Michael Porter: Rethinking Capitalism the Next Major Business Transformation

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The View from Harvard Business

Few people are as associated with modern capitalism as Harvard Business School professor Michael Porter, whose theories on strategy and competitiveness have shaped the direction of countless corporations.

So his latest article in Harvard Business Review comes as a shocker. Porter, writing with coauthor Mark R. Kramer, a senior fellow at Harvard Kennedy School, argues that companies are locked in an “outdated” approach to creating value, focused on short-term profit while forgetting what they can do to benefit society–investments, by the way, that would pay off by ensuring long-term success.

One result: People have justifiably lost trust in business and are even questioning the very notion of capitalism.

Here is their bleak outlook on the short-term vision of modern business:

“How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable ’solution’ to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.”

The idea that business has sold its soul in the pursuit of quick profit is nothing new, of course. But Porter and Kramer bring to the party a wealth of knowledge on the mutual benefits derived from a linking of economic and social goals.

And they create a new vision of how to get it done, a framework they call the “principle of shared value.”

The solution “involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”

Some of the other highlights:

New skills required. Leaders and managers must develop skills and knowledge that give them a keen appreciation of societal needs, the ability to work across profit/nonprofit boundaries, and a deep understanding of how business productivity serves more than shareholders.

Government’s role re-conceived. Regulators must create policies, regulations and laws in ways that support shared value rather than work against it.

Broaden the role of capitalism. Companies have taken too narrow a definition of capitalism. We should be looking to business you do of the latter, the more strategic you are to the organization. Right?

Wrong. Of course wrong. Your HR department is not tied directly to P&L, yet the policies it creates, hiring it does, and staff development opportunities it pursues are all directed at bringing in the smartest people and tuning them to company culture so they can be most effective.

Still, the role of “support staff” is often perceived as not strategic, says Harvard Business School professor Ranjay Gulati.

“Most organizations tend to underutilize these functions,” Gulati tells HBS Working Knowledge. “For years there have been arguments regarding whether they should be centralized or decentralized, but the larger issue is, how do you leverage these people to maximize their impact?”

• People who fill these roles can develop inferiority complexes that causes some crazy defensive behavior. For example, since they cannot fulfill a “profit” role, they try to prove their worth on the “loss” side by becoming extreme cost cutters.

• Rather than try to contribute ideas, Gulati says, these employees create “rules, regulations, and spreadsheets” that turns them into naysayers loathed by colleagues.

• Business managers and the P&L leaders themselves can turn this behavior around by creating an environment of cross-collaboration, where these employees can act as catalysts for new ideas and company growth.

Easy to do? Not hardly. Changing a deeply embedded culture is one of the most difficult things any organization can tackle. But business managers can at least start the process by tapping their HR, marketing, and finance support staff for ideas. Bring them to the table, and not just when it’s time to cut costs or consolidate.

Have you seen staff identity crisis where you work? Is there a way out of it?

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Sean Silverthorne

Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001. Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News.

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