In an earlier piece, I discussed the concept of a “cluster strategy” by which firms that operate in close physical proximity to one another (such as locators in Special Economic Zones) form a collaborative network among themselves for the purpose of virtually achieving economies of scale, effectively enhancing the scope of their operations, and enjoying the strategic benefits arising from networking. Such a strategy enables firms to remain small and agile while enjoying the advantages usually associated with size.
This piece focuses on a special application of clustering which I term “collaborative inclusivity” -- the implementation of inclusive business models in partnership with other business establishments.
NON-INCLUSIVE GROWTH AND THE CASE FOR INCLUSIVE BUSINESS MODELS
The topic that dominated the Fortune/Time Global Forum held in Rome in December 2016 was the continued worsening in the distribution of wealth and increasing economic inequality both among and within the nations of the world. The two-day conference was devoted in its entirety on how to deal with this distressing trend and the consequent prevalence of poverty amidst plenty.
The forum participants were quick to concede that business has been complicit in the deteriorating world economic order and in the apparent failure of Western capitalism to spread the benefits of economic growth to all segments of society. There was consensus among the conferees that in order to thrive in an increasingly hostile global economic environment, business must find a new role for itself by making a “strategic shift,” one that would bring business and society together in what Lynn Forester de Rothschild, CEO of the Edmund de Rothschild Investment Partners, calls “Inclusive Capitalism.”
While aiming for such a major strategic shift makes good sound bite, it is problematic to pull off as it requires a 180-degree turn from the manner in which business firms pursue their traditional goal of profit maximization.
The crux of the matter is how profit-seeking firms can co-align the economic interests of their owners -- or shareholders, in the case of public corporations -- with those of the other groups which have a stake in the business, and who contribute to the process of value creation. Foremost among these stakeholders are the workers, the customers, and the communities of which business firms are an integral part.
We are particularly concerned here with how businesses can help solve social ills and alleviate poverty while pursuing their usual financial interests.
RETHINKING THE GOAL OF PROFIT MAXIMIZATION
We resolutely adhere to the goal of profit maximization as the primary motivation for value creation in a capitalistic society.
However, we believe that pursuing profits with single-minded determination and being driven by the overpowering urge to make big money often leads to short-sighted choices that may yield desirable immediate financial results for the business, but are detrimental to its continued profitability and survival over the long haul.
For example, cutting cost corners by underpaying workers often leads to low employee motivation and poor quality of work, while scrimping on customer service or product quality leads to customer dissatisfaction and loss of sales, conditions which no self-respecting business establishment can long endure.
More pointedly, we contend that the sustainability of the business can only be achieved in a sustainable business environment. An environment characterized by increasingly widespread poverty and unequal economic opportunities is not sustainable. One can only conclude therefore that addressing the social and economic needs of society is in the strategic (i.e., long-run) interest of businesses.
This brings us to the notion of inclusive business model (IBM).
IBMs are business solutions that provide access to economic opportunities for low-income communities in a manner that will help businesses become more viable and sustainable -- in a word, profitable. Not to be confused with Corporate Social Responsibility (CSR), IBMs are implemented by incorporating low-income populations in the management of the firms’ supply chains in order to be assured of a continuous source of well-trained and highly capable workers, constant and reliable supplies of raw material, and steady increases in sales revenue from poor customers who benefit from inexpensive versions of their products and services.
Coca Cola’s 5by20 initiative is illustrative of how a company can help serve the needs of society and at the same time pursue its long-run business interests. Launched in 2010, the purpose of this highly touted and universally admired IBM is to train and assist 5 million women entrepreneurs, mostly market vendors, stall operators, and small shop owners, across Coca Cola’s global value chain by the year 2020. The ultimate goal of this endeavor is to hasten economic growth and promote sustainable development in the over 200 countries where the company operates and thereby expand its distribution network and market reach in the remotest and poorest regions of the globe. Anyway one looks at it, this is CSR, philanthropy and smart business move all rolled up into one!
Because of their large sizes and extended value networks, multinational corporations and large conglomerates have a clear advantage over small and medium-sized enterprises (SMEs) in the implementation of IBMs. Small businesses simply do not have the critical mass of resources to help solve social problems, such as poverty and inequality on their own, and at the same time address their individual strategic needs. What small firms in the same (or similar) industries can do is to band together in developing common platforms from which to embark on collaborative IBMs.
By pooling their resources together and sharing their individual supply chains to form expanded value networks, they can, by their collective action, play an important role in helping solve the social and economic problems faced by their communities, and at the same time enable them to achieve their long-term business objectives.
The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or the MAP.
Dr. Niceto S. Poblador is a retired UP Professor, and until recently was Professorial Lecturer at the UP School of Economics.