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Investing in the Commons

October 4, 2012

Harvard Business School representatives, led by Michael Porter, were in Chicago Monday, to talk about their U.S. Competitiveness Project.  On the whole, it was a thoughtful series of presentations by both professors and local Chicago business people.  I consider three aspects they introduced here:

1.  Inadequacy of current financial tools:  Off-shoring was discussed at length.  Professor Porter had some observations about the limitations of traditional financial analyses, which often seemed to support off-shoring due to the large wage differentials, but don’t take into adequate account the other considerable costs and risks:

– distance from markets and less predictable transit times with the corresponding lengthening of response times, a competitive disadvantage in dynamic markets
– inventory costs in transit
– quality and inspection issues
– differences in workforce skills and communication challenges
– local inflation trends affecting wages
– lack of supporting infrastructure, and so on.

Basically, Porter seemed to suggest that traditional financial analyses are not been sufficiently broad in their scope to capture the full cost/benefit/risk picture, resulting in decisions that have a very short shelf life, quickly becoming uneconomic.

I agree.  The financial metrics taught in most business programs are insufficient for today’s world.  I think Peter Soyka, author of Creating a Sustainable Organization, would emphatically say that business financial practices are even more inadequate when it comes to capturing the full economic benefits of sustainable business practices.  I will talk about that in a later post.

2.  Business need to  understand the U.S. industrial eco-system – or “industrial commons.”  Professor Jan Rivkin noted that companies historically invested in their locales, as every business draws on the resources of those locales, such as an educated workforce, vibrant transportation and supplier networks, and an astute legal system providing a level playing field and protecting IP.  With globalization, and the capability to do business from anywhere to anywhere, many executives concluded they no longer needed to “put down roots.”  In Rivkin’s words, “The problem is when you do that, the commons gets run down.  You start to not have the skilled workforce you need.  You don’t have capable suppliers.”  That happens wherever a business is, over time, unless there is some compensating force.

There are strong parallels to our planet’s Natural Capital….. the real commons of clean air, clean water, artificial-toxin-free and robust soils, their supportive biodiversity and a protective atmosphere.  If we don’t all take care of these life-critical factors, they may disappear, as will we.  Sad to say, the environmental commons were only indirectly alluded to as “resources.”

3.  Recognize that business has created the monster – the regulatory environment and overcomplicated taxation systems.  Kudos to Mike Porter for stating this, albeit tentatively.  He continued that we businesses need to tackle the issues… we need to use our influence to make the whole system work better.  “We cannot grouse – we must take on the issues.”

Porter then reiterated an earlier theme: that businesses must recognize that it is facing a challenge of legitimacy in the minds of the public.  He challenged business to do three things:

a.  Run the business well.  Be innovative and productive.  Be mindful of all your stakeholders.
b.  Strengthen the commons in the U.S. communities (and here I would also include the environmental commons)
c.  Shift the business-government relationship away from narrow self-interests toward general business environment improvement (here too, the natural environment plays an important part).

For only two hours, a lot was put on the table.

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