Michael Porter, strategy guru extraordinaire, and Mark Kramer have an article in the January 2011 issue of Harvard Business Review entitled How To Fix Capitalism. HBR has headlined the article in vivid red letters as “the big idea” on the cover, so that we are compelled to pay attention.
Umair Haque, the author of the wonderful new book, The New Capitalist Manifesto, offers a positive interpretation of the article on Twitter and notes Porter's 10 minute video on the HBR website:
"Delighted to see Michael Porter's new themes, rethinking capitalism + creating real value, strikingly echo my new book. http://bit.ly/hydDuH"
I am also delighted to see Porter, Kramer and HBR addressing the question of how to fix capitalism. I would have been even more delighted if the article had offered a real fix.
The argument of the article and the video
The video is entitled "Rethinking Capitalism" (rather than "How to Fix Capitalism"). It echoes the article, apart from the title. It starts out by saying that capitalism has an image problem. Then Porter gradually slides into the notion that capitalism today has certain real problems, including waves of restructuring, personnel reductions, relocation to lower cost regions, commoditization, price competition, little true innovation and slow organic growth,
In the video, Porter rightly questions the argument that what is good for business is necessarily good for society. He implies that in the elevated business circles in which he operates questioning such a straw man argument is seen as being radical.
He goes on to suggest that "the solution" is to see that what is good for society can also be good for business. Business has missed profit opportunities. It has not explored those profit opportunities that would benefit society. For instance, a firm can make "gobs of money" out of the environment by reducing energy costs, or by producing healthy food products. If firms focus on these additional profit opportunities, they will make a lot more money and society will be better off than it otherwise would be. The beauty of his solution is that capitalism can go on operating as it always has: no fundamental change is needed. There is no need to change managerial practices or behavior. Just a minor tweak of the "value chain" and, "open sesame!" Suddenly a whole new set of profit opportunites open up.
This, he says, is the next chapter in strategy and "value chains". He says that conventional strategy models have become exhausted. His new model offers additional profit opportunities that will differentiate a firm. For instance, Whole Foods has made a lot of money by offering high quality food.
No need to choose
The video is particularly interesting in that Porter has made his reputation in strategy and by insisting that the role of top management is to choose. In Porter's view, the greatest failure of management over the years has been its failure to make a strategic choice.
However when asked in the video whether companies will have to choose between making profits and serving society, Porter says no: companies should be able find "copious opportunities" to do both. In this instance, no need to choose.
The next step, he says, is to develop the analytic models, value chains and the toolkits, which his company be happy to provide (presumably for a fee) to companies so that they can implement his ideas.
He presents his ideas as the antidote to current Corporate Social Responsibility (CSR) programs, which, he says, typically involve making random donations to charity. This, he says, is an approach that has come to the end of the road.
His approach, he says, is an improvement on those programs, although one is tempted to think that he has caricatured many CSR programs so as to make his “new approach” look like a clear improvement.
I agree that Porter's approach is an improvement on the caricature.
But it is a big leap to suggest that his approach will "fix capitalism". Even on the limited definition of capitalism’s problem offered in the article, the approach does not offer a solution.
The GE story
Thus Porter and Kramer are impressed that GE had as much as $18 billion of ecologically friendly products (“Ecomagination”) in 2009 and that these products are growing faster than the rest of GE’s business.
To be sure, it is good to see GE making progress of this kind. However the relative size of the gains needs to be kept in mind: $18 billion is only 11.5% of GE’s total sales. Thus 88.5% of GE’s sales are still “business as usual” i.e. not ecologically friendly. In public relations term, we do not have a different view of GE as a whole, simply because 11.5% of its overall business is now ecologically friendly. The question in thinking people’s minds is: when will GE get around to doing something about the rest of its business?
It’s like the Safeway supermarket in my neighborhood that not so long ago opened a small counter offering organic products while the rest of the large store continued with its usual stuff. I am happy that the organic counter now exists, but my image of the supermarket as a whole hasn’t fundamentally changed.
The problems of capitalism missed
More seriously, one would never guess from the article or the video the deeper and well-documented problems of capitalism, such as
- the rate of return on assets on US firms is now a quarter of what it was in 1965;
- the life expectancy of firms in the Fortune 500 has declined to 15 years, and is heading towards 5 years.
- only one in five workers is fully engaged in his or her work.
- 84% of workers in the US plan to look for another job in 2011.
- established firms created zero net new jobs between 1980 and 2005.
The Walmart story
Thus ecological progress is only one part of capitalism’s negative image or real problems. For instance, Walmart is making commendable, even extraordinary, efforts to put all of its activities on a sounder ecological basis. However good progress in ecological terms does not erase the extraordinary asocial nature of Walmart’s practices in other areas, including underpayment of workers resulting in a need for public support through food stamps and welfare payments, underhand tactics to prevent unionization and the negative effects on employment and small business in the locations of its stores.
The intellectual quality of the article
If I were to grade the Porter/Kramer article as an undergraduate essay, I would give it a C-. The title is "how to fix capitalism" but the article never makes up its mind as to what is being fixed or why. It oscillates between two views as to what is wrong: an image problem or a set of substantive problems. The substantive problems that it alludes to are only part of a larger set of problems. The remedies suggested would not resolve even the image problem, or the substantive problems noted in the article, let alone the larger set of substantive problems which it doesn't mention. The article is not wholly lacking in substance, but it is lacking in intellectual coherence. So it would escape getting an F, but only just.
Capitalism 2.0 vs Capitalism 3.0
As Rod Collins, author of Leadership in a Wiki World, has pointed out to me, Porter’s thinking about expanding value chains to include socially worthwhile opportunities reflects the continuation of shareholder capitalism and has yet to come to terms with the implications of customer capitalism.
Thus the article makes no reference to the 'three ages of capitalism" defined in Roger Martin’s landmark article in HBR of January 2010 entitled “The Age of Customer Capitalism". That article argued persuasively that, following the periods of “managerial capitalism” and “shareholder capitalism”, which one might call respectively “Capitalism 1.0” and “Capitalism 2.0” we are entering a new and very different third era of capitalism - "customer capitalism" or “Capitalism 3.0”. Porter and Kramer are still mired in Capitalism 2.0.
The real change needed in capitalism is not just evolving the second era of "shareholder capitalism" to include the shared values of both business and societal stakeholders and find more profit opportunities in socially worthwhile goals, or fine-tuning value chains that operate from an inside-out perspective while "parsing and manufacturing demand".
That's essentially a "push" strategy in today's "pull" world, as John Hagel, John Seely Brown and Lang Davison would put it in The Power of Pull.
Capitalism 3.0 and a real fix
The real change needed is the development of Capitalism 3.0 and a wholesale revolution in management thinking focused on "delighting customers" and redefining managerial roles, coordination mechansisms, values and communications so that everyone and everything in the firm is oriented towards accomplishing this goal.
It means reversing the value chain and starting from what would delight the client and focusing the entire organization on that goal. When this is done, as Apple shows, the returns can be extraordinary: its share price is more than fifteen times higher than a decade ago.
One can agree wholeheartedly with Porter, Kramer and HBR that capitalism needs fixing. The extent of the fix offered in the Porter/Kramer article however is limited to that of fixing capitalism's image problem and tweaking the value chain so as to find more profit opportunities for the Fortune 500.
One regrets that the fix deals with only part of the problems from which capitalism is suffering. When a patient is suffering from a lethal disease like cancer, survival depends on adjusting the metabolism through radical surgery or chemotherapy. In this case, all we are offered is a bandage .
Also: read later posts on how to fix capitalism: