The following are the author’s remarks at the Financial Leader of the Year (FLY) awards dinner on October 4, 2017, sponsored by the McCracken Institute and Rollins College. This is Part 4 of 4.
To read Part 1, click here.
To read Part 2, click here.
To Read Part 3, click here.
But suppose you’re not a Millennial with the inclination to travel to Outer Mongolia to do business directly with goat herders. (I can tell you that’s not on my bucket list.) Suppose you work for a big company. Let’s say a global corporation… like Nestlé.
Nestlé is an $89 Billion food and beverage company. The company’s mission statement is “Good Food, Good Life.” If you’re an espresso drinker, you may be familiar with one of their products: Nespresso. Perhaps you’ve seen a TV ad that features these guys:
Nespresso follows the old Gillette razor blade business model. Nestle doesn’t exactly give away Nespresso machines like Gillette gave away razors. However, selling coffee in little pods is a very profitable business for them. And, it enjoyed 30% annual growth in its first decade on the market. It’s fair to say that Nespresso expanded the market for premium coffee and, simultaneously created a huge problem for Nestle:
Where would they obtain a reliable source of coffee to feed the demand they had created?
The traditional playbook for procurement managers is to commoditize the supply and drive the price down, particularly when buying from much smaller businesses. Coffee farmers fit that mold. Most coffees are grown in rural areas in Africa and Latin America. Small farmers living on subsistence incomes are trapped in poverty. Their farms were characterized by low productivity, poor quality, and environmental degradation.
And, much like our mohair guys, they sell to middlemen who reap most of the profits in the supply chain.
So, Nestle did something like what the mohair guys did. They established local facilities to measure the quality of coffee at the point of purchase, which allowed them to pay a higher price to the farmers.
They also provided advice on best farming practices and guaranteed bank loans to the farmers so they could purchase better plant stock, fertilizers, and pesticides.
Nestle also discovered something else: dealing directly with local suppliers eliminates inefficiencies in the supply chain, lowering their costs.
Think about how difficult this project must have been. Not only did someone in a senior position have to sign off but also everyone in supply chain management had to change their worldview, if not their job description.
Think about it this way. A popular consumer trend right now is the Fair Trade movement. The idea is to pay poor farmers higher prices for the same crops. As noble as this sounds, it’s really about redistribution of income rather than creating more economic value.
The shared value approach focuses on creating economic value by improving product quality and crop yields. So, the profit pie is larger and everyone benefits.
If you’ve earned your MBA in the last half-century, you were likely taught to focus solely on creating shareholder value. Milton Friedman promoted a paradigm where businesses measure their contribution to society by making a profit, which supports employment, wages, purchases, investments and taxes. We must now reconsider. Companies can create more sustainable economic value by creating social value.
Every decision must be made in the context of its impact on the global community. To succeed, you and your colleagues must ask a different set of questions.
There are efficiencies to be gained by any company when making decisions about energy and water use. Is there a corporate/government partnership that would result in improved environmental impact and lower costs?
Healthy, happy employees with stable families and communities reap rewards for employers. How can you improve not only employee skills but also worker safety and health?
Think of the possibilities. Banks can make more loans if families are more creditworthy. They can contribute to their communities and earn more profits by providing low cost or even free financial planning services.
Companies with high transportation costs can convert to environmentally friendly power supplies improving both environmental impact and their cost profile.
Information technology companies can deploy digital tools to improve the efficiency of power plants.
What’s implied by these examples is a change in corporate culture. Culture is about behavior and it starts at the top. If the CEO asks the right questions, so will senior management and, eventually, middle managers and front line supervisors.
If the behaviors are defined and articulated in writing, they form a framework for every decision. If management celebrates the successes, the values will be reinforced. Before long, the culture will be ingrained with a new perspective.
I’ve always been a fan of Milton Freidman. In 1970, he summarized his philosophy very neatly in a NY Times essay. Referring the inclination among corporate leaders to pursue social as well as corporate objectives, he suggested that any CEO who did so was spending someone else’s money.
He made these comments a good decade or so before globalization became an imperative for businesses. Once corporations started building factories in developing countries, they lost their connection to local communities in their home countries.
Friedman’s point is still valid. Corporate Social Responsibility as it’s now called is an expense – one that’s often justified as part of the company’s brand. Like any expense, it clearly reduces shareholder returns.
But, Porter’s approach overcomes that objection. He proposes win-win solutions. Better outcomes for stakeholders and more profit for corporations.
Yes, our prosperity is like oxygen. You need it in order to live but it’s not what you live for.