and not just the shareholders. Basically Barton is discussing the same concepts as Porter. It's like there is a big PR machine pushing shared value on us.
If we look at the major areas in which there has been significant improvement in productivity and cost savings in the last 10-20 years, three areas come to mind:
- Supply chain and logistics
- Customer acquisition and retention
- Administration (accounting, human resources, etc.)
I think that most large companies have wrung as much cost savings out of these areas as possible. The economic crisis of 2008 gave them the chance to wring out the last few dollars (and unnecessary jobs). Business schools have gotten very good at teaching this kind of productivity improvement and the resultant executives have learned to implement such approaches well....but we have reached the end of this game. There is not much more benefit to be derived from productivity improvement. So the executives face the hard choice of either learning how to innovate in new products to grow revenue or learning a new toolset called shared value as the way to increase profits.
What is this new frontier of shared value--simply the idea that margins can be improved or competitive advantage strengthened by looking at societal issues. Instead of the old way where people were replaced by APIs, we now look at employees and society as the way to increase profitability. For example, if we teach and encourage employees to behave in a more healthy way, we can reduce the expense of health insurance. Looking for ways to reduce carbon emissions may lead to less fuel consumption. Organizing peasant farmers into cooperatives reduces the expense of managing suppliers. This new approach to business will require a new management philosophy and a new executive toolset.
After listening to Porter and thinking more about shared value, I think that Porter is not contradicting Milton Friedman's maxim that the corporation's role is to maximize shareholder return. In fact, I think that Porter is just proposing a new area in which corporations should focus to increase their profitability. Personally, I am indifferent between whether we start with profit and end up benefiting society or if we start with benefiting society and then figure out the economics (social entrepreneurship). In the end society benefits.
The question that now concerns me is why did it take us until 2011 for someone to articulate an approach whereby focusing on society is consistent with return maximization. I do not think it was that anti-business sentiment finally reached a level at which corporate America had to respond. I rather think that big business can only cope with one big idea at a time and IT/integration/productivity was that idea for the last twenty years. I am sure that over time business school curriculum will be shaped by Porter's shared value concept. What someone should study is the failing in business school education that the graduating executives can only manage one big idea at a time. Shared value is long overdue in corporate America.
Image via Wikipedia
