Sunday, July 28, 2013

Sustainability in Value Creation

A)     Introduction
Against the historical background of economic booms and busts, companies big and small come and go over time. There is no shortage of academic literature on business management and practical prescriptions – from consultants, journalists, celebrities and even the likes of witch-doctors - on what makes companies strong and how they can endure through time over adversity. In the discipline of business strategy, for example, the contribution in thinking and researches by those big names of consultancy – Boston Consultant Group, Bain & Company and McKinsey & Company - is particularly inspiring and even far-reaching in influencing business practices in real life. However, of course, no studies or strategies guarantees success for any individual firm and, arguably, there is hardly any absolute truth in business disciplines in a purely scientific sense. One may even logically ask where strategy was when the global financial system collapsed. In reality, only fragility seems to be the very nature of business in the environment of economic and industrial volatility. Despite that, indeed because of that, the pursuit of intelligence, knowledge and wisdom in business management is more relevant and urgent in our contemporary age of disillusion - as defined by an era of severe financial crisis, seemingly endless monetary turmoil, at the same time, increasing calls for social justice and environmental protection from various parts of the world – than ever.

It is in this context, and also as inspired by our EMBA trip to the Netherlands, that the quest for sustainability forms a core theme for our assignment. But our focus is more on business survival and prosperity in the context of conceivable social and other environmental challenges - hence sustainable value creation - than on the conservation of the ecological environment per se, though, as we shall argue, the two focuses should be aligned after all. Given the limitation of time and space, however, we shall align our thoughts along but three main perspectives - people, innovation and platform – and, in particular, how learning in these dimensions contributes to value creation and sustainability. But in order to sharpen our focus and to ensure the logical rigor of our argument, we shall start with defining the relevant ideas of value and sustainability in clearer terms.

B)     Value
It was perhaps since Michael Porter’s concept of value chain that the focus on value began to be most prevalent in business thinking, although, no doubt, relevant studies on the idea could have come much earlier. Intuitively, in business terms, value is most commonly perceived as a company’s earning or profit. But, by definition, as the equivalent worth or importance, not necessarily in monetary terms, of something to a person, value is subjective and can be interpreted as whatever that makes the person happy in his own way. As such, it is even logical to simply define value as happiness.
A fundamental understanding of the idea of value is critically important for business management because the very subjectivity of the concept means that value creation is inherently a process of balancing acts and trade-offs among varied and even possibly conflicting interests. As the early days of capitalism were tinted with Marx-advocated class struggles, businesses’ value creation was mostly characterized by the conflict between owners and workers. The French revolution and all ensuing political liberalization in the West no doubt helped set the economic and social scene for collective bargaining as the legitimate framework for resolving that structural conflict.  The creation and rise of the social middle class, however, gradually ushered in an age of consumerism where the customer was always right. As such, customers were progressively gaining a larger share of a firm’s value chain, depressing business margins, particularly in competitive industries. Along with globalization and the industrial focus on logistics’ efficiency, subsequently, a value chain is no more restricted to a firm’s context but extended to the whole supply chain. As a result, the company’s balancing acts have to be played out on a much broader basis, along with the suppliers.
As the world’s Green movements have been gathering momentum since time hardly memorable, nowadays, companies have to take responsibilities of not just the costs of doing business but those of externalities. Corporate Social Responsibilities have long evolved from mere buzzwords and lip services to serious commitments to preservation of the natural environment and conservation of social stability. Against the evolving background of ever-increasing demand of varied interests on companies as corporate citizens, therefore, the legitimacy of business leaders to lead could only rest on a platform of shared values – among shareholders, employees, customers, suppliers, other partners, and other social interest groups. Value creation, as such, is no more simply about hard-headed profit maximization of the old capitalistic days, but a dynamic process of collaboration and co-creation for common interests. 

Of all companies or institutions visited on our trip to the Netherlands, perhaps Rabobank offered the best example of a business formed out of people’s common interests and their determination for co-creating shared values. It was founded 110 years ago by the small farmers who felt the common need to look after their wealth collectively and to help each other to grow their agriculture businesses. Solidarity was clearly as important as profitability for the alternative Rabobank. As such, the bank made the conscious decision not to have it floated on the stock market even it has well surpassed the financial conditions to do so, lest it losing control over its uniquely sustainable process of value creation. 

C)     Sustainability
The focus on the idea of sustainability usually falls under three dimensions – social, economic and ecological – which, however, are closely related to each other. People’s concern about how they could co-habit peacefully together, hence the sustainability of sovereign and social cohesion - if not harmony - could have begun as early as the start of civilization. Paradoxically, the mere fact of wars and the evolution of political activities over history are sufficient testaments to it. As economic intelligence grew, however, people became conscious about the need for long term planning for commercial activities and how they could endure the business cycles of ups and downs, hence the economic sustainability of enterprises. Then, perhaps out of a long process of conscientious awakening of the human race, the concern for sustainability about the ecological environment primarily stemmed from the ongoing depletion of natural resources by mankind and all ensuing damages inflicted on it by all human activities over generations. On one account, sustainability "concerns the specification of a set of actions to be taken by present persons that will not diminish the prospects of future persons to enjoy levels of consumption, wealth, utility or welfare comparable to those enjoyed by present persons." (1)

Indeed, increasingly, a business’ concern about its ability to endure is no more just restricted to the sustainability of market demand, henceforth, its revenue stream, cash flow and profitability, but related to its impact on the immediate social and even the remote ecological environments, and the subsequent social and environmental reaction it may have to deal with. The ideal business model of sustainability, therefore, is one which not only establishes shared values among the business’ immediate stakeholders, but accommodates multiple perspectives of demand from the societies it serves, and does so for the long term towards eternity. But the big question is: How?

D)     People
A sustainable business model needs to start with the people, more precisely, their mindset – be they entrepreneurs or business executives. It needs to be awakened to the fundamental truth underlying the façade of all human activities – political, economic and social:

  1. The interconnectivity of all things in the world means that the life and death of one part of it may affect that of the other in one way or another, and vice versa. Though not necessarily played out in a readily conceivable manner, the cause and effect relationship is everywhere.
  2. Collectivity is the nature of any society. As such, individualism has to rest on mutual-respect; peace and harmony on common interests; and prosperity on shared values.   
  3. Given ongoing changes in all dimensions in the surrounding environment, business leaders need to be mentally prepared to be engaged in dynamic balancing acts on a perpetual basis. No so-called normalcy should be taken for granted.
  4. As such, without compromising the bottom line of core values, i.e., a person’s integrity, adaptability is a key to sustainability – in particular, the capacity for paradigm shifts and the capability to see light in various perspectives. 
  5. After all, for an organization or activity to be sustainably creating value towards eternity, i.e., crossing over generations, it has to be good for both mankind and the nature.
  6. At the personal level, sustainability is an attitude towards life. Fundamentally, it stems from the natural love for life, evolves out of the conscious mind for the preservation of its beauty, and should result in a person’s ongoing effort for continuous learning and action for improving lives.
  7. Fundamentally, sustainability is about people’s ways of living and their harmonious co-existence with each other and the nature; therefore, wholehearted learning to do so is another key to it.
Given all the above considerations, a key mission for business leaders today is to create the right organizational environment and develop the right culture to facilitate mass learning for genuine awakening and align personal growth with the company’s direction of sustainable value creation.  

E)      Innovation
With the mindset awakened and well-tuned to the reality of all challenges, innovation has an indispensable role to play for sustainable value creation. But it calls for the vigilance about all conceivable world trends – political, economic and social - affecting a business and, most importantly, the ability to make and drive changes for ensuring the business riding on and benefiting from the trends instead of being damaged, let alone destroyed, by any of them.  For a company to be able to transform itself sustainably for the better, however, it also needs to possess the capability to deal with unforeseeable changes and, by way of learning, incorporate new information in shaping its organizational strategy in order to quickly adapt itself to the changes, perpetually building up its knowledge and wisdom for survival and prosperity.

Virtually every company and institution we visited in the Netherlands demonstrated their focus on both innovation and sustainability in one way or another. Philips’ mission is about “improving people’s lives through meaningful innovation”; Heineken ceaselessly reinvented itself by introducing new brands of product to the market to ensure its relevance to the world despite its century of heritage, which is also vividly showcased by way of its state-of-the-art Heineken Experience in Amsterdam; Tommy Hilfiger’s management humbly remind themselves that “most companies failed not for doing the wrong things, but for doing the right things for too long”.

There is no shortage of both failure and success stories about innovation in history, perhaps with IBM best serving for both. Failing to appreciate and ride on the evolutionary trend from mainframe to PC in the early 80s, the company went from world dominance to almost extinction in no time; but since it successfully reinvented itself from being a behemoth hardware supplier to a world-class IT solutions provider, it was reborn with a second life since the turn of the century.

The good news for business leaders is that the process of innovation can be systematically studied, as we ourselves have learnt from the course of “strategic management of innovation”. Another good news (or bad news, depending on whether you are the market leader or not) is that innovation does not necessarily have to be original, as the disruptive kind of innovation in an industry usually comes from some new entrant who successfully spots an unfulfilled niche from the bottom end of the market – particularly one over-served with sophisticated products by existing companies - and cleverly finds some sustainable way to fill it with popularly back-to-basic kind of product offering, e.g., the likes of Ryanair, Southwest Airlines and JetBlue.
Product innovation, however, needs to rest on the core value of integrity – and, as mentioned above, good for mankind and the nature - for it to be sustainable. The Chinese were pretty innovative in churning out fake products of all kinds, not least eggs and milk powder, but they hardly went too far before they got exposed and received what they deserved by demonstration of the law. But product innovation alone is not enough to guarantee sustainability of a business itself in today’s competitive environment in all industries. Indeed innovation should not be simply about product improvement but better ways of doing things or new ways for solving unresolved problems in the context of all three dimensions – social, economic and ecological - of sustainability. Ultimately, innovation should also be about turning liabilities into opportunities and turning weaknesses into strengths. For example, increasingly more companies are making sustainable earnings out of wastes management and recycling; hotels are reducing costs by proactively advocating to customers to avoid demanding their towels changed on a daily basis, hence reducing washing and protecting the ecological environment at the same time; and protecting the workforce by flexible deployment means, albeit at reduced incomes, instead of sole redundancy during business downturns will build and secure staff loyalty for a long time to come.

But the challenge for business leaders is as much about striking out the fruitful kinds of product and process innovation as finding and tapping into the right sources of creative ideas to do so. Again, the big question is: How?  

F)      Platform
As learning is a key to sustainability in value creation, as mentioned earlier, it needs to be facilitated through the right kind of organizational environment, which should also fertilize the exchanges of creative ideas for innovation. The Utrecht Science Park is one inspiring example to learn from: like an incubator for the commercialization of breakthrough ideas, it creates and maintains a platform for matching interested venture funds to talented projects, particularly in the area of bio-technology, which all have the same vein of focus in sustainability running through.

Thanks to today’s superlative online capabilities, the likes of Google and Amazon managed to build themselves up and achieve unprecedented scales of operation in no more than two decades – a feat certainly inconceivable and undreamt of in Carnegie’s and Rockefeller’s time. Fundamentally, however, the nature of interaction for value creation in the business world timelessly remains the same, that transactions can only result from effective networking and matching of supply and demand. The big difference from today is that the online world allows for all sorts of enterprises to build up platforms for networking on unprecedentedly huge scales, allowing collaboration on a global basis unrestricted by time zones. But the prime lesson for entrepreneurs and business leaders here is not so much about online networking for scaling up fast as about the strategy for platform building.

Indeed scale itself may not necessarily be a critical – though perhaps a favorable - factor for sustainability. Platform building is about fitting and matching. As a concept related to exchanges and synergy, it is through building and leveraging on the right platforms – as in websites, associations, committees or any alternative forms of gathering of individuals with common interests - that shared values can be established, talents can be tapped, ideas can be exchanged and, for value to be created and captured, transactions can be facilitated, on sustainable basis.

At a more fundamental level, platform is also about a company’s infrastructure of management processes and practices; ensuring that value is created out of the appropriate codes of conduct, rules of engagement and procedures of corporate governance. 

Of course, in today’s business world where geographical boundaries hardly make too much sense other than for the consideration of local tastes and tax regimes, scale does matter for both sustaining market demand and driving down costs. Nevertheless, the concept of platform building, in the context of both organic growth and mergers & acquisitions, is still essential for ramping up economic scale. 

G)     Conclusion
Given the limitation in space, this paper only highlights key considerations in the three dimensions – people, innovation and platform – for the pursuit of sustainability in value creation. Of course, the subject can well be studied in other alternative perspectives. After all, by the very definition of the concept as outlined above, sustainability in value creation calls for business leaders proactively breaking out from their comfort zones and inertia, therefore, also demands conscious succession planning for leadership development. But that is where the major challenge lies for most companies, especially for the Chinese owners – given the Chinese conventional and self-defeating bias that a family’s wealth and fortune never gets passed beyond the third generation. On the other hand, funny enough, there seems no shortage of family-run commercial empires having survived over centuries in the West.

Notwithstanding the focus of this paper, the common goal for sustainability in value creation should not be restricted within the business context, but extended to the political arena. For a promising start, it should form a major subject of education early on for the next generation and, progressively, it needs to find its way up the priority of political agenda on the world stage and stays there for the world’s attention and, hopefully, fruitful collaborative effort consistently.

So for the unending quest for sustainability, here is an interesting area for research: how do those centuries’ old enterprises sustain their values over time, and how do they possibly guarantee their sustainability into the future; and how can world leaders help? Our intent to explore it and to write up our original literature for contributing to the world’s wisdom in this subject is a proposition with which we end this short paper.
Although our EMBA program is coming to a close, our pursuit for learning will never end. Indeed, the completion of the program, which itself serves as a fruitful platform for bonding, learning and value creation of our own, marks the beginning of no doubt plenty of social and business initiatives - not least the enterprise some of us have formed in the name of InspirElite - to come in our life time. We are determinedly shaping our own sustainable path of value creation.

(1) Bromley, Daniel W. (2008). "Sustainability", The New Palgrave Dictionary of Economics, 2nd Edition.

(*) Gratitude and compliments from the blogger are due for his EMBA teammates at CUHK: Jason Wong, John Kwong, Kenny Chan, Kenny Tsung & Marston Wong         

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