Business ethics (Strategic Dimension)

Business Ethics – Strategic PerspectiveDR. C.C. TANSCHOOL OF MANAGEMENTMAE FAH LUANG UNIVERSITY

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Historian Ethics

Philosophies

Who – For whose sake

How – Power, Free Choice

What – Inner Calm, Good is Pleasure, Greatest Good for the Greatest Numbers

Why – the Right thing to do, duty, good or bad, or on God’s hands, using Rationality

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Right Good

Other Justification i.e. Culture, Principles, Historian Philosophies, Religious Beliefs, Business Best

Practices, Self-Interest, New Beliefs and Paradigm such as Environmental Sustainability.

Doing the Right things i.e. Being honest, not cheating, have justice and being fair. Deontological theory of ethics Moral Standard

Doing what is good – purpose and for whose is good such as individual and organizational (tactical ethics), the voices of majority and society level (Social ethics) and environment and earth (transcendental ethics). Teleological theory of ethics Non-Moral Standard.

Business Ethics

Provide reasons for what is right and what is good.

Provide reasons for what is right and what is good.

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Self-Interest/Disinterest

Non-Moral Standard

Moral Standard

Temptation Zone:

Threshold / Conscience kicks in

Deontology theory of ethics: The right thing to do – justice, honesty,

fairness Based on the characteristics of the behavior. How to fairly distribute rewards or outputs to

people who are in need, who contribute. For instance, how to distribute / allocate outcomes such as pay, rewards, recognition and promotion relative to an employee’s input as well as retribution.

Thus a distributive justice.

Teleological theory of ethics: Based on the goals or what is goof for the

majority i.e. rules and laws, and policies like the Food and Drug Administration’s policies.

Thus a procedural justice.

Good Right

Self-Interest

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Philosophy: Believing in re-

generative sustainable environments

Policy (Motivation): Learning from the

Nature policy to self-regenerate and reproduce

C2C (Cradle to Cradle Knowledge and Certification)

Patterns of Behaviors (Strategies): Biodegradable

Shoes Business Green Roof

Buildings C2C Car Concept

– the Ford Model U

Change begins with awareness

A strategic management

approach to business ethics

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What consumers know about a company can influence their evaluations of products introduced by the company and corporate social responsibility (CSR) actions and commitment can lead to productive corporate association which can serve as an important context for the evaluation of a company’s products and services.

Your company’s actions: CSR

Build company association

Consumers’ evaluation of your products and services

Organization’s image

Organization’s image could influence the extent of member identification with the organization.

Organization’s image can also serve as a reputation barrier in a market

Image

CSR

Image

Image

Image

Cust

om

ers

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Company’s Rivalry

New entry

Reputation serves several functions, as an effective entry barrier in the market, a mechanism to enable the firm to receive premium prices for its output, a basis for repeat business

New substitute

Bargaining power of consumers

Bargaining power of suppliers

Consumers became increasingly dissatisfied with product performance, deceptive and/or unsafe business practices and marketer handling of complaints.

The rights of consumers were proclaimed by the U.S.A. President, John F. Kennedy, in 1962, in what became known as the “consumers’ Magna Carta”.

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Consumers’ Magna Carta: The right to safety The right to be informed The right to choose The right to be heard.

A combination of all four of these rights gives rise to a “right” which Kotler regards as the “most radical and the most basic challenge to the traditional rights of marketers, and that is the right to influence products and marketing practices in directions that will increase the quality of life.” (Kotler, 1972).

This right implies that profitability and immediate consumer gratification are not sufficient fulfillment of marketing’s responsibility, and that marketing activities and products must, in addition, be “life-enhancing” because the world’s resources are too limited to be used indiscriminately to satisfy customer desires without considering the social wisdom of doing so.

Kotler, P. (1972), “What Consumerism Means for Marketers,” Harvard Business Review, 50, pp. 48-57.

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HeardInformed

Choose

Safety

Marketing Quality of LifeLimited Resources

Company’s Rivalry

New entry

New substitute

Bargaining power of consumersOrBargaining power of other stakeholders in addition to consumers

Bargaining power of suppliers

?

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From the marketing to the societal marketing concept: The essence of the marketing concept which reached its apotheosis in the early

1960s has been described by Kotler (1972) as a “consumer orientation backed by integrated marketing aimed at generating customer satisfaction as the key to attaining long-run profitable volume.”

Bell and Emory (1971) identified its three basic elements as a customer orientation: Studying and understanding customer needs, wants and behavior, not

excluding “stimulated” needs and wants. An integrated effort i.e. a systems approach coordinating the elements of the

marketing mix, and A Profit orientation.

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Supply Activities

Resources i.e. Cost.

Products and Services: Values

Integrated Marketing

Customer Satisfaction

Profit

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From the marketing to the societal marketing concept: In the 1960s marketing writers such as Lazer (1969) still advocated growth through

consumption. He saw marketing as an instrument of social control, designed to convert society from a producer to a consumer culture. By changing norms and values in favor of greater consumption, society would be more able to adapt to the requirements of an abundant economy.

Products and Services: Values

Integrated Marketing

Customer Satisfaction

Profit

Consumer Culture? Sustainability Culture?

Producer Culture? Sustainability Culture?

Supply Activities

Resources i.e. Cost.

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Profit Orientation (Growth) Producer culture Consumer culture

Integrated Marketing Effort through satisfying the stimulated needs and wants (Consumption) within an abundant economy (View)

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By the 1970s, however, as it became clear that society’s resources were finite and its environment damageable, writers like Feldman (1971), Kotler and Levy (1971) became critical of the emphasis on material consumption without consideration of societal benefit.

Dawson (1969) also regarded the original marketing concept as having certain inherent weaknesses. Dawson argued that the customers of a particular business are only a minority group in society as a whole, and he cited the tobacco industry as a classic case of an industry which has always been particularly attentive to customer satisfaction (for example, different shapes, styles and tastes of its products) yet it is one facing increasing unpopularity, particularly amongst those sections of society which are not its customers. Thus the marketing concept emphasized – and sought to satisfy – selfish interests of the individual in his role only as consumer and was seen as uni-dimensional and narrow in outlook.

According to Dawson (1969) “market considerations alone, even long run, can no longer determine what is good or bad, right or wrong, prudent or imprudent, urgent or non-urgent in the business community.”

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View (New Paradigm): Env. Damageable and

thus resources are finite.

Need multi-dimensional and wider perspectives in outlook

e.g., Moral Standards

Kotler (1972) saw the main problem as arising from the ambiguity of the term “customer satisfaction.” It could mean either short-run customer desires or long-run customer interests.

Kotler cited cigarettes and alcohol as classic products which provide immediate satisfaction but may be detrimental in the long-run.

The inadequacies of the marketing concept thus center around its short-run operational focus on profit, with the satisfaction of the consumer not a goal in itself, but merely a means to this end; its emphasis on material consumption without consideration of the long-run societal or environmental impact of this policy; its narrow stress on the individual and the gratification of immediate and selfish wants without concern for long-run consumer interests.

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View: From producer or consumption views to more proactive, environmental and society friendliness views

Means (Strategy) Customer

Satisfaction Green

Approach

End: Short-term

desire Long-term

interests and benefits

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Transcendental Ethics

Social Context

Tactical Ethics(Self-Interest)

Right Good

Other rationales

Ethics

Innovative business strategies, actions, and behaviors

Level / ApproachJustification / Judgment

Short-Run Operational Focus on Profit

Long-Run Society and Environment Sustainability

Well-being of people Smartness of people

Profit driven marketing concept

Profit driven marketing concept but added on with some ethical consideration. Information – to make

intelligent purchase decision Moral duty Fair and justice Long-run consumer welfare Avoid deleterious

consequences of society

The societal marketing concept: Like the marketing concept, the societal concept of marketing recognizes profit

as a major business motive and counsels firms to market goods and services that will satisfy consumers under circumstances that are fair to consumers and that enable them to make intelligent purchase decisions, and counsels firms to avoid marketing practices that have deleterious consequences for society.

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Dawson’s (1969) conception of societal marketing goes considerably further than that of Kotler (1972).

Dawson’s “human concept” entails a widening of business concerns on three levels: The internal environment (human resources within the organization) The proximate environment (consumers, competitors, suppliers and distributors) The ultimate environment (society in general).

This third level is the most far-reaching and refers to the achievement of a genuine external social purpose by contributing to the identification and fulfillment of real human needs such as security, dignity and spiritual solace.

Dawson requires from business a commitment to the solution of the social problems of the world and argues that if profits are viewed in sufficiently long-run and indirect terms, then the human concept can be said to contribute towards business survival and profitability. For, like Kotler, he has implicit faith in the theory that what is good in the long-run for society, is good for business.

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What is good in the long-run for society, is good for business

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Internal environment:

HR

Proximate environment:Consumers, competitors, suppliers, distributors

Ultimate environment:The society in general

3 Levels of the business stakeholders in societal marketing:

Communication: Feedback Consultation Negotiations

To fulfill human needs for security, dignity, and spiritual solace

Commitment Strategies Policies Organization Management

Business Environments:

Business:

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Self-actualization is different from all the previous needs. We don’t feel spurred into action by a sense of deficiency “Must find food…” “Must

make friends…”. Rather, we feel inspired

to grow, to explore our potential and become more of what we feel we can be. Maslow called self-actualization a growth need while all the rest are deficiency needs.

Physiological Needs: Hunger Thirst

Safety Needs: Security Protection

Social Needs: Sense of belonging Love

Esteem Needs: Self-Esteem Recognition

Self-Actualization

Self Transcendence

Deficiency Needs

Grow Needs

Deliverance Needs

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At the self transcendence level:

People view the world and their purpose in it in a more global scale

To identify with a cause greater than themselves, to experience a communion beyond the boundaries of the self.

As a person’s ability to obtain a unitive consciousness with other humans

Realizing that people is not independent from culture and environment.

Helping others to achieve self actualization.

what is good in the long-run for society, is good for business. This principle is in fact the basis upon which most proponents of societal

marketing expound their views. Other aspects of the societal marketing viewpoint are its emphasis on

communication between the business and its environment in the form of feedback mechanisms, consultations and negotiations between competitors, consumers and government agencies.

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Good for Society

Good for Business

Reference:

Bell, M.L. and Emory, C.W. (1971), “The Faltering Marketing Concept,” Journal of Marketing, 35, pp. 37-42.

Dawson, L.M. (1969), “The Human Concept: New Philosophy for Business,” Business Horizon, 12, pp. 29-38.

Feldman, L.P. (1971), “Societal Adaptation: A New Challenge for Marketing,” Journal of Marketing, 35, pp. 54-60.

Kotler, P. and Levy, S.J. (1971), “Demarketing, Yes, Demarketing,” Harvard Business Review, 49, pp. 74-80.

Lazer, W. (1969), “Marketing’s Changing Social Relationships,” Journal of Marketing, 33, pp. 3-9.

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In sum, what is business ethics: Ethics are concerned with doing good, or the right thing in a given human situation. Business ethics are concerned with an evaluation of business practices in the light

of some concept of human value, it looks at corporate profits not for their own sake but with respect to the achievement of some human good.

Vitell and Davis (1990) define business ethics as the “inquiry into the nature and grounds of moral judgments, standards and rules of conduct in situations involving business decisions” (p. 64). Thus ethics is concerned with the motivation for action rather than the action itself.

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Ethical, Social and Moral Grounds (Views)

Motivation / Incentive for Action: Concerns for ethical

actions / profits

Ethical / Ecological Action / Conduct, and Consequences

Take, for example, South African divestment. During the 1980s American corporations found themselves under increasing pressure to divest their subsidiaries and any other interests in South Africa. This pressure came, and still comes, primarily from various racial-minority groups.

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During the period 1984 through 1988, some forty America’s largest corporations did divest their South African subsidiaries:

American Brands, American Tel & Tel, Bank of Boston, Black and Decker, Borg Warner, Bundy Corporation, CPC International, Chase Manhattan, Citicorp, Clark Equipment, Coca-Cola, Dow Chemical, Dun and Bradstreet, Emery Air Freight, Emhart, Exxon, Firestone, Flour, Ford, Foster Wheeler, General Motors, Honeywell, IBM, ITT, Johnson Controls, Kellogg, Kodak, MacMillan, Motorola, NCNB, Norton, Pepsico, Perkin-Elmer, Phillips Petroleum, Proctor and Gamble, Rohm and Haas, SPS Technologies, Sarah Lee, Tambrands, Union Carbide, Varity, Warner, Westinghouse, Xerox.

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Superficially this may appear to be evidence of ethical concern among these companies in that they sold off profitable operations because they were located within an immorally governed country. But was this action truly motivated by ethical concern, or were these corporations merely concerned that their profitability could be damaged by continued ties with South Africa?

In other words, was the underlying motivation for the divestment decision moral or economic? In this case actions clearly to not readily betray motives.

Vitell, S. and Davis, D.C. (1990), “Ethical Beliefs of MIS Professionals: The Frequency and Opportunity for Unethical Behavior,” Journal of Business Ethics, 9(1), p. 63.

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Ethical, Social and Moral Grounds (Views)

Motivation / Incentive for Action: Concerns for ethical

actions / profits

Ethical / Ecological Action / Conduct, and Consequences

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The Nation November 17, 2013 1:00 am

Women, water, well-being top priorities for Coca-Cola:

Coca-Cola's sustainability strategy is improving lives, creating jobs, increasing opportunity, preserving resources and meeting needs for the community, said chairman and CEO Muhtar Kent.

"There are no issues that will shape or define the 21st century more than the global empowerment of women; the management of the world's precious water resources; and the well-being of the world's growing population," he said after the company released its 10th annual "Sustainability Report and third Global Reporting Initiative Report" highlighting the progress the Coca-Cola system made last year, and the new 2020 sustainability goals announced earlier this year.

This is the first report to include both an update on existing sustainability goals and the company's new global 2020 goals. It follows Coca-Cola's sustainability framework - "Me, We, World" - and is rooted in three leadership priorities.

Spectrum of business ethics:

Firms avoid illegal zones. A firm, for example, that pays all its employees in America at least the minimum wage signals nothing about the firm’s moral stance on labor exploitation; the firm is merely obeying the law.

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BA

Illegal

Unethical Ethical

Highly ethicalHighly unethical

Environmental Regulation, Gov. Policy, e.g. Penalty level

Obeying law

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Published: 19 Nov 2013 at 08.49Online news: US retail giant Walmart violated employees' rights by unlawfully

threatening and firing workers who participated in strikes and other group protests, the National Labor Relations Board said.

The NLRB said it has found some merit in charges alleging that Walmart violated employee rights in 14 states and that it was prepared to issue complaints, unless the parties reach settlements in the cases.

Among the charges, Walmart "unlawfully threatened, disciplined, and/or terminated employees for having engaged in legally protected strikes and protests," the federal agency said in a statement.

The stores where the violations took place were in California, Colorado, Florida, Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Minnesota, North Carolina, Ohio, Texas and Washington state.

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in Palmdale, California, Wal-Mart.

in Maryland, Wal-Mart.

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Now we’re going to discuss on this domain.

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Creates and sustains competitive advantage by ensuring your company is in compliance with the law.

We call this “Light Green” Strategies. Freeman et al. (2008): Relies on the public policy to drive its strategy. Countries with strict environmental standards seem to gain an edge in the global

marketplace – they become more efficient and have better technology. Within an industry, companies can actively pursue public policies that fit with their special

competitive advantage. By innovating with technology and expertise, a company gains an advantage over a competitor that cannot comply as efficiently.

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Through its 3P (Profit-Planet-People) program, 3M is able to easily comply with new chemical legislation while competitors must exert resources.

At the 3M Website:Business Conduct At 3M, they believe that what the company stands for is just as

important as what they sell. They are proud to have built a century-old tradition of operating with uncompromising honesty and integrity.

What They Stand For: A good corporate reputation does not develop by accident. 3M's

reputation is rooted in their corporate culture and embodied in our Business Conduct Policies, the code of conduct they first introduced in 1988. Today's policies embody the same spirit of integrity that has always been at the core of their company; they define what legal and ethical conduct means in everything they do, wherever in the world they are doing business on 3M's behalf.

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Creates and Sustains competitive advantage by paying attention to the environmental preferences of customers – the needs of the Market. We call this “Market Green”.

Market green strategies following the greening of customers. Today’s customer-focused, market-driven company cannot afford to miss the fact that many

customers prefer environmentally friendly products given a similar cost. The Internet has made customers more informed about every aspect of a product, including its potential environmental harms. Companies that can meet these environmental needs will be the winners.

BA

Illegal

Unethical Ethical


Obeying law

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Whole Food Markets successfully appeals to a demographic that values organic and local products.

Coastwide Laboratories, an industrial cleaning products company, has appealed to its customers through offering its “Sustainable Earth” formula.

BA

Illegal

Unethical Ethical


Obeying law

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Create and sustain competitive advantage by responding to the environmental preferences of stakeholders.

We call this “Stakeholder Green”.

Companies can seek to maximize the benefits of one group, or they can seek to harmonize the interests of all groups.

Stakeholder green strategies are based on a more thorough adoption of environmental principles among all aspects of a company’s operations. Many companies have adopted a version of stakeholder green by requiring suppliers to meet environmental requirements and by setting strict standards for the manufacturing process.

BA

Illegal

Unethical Ethical


Obeying law

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Customers

Suppliers

Employees

ShareholdersSocieties

Future Generation

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BA

Illegal

Unethical Ethical


Obeying law

Create and sustain competitive advantage by responding to the environmental preferences of stakeholders.

Example: Wal-Mart recently announced a variety of environmental goals, including cutting greenhouse

gas emissions by 20% and constructing stores that are 30% more energy efficient. While these measures consider the impact on the communities in which Wal-Mart locates,

other measures are impacting suppliers, for example, rewarding those who can reduce packaging.

Paying attention to recyclable material in consumer packaging, educating employees on environmental issues, participating in community efforts to clean up environment, and appealing to investors who want to invest in green companies are all a part of stakeholder green.

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2013 Global Responsibility Report Walmart has a responsibility to lead, and is proud of what she accomplished so far on the journey to become a more sustainable and more responsible business. By working collaboratively with many fantastic partners around the globe, Wal-Mart had a productive year. Here are a few examples:

Renewable energy now provides 21% of Walmart's electricity globally, and Wal-Mart became the largest onsite green power generator in the United States;

Walmart and the Walmart Foundation are increasing training, market access, and career opportunities for nearly 1 million women worldwide;

Walmart and the Walmart Foundation gave more than $1 billion to support organizations that impact local communities around the world;

The Walmart Foundation became the first partner of Feeding America to donate 1 billion meals (since 2005);

Saved customers $2.3 billion on fresh fruits and vegetables since 2011; and Wal-Mart committed to hire any honorably discharged U.S. veteran in his or her first year off

active duty.

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BA

Illegal

Unethical Ethical

Highly ethical

Highly unethical

Obeying law

Create and sustain value in a way that sustains and cares for the Earth. We can call it the “Dark Green”. Being a dark green commits a company to being a leader in

making environmental principles a fundamental basis of doing business – deep commitment to environmental and business values. Dark green logic simply says that the belief that we must respect and care for the Earth is one of the deep values we share.

Nike, Ford Motor Company, and textile maker DesignTex, have adopted to some extent the design idea of “cradle to cradle” rather than “cradle to grave.”

These companies are seeking to design products that can be reduced to reusable materials, with whatever is not reused harmlessly decomposing into nutrients for the earth.

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With an agenda of having all performance footwear meet their own internal sustainability standards by 2011, the Nike ‘Considered’ line is obviously searching for ways to remain competitive in low-cost Asian manufacturing markets as well as in urban neighborhoods where personal street style is constantly reinventing itself.

http://www.nikeresponsibility.com/%23environment-design/main

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Nike has vowed to remove hazardous substances from across their entire supply chain, and the entire life-cycle of its products, by 2020. The sportswear giant have also promised to use their influence, knowledge and experience to bring about “widespread elimination” of hazardous chemicals from the clothing industry, Greenpeace says.

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Designtex seeks to instill the potential for a closed loop system in its products. Early in the lifecycle of every material, there are opportunities to infuse environmental qualities, that by design, challenge each subsequent stage to preserve and amplify those qualities. This is Environmental Design at Designtex.

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PET (polyester) resin bottles used for water, soda and other beverage packaging can be converted into recycled polyester yarns and fabrics. Plastic bottles make their journey from the consumer to curbside collection and on to separation and processing at a materials recovery facility. The recycling facility sells post-consumer PET resin to a company that extrudes it into polyester yarn, which is then up cycled into fabric. For every 2 million tons of PET bottles that are not recycled and instead sent to landfills, the equivalent of 18 million barrels of crude oil are dumped down the drain. And while rates of recycling are increasing among the general public, consumers still throw away three timesas many bottles as they recycle². By giving plastic bottles a new lease on life in polyester textiles, the value of this material is not wasted, and is instead allowed to live on in a useful, durable product. Designtex’s new Regeneration collection of upholsteries is made of 100% post-consumer recycled polyester.

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IKEA to educate and use societal marketing to promote Green Brand and Green Buying: “Turn your recycling into awards at IKEA Edinburgh”. Any can, plastic bottle or glass bottle bought in our store can now be recycled using a brand new Recycle & Reward Machine in The IKEA Edinburgh Customer Restaurant. You can either donate your reward to one of our chosen charities (10p per recycled drink container) or collect your vouchers to redeem one of our rewards below. (1 recycled drink container = 1 voucher) Choose your reward!

Making a can from recycled materials instead of new saves enough energy to power a television for three hours. Recycled plastic bottles can also be turned into all sorts of new things, from park benches to fleece jackets!

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Designtex is first to market with Eco-Intelligent™ polyester made with an antimony-free catalyst for panel and upholstery.

What does titanium have to do with fabrics? Traditionally polyester has been made using the heavy metal antimony as a catalyst during the production process. Things began to change in 1999, when Designtex started collaborating with Victor Innovatex and McDonough Braungart Design Chemistry on a new kind of polyester that no longer relies on this heavy metal.

Classified as Eco Intelligent™, this new polyester is antimony-free. Here’s where the titanium comes in: the catalyst for the production process has been successfully switched from antimony to this environmentally safer material. Beyond that, the fiber is designed to be used, recovered and remanufactured safely and effectively throughout multiple product lifecycles, and is produced with materials and manufacturing practices that are optimized for human and environmental health and safety.

After initially introducing this revolutionary new fabric into the market place in 2003, Designtex continues to add new Eco Intelligent™ Polyester styles to their sustainable product offering.

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Hazard Summary-Created in April 1992; Revised in January 2000 Everyone is exposed to low levels of antimony in the

environment. Acute (short-term) exposure to antimony by

inhalation in humans results in effects on the skin and eyes. Respiratory effects, such as inflammation of the lungs, chronic bronchitis, and chronic emphysema, are the primary effects noted from chronic (long-term) exposure to antimony in humans via inhalation. Human studies are inconclusive regarding antimony exposure and cancer, while animal studies have reported lung tumors in rats exposed to antimony trioxide via inhalation. EPA has not classified antimony for carcinogenicity (substance that produce cancer).

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New Belgium Brewing Company has a fulltime sustainability “goddess” and is the world’s first 100% wind-powered brewery; conversion to wind power funded by voluntary reduction in employee bonuses.

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Light Green

Market Green

Stakeholder Green

Dark Green

BA

Illegal

Unethical Ethical

Highly ethical

Highly unethical

Obeying law

Some competitive advantage can be gained through efficiency gains.

Competitive advantage obtained through differentiation and innovation.

Competitive advantage gained through reputation and relationship benefits.

Aligns with fundamental principles of founders, employees, and customers leading to high commitment – along regenerative sustainability.

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BA

Illegal

Unethical Ethical


Obeying law

Light Green

Market Green

Stakeholder Green

Dark Green

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How business measure and assess business ethics decisions?

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Sample Answer:

It should be the same as the way we get used to measure and assess business as usual, except that the management has strong ethical belief in making a difference. However, the extent of ethical leadership in each business decision varies from person to person, due to different levels of competencies, innovativeness capacity, ethical values and culture, etc. For instance, Professor Michael Porter provides three levels of ethical principles or values or paradigms to guide business decisions, i.e. from the fundamental stage of reconceiving customer needs, products and markets, to redefining productivity in the value chain, to enabling local cluster development to embrace shared values. In a way, his philosophy also matches with this illustration i.e. from light green to dark green. The C2C approach has become favorable to many giant Transnational Corporations to innovate both business models and products.

Also, Professor Michael's shared value cluster development based on business ethics principle also stimulate a fast movement in social entrepreneurship in which Doi Tung development is actually an exemplary case.

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The decision making can also be considered to be along the continuum of deontology theory of ethics and teleological theory of ethics. That is, decision is made either based on "moral" i.e. fairness, rightness and justice to allocate outcomes such as pay, rewards, recognition and promotion relative to an employee's contributions, or "non-moral standard" i.e. procedures and rules and regulation of the organization or the government for the defined goodness (i.e. the voice of the majority).

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In short, the role of business in society, in its communities: Business increasingly is seen as a major cause of social, environmental, and

economic problems – the 3P (People, Planet, and Profit). Shared value thinking represents the next evolution of “Capitalism.”

PhilanthropyCorporate

Social Responsibility

Creating Shared Value

Donations to worthy social issues

Good corporate citizenship and compliance with community standards.

“Sustainability”

Integrating Societal improvement into economic value creation itself.

Shared Value – Corporate policies and practices that enhance competitiveness of the company while simultaneously advancing social and economic conditions in the communities in which it sells and operates.

Profit involving shared values enables society to advance and companies to grow faster.

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Corporate Social

Responsibility

Creating Shared Value

Value – Economic and societal benefits relative to cost.

Integral to competing Essential to profit maximization Agenda is business specific Mobilize the entire company

budget

Example: Transforming procurement to increase quality and yield

Value – Doing good, good citizenship, philanthropy, and sustainability.

Discretionary. Separate from profit

maximization. Agenda externally determined. Impact is limited by the

corporate footprint and CSR budget.

Example: Fair trade purchasing

In both cases, compliance with laws and ethical standards and reducing harms for corporate activities are assumed.

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Company Productivity

Environmental Impact

Supplier Access and Viability

Employee Skills

Gender and Racial Equity

Worker Safety

Employee Health

Water Use

Energy Use

Social deficits create economic cost. External conditions shape internal company productivity. Social needs represent the largest market opportunities i.e. Cluster Development. There is a growing congruence between economic value creation and societal

objectives (based on the examples we illustrated earlier – i.e. light green to market green to stakeholder green to dark green.

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Reconceiving customer needs, products, and markets

Redefining productivity in the value chain – How the organization conducts its business

Enabling local cluster development

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Design products and services to address societal needs: e.g. environmental impact, safety, health, education, nutrition, living with disability, housing, financial security.

Open new markets by serving the unmet needs in underserved communities (bottoms of the pyramids) : Often requires redesigned products or different distribution methods.

Businesses have the potential to be more effective than governments and NGOs in creating and marketing solution to community problems.

Thus, new needs and new markets open up opportunities to differentiate, innovate, and grow.

A new generation of social entrepreneurs is capturing these opportunities, often faster than mainstream businesses.


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Novo Nordisk in China provides diabetes training programs together with governments, NGOs, and opinion leaders to promote the latest thinking among physicians on diabetes prevention, screening, treatment, and patient communication.

Targeting smaller cities. 220,000 sessions to date.

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Novo Nordisk’s “Diabetes bus” program to raise patient awareness and provide on-site advice.

NovoCare telephone hotline allows patients to reach specialists with questions.

NovoCare Club provides ongoing updates to members.

Patient education focuses on prevention, lifestyle changes, and effective use of insulin products.

280,000 patients educated to date.

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Result:

Since 1997, this program is estimated to have reduce healthcare costs in China by $ 700 million through reducing diabetes related complications

Novo Nordisk revenues have increased by an estimated $ 114 million.

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Cost Leadership Companies save Lives:

Frugal innovators in China and India are making medical devices that are cheaper—sometimes by an order of magnitude—than their Western equivalents.

Companies such as China's Mindray and India's TRS serve home markets and create products that are stripped to their essentials: scanners that cost $10,000 rather than $100,000; portable electrocardiographs that cost $500 instead of $5,000.

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These devices are not merely cheap knock-offs of Western designs. Often they are just as effective as the gold-plated kit used in the West, yet they are rarely found in rich-world hospitals. Their absence helps explain the massive disparity in costs between Western and emerging-world treatments. A night in an American hospital typically costs 25 times as much as a night in an Indian, Brazilian or Chinese one; a night in a European hospital typically costs four times as much.

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What Novo Nordisk in China is doing is:

Redefine the business around unsolved customer problems or concerns, not traditional product definitions, or the customer’s customer.

Think in terms of improving lives, not just meeting consumer needs.

Identify customer groups that have been poorly served or overlooked by the industry’s products.

Start with no preconceived constraints about product attributes, channel configuration, or the economic model of the business e.g. small loans are unprofitable.

Targeted Customers: Underserved

and Overlooked

Customer Value Proposition: Improving Lives Opens up new

opportunities to customer segmentation and marketing

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April 30 2013 /3BL Media/ - Novo Nordisk was named as one of the top 100 sustainable companies at the Annual Summit of Green Companies held in Kunming, China. The annual event assesses sustainable competitiveness of enterprises doing business in China. On the Annual Summit’s ‘China Top 100 Green Companies 2013’ list, Novo Nordisk ranked number five in the multi-national company category. It is the first time the company has been selected.

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Redefining Productivity in the Value Chain

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Redefining Productivity in the Value Chain

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Cluster Development in the Company’s Major Locations

A strong local cluster improves company growth and productivity Local suppliers Supporting institutions

and infrastructure Related businesses

Companies, working collaboratively, can catalyze major improvements in the cluster and the local business environment (the environment for innovation)

Thus, local cluster development strengthens the link between a company’s success and community success.



Enabling local cluster development

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vels

of S

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Competitiveness

Innovation Market

Clusters and Culture

Red: Illustrated (CC Tan, 2014)

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Nespresso Capsules Varieties

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Business Model Elements

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Conclusion: The Purpose of Business There is an opportunity to transform thinking and practice about the role of the

corporation in society. Shared value gives rise to far broader approaches to economic value creation. Shared value thinking will drive the next wave of innovation, productivity growth,

and economic growth. Business acting as businesses, not as charitable givers, are arguably the most

powerful force for addressing many of the pressing issues facing our society.

Conclusion: The Purpose of Business A transformation of business practice around share value will give purpose to the

corporation and represents our best chance to legitimize business again.

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Weekly Project No. 4 Let’s study the governmental factor towards creating competitive advantage of a

nation. Brainstorm and do some research to answer this question: If the government continues to behave to yield to political pressure to insulate

inefficient farmers, is this really helping the farming industry and the overall competitive advantage of a nation who relies heavily on farming activities and their supply and demand systems? Argue your points from ethical reasoning you have learned so far and also from the principles of the Diamond Model.

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Weekly Project 3:

Using the 5-point scale, state the extent to which you agree with each of the following statements:

1 2 3 4 5Strongly Disagree Disagree Neither Agree Strongly Agree

Agree NorDisagree

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About the Head:1. The head listens to what employees have to say.2. The head has the best interest of employees in mind.3. The head makes fair and balanced decisions.4. The head can be trusted.5. The head discusses business ethics or values with employees.6. The head sets an example of how to do things the right ways in terms of ethics.7. The head disciplines employees who violate ethical standards.8. The head conducts his or personal life in an ethical manner.9. The head defines success not just by results but also the way they are obtained.10.“When making decisions, the head asks, What is the right things to do?”

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About the respondent himself or herself:1. I am willing to put in a great deal of effort beyond that normally expected in order to

help this organization be successful.2. I talk this organization to my friends as a great organization to work for.3. I would accept almost any type of job assignment in order to keep working for this

organization.4. I find that my values and the organization’s values are very similar.5. I am proud to tell others that I am part of this organization.6. This organization really inspires me to pursue for the best.7. I really care about the performance of this organization.8. For me this is the best of all possible organizations for which to work.

State yourself a little:Male ( ) Female ( )Organization: University ( ) Government ( )

Private Business ( )

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It’s no secret that in many industries today, upstream activities—such as sourcing, production, and logistics—are being commoditized or outsourced, while downstream activities aimed at reducing customers’ costs and risks are emerging as the drivers of value creation and sources of competitive advantage. Consider a consumer’s purchase of a can of Coca-Cola. In a supermarket or warehouse club the consumer buys the drink as part of a 24-pack. The price is about 25 cents a can. The same consumer, finding herself in a park on a hot summer day, gladly pays two dollars for a chilled can of Coke sold at the point-of-thirst through a vending machine.

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That 700% price premium is attributable not to a better or different product but to a more convenient means of obtaining it. What the customer values is this: not having to remember to buy the 24-pack in advance, break out one can and find a place to store the rest, lug the can around all day, and figure out how to keep it chilled until she’s thirsty.

Downstream activities—such as delivering a product for specific consumption circumstances—are increasingly the reason customers choose one brand over another and provide the basis for customer loyalty. They also now account for a large share of companies’ costs. To put it simply, the center of gravity for most companies has tilted downstream.

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Yet business strategy continues to be driven by the ghost of the Industrial Revolution, long after the factories that used to be the primary sources of competitive advantage have been shuttered and off-shored. Companies are still organized around their production and their products, success is measured in terms of units moved, and organizational hopes are pinned on product pipelines. Production-related activities are honed to maximize throughput, and managers who worship efficiency are promoted. Businesses know what it takes to make and move stuff. The problem is, so does everybody else.

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The strategic question that drives business today is not “What else can we make?” but “What else can we do for our customers?” Customers and the market—not the factory or the product—now stand at the core of the business. This new center of gravity demands a rethink of some long-standing pillars of strategy: First, the sources and locus of competitive advantage now lie outside the firm, and advantage is accumulative—rather than eroding over time as competitors catch up, it grows with experience and knowledge. Second, the way you compete changes over time. Downstream, it’s no longer about having the better product: Your focus is on the needs of customers and your position relative to their purchase criteria. You have a say in how the market perceives your offering and whom you compete with. Third, the pace and evolution of markets are now driven by customers’ shifting purchase criteria rather than by improvements in products or technology.

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Must Competitive Advantage Be Internal to the Firm?In their quest for upstream competitive advantage, companies scramble to build unique assets or capabilities and then construct a wall to prevent them from leaking out to competitors. You can tell which of its activities a firm considers to be a source of competitive advantage by how well protected they are: If the company believes its edge lies in its production processes, then plant visits are strictly controlled. If it believes that R&D sets it apart, security around its research labs is airtight and armies of lawyers protect its patents. And if it prizes its talent, you’ll find hip work spaces for employees, gourmet lunches, yoga studios, nap nooks, sabbaticals, and flexible work hours.

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On a hot day, consumers gladly pay a 700% price premium for the convenience of buying a cold can of soda from a vending machine.Downstream competitive advantage, in contrast, resides outside the company—in the external linkages with customers, channel partners, and complementors. It is most often embedded in the processes for interacting with customers, in marketplace information, and in customer behavior.

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Experimental Research Result

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A classic thought experiment in the world of branding is to ask what would happen to Coca-Cola’s ability to raise financing and launch operations anew if all its physical assets around the world were to mysteriously go up in flames one night. The answer, most reasonable businesspeople conclude, is that the setback would cost the company time, effort, and money—but Coca-Cola would have little difficulty raising the funds to get back on its feet. The brand would easily attract investors looking for future returns.

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The second part of the experiment is to ask what might happen if, instead, 7 billion consumers around the world were to wake up one morning with partial amnesia, such that they could not remember the brand name Coca-Cola or any of its associations. Long-standing habits would be broken, and customers would no longer reach for a Coke when thirsty. In this scenario, most businesspeople agree that even though Coca-Cola’s physical assets remained intact, the company would find it difficult to scare up the funds to restart operations. It turns out that the loss of downstream competitive advantage—that is, consumers’ connection with the brand—would be a more severe blow than the loss of all upstream assets.

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Establishing and nurturing linkages in the marketplace creates stickiness—that is, customers’ (or complementors’) unwillingness or inability to switch to a competitor when it offers equivalent or better value. Millions or billions of individual choices to remain loyal to a brand or a company add up to real competitive advantage.

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The reality is that companies are increasingly finding success not by being responsive to customers’ stated preferences but by defining what customers are looking for and shaping their “criteria of purchase.”

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Must You Listen to Your Customers? A company is market-oriented, according to the technical definition, if it has mastered the art of listening to customers, understanding their needs, and developing products and services that meet those needs. Believing that this process yields competitive advantage, companies spend billions of dollars on focus groups, surveys, and social media. The “voice of the customer” reigns supreme, driving decisions related to products, prices, packaging, store placement, promotions, and positioning.

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But the reality is that companies are increasingly finding success not by being responsive to customers’ stated preferences but by defining what customers are looking for and shaping their “criteria of purchase.” When asked about the market research that went into the development of the iPad, Steve Jobs famously replied, “None. It’s not the consumers’ job to know what they want.” And even when consumers do know what they want, asking them may not be the best way to find out. Zara, the fast-fashion retailer, places only a small number of products on the shelf for relatively short periods of time—hundreds of units per month compared with a typical retailer’s thousands per season. The company is set up to respond to actual customer purchase behavior, rapidly making thousands more of the products that fly off the shelf and culling those that don’t.

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Indeed, market leaders today are those that define what performance means in their respective categories: Volvo sets the bar on safety, shaping customers’ expectations for features from seat belts to airbags to side-impact protection systems and active pedestrian detection; Febreze redefined the way customers perceive a clean house; Nike made customers believe in themselves. Buyers increasingly use company-defined criteria not just to choose a brand but to make sense of and connect with the marketplace

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36-hour window

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How Cialis Beat Viagra: Redefining customers’ purchase criteria is one of

the most powerful ways companies can wrest market leadership from competitors.

The strategy serves incumbents and challengers alike. Consider, for example, the $5 billion market for erectile dysfunction drugs. Pfizer launched the first such drug, Viagra, in April 1998, with a record 600,000 prescriptions filled that month alone. At a price of $10 per dose and a gross margin of 90%, Pfizer could afford to splurge on marketing and sales. It rolled out a $100 million advertising campaign, and sales reps made a whopping 700,000 physician visits that year. In the process, Pfizer created an entirely new market on the basis of one key criterion of purchase: efficacy. The drug got the job done.

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By 2001 annual sales had reached $1.5 billion, and other pharmaceutical companies had taken note of the size, growth, and profitability of the market. In 2003, Bayer introduced Levitra, the first competitor to Viagra. The drug had a profile very similar to Viagra’s and a slightly lower price—classic “me too” positioning.

Soon after, Lilly Icos, a joint venture between Eli Lilly and the biotech firm ICOS, entered the market with a new product—Cialis—that was different from its competitors in two ways. First, whereas Viagra and Levitra were effective for four to five hours, Cialis lasted up to 36 hours, making it potentially much more convenient for customers to use. Second, product trials showed fewer of the vision-related side effects associated with Viagra and Levitra.

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At the time, the key criteria that physicians considered in prescribing a drug for erectile dysfunction were efficacy and safety. Those two criteria accounted for a relative importance of 70%. Duration had a relative importance of less than 10%.

The strategic question for Lilly Icos was whether it could influence how physicians perceived the importance of the criteria. The positioning was hotly debated prior to launch: Should the company center its marketing strategy on Cialis’s lack of side effects, given that safety was already one of the two key criteria? Or should it attempt to establish duration as a new criterion?

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The marketing team decided to emphasize the benefits of duration—being able to choose a time for intimacy in a 36-hour window—in its launch campaign, and it set the price for Cialis higher than that for Viagra to underscore the product’s superiority.

The new criterion of purchase—marketed as romance and intimacy rather than sex—caught on. A BusinessWeek article reporting on an early positioning study stated, “Viagra users who had been informed of the attributes of both drugs were given a stack of objects and asked to sort them into two groups, one for Viagra and the other for Cialis. Red lace teddies, stiletto-heeled shoes, and champagne glasses were assigned to Viagra, while fluffy bathrobes and down pillows belonged to Cialis.”

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In 2012 Cialis passed Viagra’s $1.9 billion in annual sales, with duration supplanting efficacy as the key criterion of purchase in the erectile dysfunction market.

Those criteria are also becoming the basis on which companies segment markets, target and position their brands, and develop strategic market positions as sources of competitive advantage. The strategic objective for the downstream business, therefore, is to influence how consumers perceive the relative importance of various purchase criteria and to introduce new, favorable criteria.

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Must Competitive Advantage Erode over Time? The traditional upstream view is that as rival companies catch up, competitive advantage erodes. But for companies competing downstream, advantage grows over time or with the number of customers served—in other words, it is accumulative.

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For example, you won’t find Facebook’s competitive advantage locked up somewhere in its sparkling offices in Menlo Park, or even roaming free on the premises. The employees are smart and very productive, but they’re not the key to the company’s success. Rather, it’s the one billion people who have accounts on the website that represent the most valuable downstream asset. For Facebook, it’s all about network effects: People who want to connect want to be where everybody else is hanging out. Facebook does everything possible to keep its position as the preeminent village square on the internet: The data that users post on Facebook is not portable to any other site; the time lines, events, games, and apps all create stickiness. The more users stay on Facebook, the more likely their friends are to stay.

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Network effects constitute a classic downstream competitive advantage: They reside in the marketplace, they are distributed (you can’t point to them, paint them, or lock them up), and they are hard to replicate. Brands, too, carry network effects. BMW and Mercedes advertise on television and other mass media, even though fewer than 10% of viewers may be in their target market, because the more people are awed by these brands, the more those in the target market are willing to pay for them.

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Indeed, the very nature of network effects is that they are accumulative. But other downstream advantages—particularly those related to amassing and deploying data—are accumulative as well. Consider Orica, an explosives company mired in a commodity business in Australia. The primary concern of its customers—quarries that blast rock for use in landscaping and construction—was to meet well-defined specifications while minimizing costs. Because the products on the market were virtually indistinguishable, the quarries saw no reason to pay a premium for Orica’s or any other company’s explosives. At the same time, Orica knew that blasting rock is not as straightforward as it may appear. Many factors affect the performance of a blast: the profile of the rock face; the location, depth, and diameter of the bored holes; even the weather. Mess up the complex formula for laying the explosives often enough and your profits crumble into dust and get blown away by the wind.

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Orica realized that customers harbored much unspoken anxiety about handling the explosives without accidents, not to mention transporting and storing them safely. If it could systematically reduce even some of those costs and risks, it would be providing significant new value for the quarries—far in excess of any price reduction that competitors could offer. So Orica’s engineers set to work gathering data on hundreds of blasts across a wide range of quarries and found surprising patterns that led them to understand the factors that determine blast outcomes. Using empirical models and experimentation, Orica developed strategies and procedures that greatly reduced the uncertainty that, until then, had gone hand in hand with blasting rock. It could now predict and control the size of the rock that would result from a blast and could offer customers something its competitors could not: guaranteed outcomes within specified tolerances for blasts. Quarries soon shifted to Orica, despite lower prices from competitors. Not only had the company developed an edge over rivals, but the advantage was accumulative: As Orica amassed more data, it further improved the accuracy of its blast predictions and increased its advantage relative to its competitors.

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Can You Choose Your Competitors?Conventional wisdom holds that firms are largely stuck with the competitors they have or that emerge independent of their efforts. But when advantage moves downstream, three critical decisions can determine, or at least influence, whom you play against: how you position your offering in the mind of the customer, how you place yourself vis-à-vis your competitive set within the distribution channel, and your pricing.

If you’re in the beverage business and you’ve developed a rehydrating drink, you have a choice of how to position it: as a convalescence drink for digestive ailments, as a half-time drink for athletes, or as a hangover reliever, for example. In each instance, the customer perceives the benefits differently, and is likely to compare the product to a different set of competing products.

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In choosing how to position products, managers have tended to pay attention to the size and growth of the market and overlook the intensity and identity of the competition. Downstream, you can actively place yourself within a competitive set or away from it. Brita filters compete against other filters when they are placed in the kitchen appliances section at big-box stores, for instance. But Brita changes both its comparison set and the economics of the consumer decision when the filters are placed in the bottled-water aisle at supermarkets. Here Brita filters have a competitive cost advantage, delivering several more gallons of clean water per dollar than bottled water. Of course, not all buyers of bottled water are buying solely for the criterion of cost (some are buying for portability, for example), but for those who are, Brita is an attractive choice.

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Brita changes its competitive set when it is placed in the bottled water aisle at the supermarket instead of with kitchen appliances at a big-box store.

If you would prefer not to be compared with any other brands, then you’re better off marketing, distributing, and packaging your products in ways that avoid familiar cues to customers. A trip to the grocery store or a glance at online catalogs shows how similar many products’ packaging is: Most yogurts are sold in exactly the same pack size and format, and their communications are often so indistinguishable that consumers cannot recall the brand after having seen an advertisement. The lack of differentiation encourages competition, when many of these brands would be better off avoiding it.

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Finally, pricing has a strong influence on whom you compete with. When Infiniti launched its comeback car, the G35, in 2002, it was hailed as a BMW-beater. The car, loosely based on the legendary Nissan Skyline, rivaled the BMW 5 series in terms of interior space and engine power, but it would have struggled to compete for a couple of reasons: The 5 series is aimed at experienced BMW buyers—or at least buyers who have previously owned a luxury automobile. Also, the 5 series is very expensive, and when customers are shelling out that kind of money, they’re not looking for value—they’re looking for an established brand and value proposition. Infiniti chose to position the G35 against the BMW 3 series instead. The right pricing accomplished that objective: Many consumers, especially car buyers, use price as a key criterion in forming their consideration set.

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Does Innovation Always Mean Better Products or Technology?Like prime real estate in a crowded city, customers’ mindspace is increasingly scarce and valuable as brands proliferate in every category and existing ones are sliced wafer-thin. Companies compete ferociously against one another not to prove superiority but to establish uniqueness. Volvo does not claim to make a better car than BMW does, nor the other way around—just a different one. In customers’ minds, Volvo is associated with safety, while BMW emphasizes the joy and excitement of driving. Because the two automakers emphasize different criteria of purchase, they appeal to very different customers. In a global study aimed at finding out what “excitement” meant to customers, respondents were asked to “describe the most exciting day of your life.” When the results were tallied, it turned out that BMW owners described exciting things they had done—white-water rafting in Colorado, attending a Rolling Stones concert. In contrast, the most exciting day by far in the lives of Volvo owners was the birth of their first child. Brands compete by convincing customers of the relative importance of their criterion of purchase.

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That is not to say that the upstream activities associated with building safer or faster cars don’t matter. The product remains an essential ingredient in demonstrating the brand’s positioning on its chosen criterion. The product and its features turn the abstract, intangible promises of the brand into real benefits. Volvo’s product innovations really do make its cars safer, reinforcing a lasting brand association with its customers. But the product itself does not occupy a more privileged position in the marketing mix than, say, the right communication or distribution.

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Business Ethics / Corporate Social Responsibility:

Competitive battles are won by offering innovations that reduce customers’ costs and risks over the entire purchase, consumption, and disposal cycle.

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Where Else Does Innovation Reside? The persistent belief that innovation is primarily about building better products and technologies leads managers to an overreliance on upstream activities and tools. But downstream reasoning suggests that managers should focus on marketplace activities and tools. Competitive battles are won by offering innovations that reduce customers’ costs and risks over the entire purchase, consumption, and disposal cycle.

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Consider the case of Hyundai in the depths of the Great Recession of 2008–2009. As the economy faltered, American job prospects looked painfully uncertain, and consumers delayed purchases of durable goods. Automobile sales crashed through the floor. GM’s and Chrysler’s long-term financial problems resurfaced with a vengeance, and both companies sought government bailouts. Hyundai, which primarily targeted lower-income customers, was particularly hard hit. The company’s U.S. sales dropped 37%.

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As overall demand plunged, the immediate response of most car companies was to slash prices and roll out discounts in the form of cash-back offers and other dealer incentives. Hyundai considered these options, but it eventually took a different approach: It asked potential customers, “Why are you not buying?” The resounding answer was “The risk of buying during the financial crisis—when I could lose my job at any time—is simply too high.”

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Although choosing to avoid competitors may minimize head-on competition, there is no guarantee that you won’t still have to contend with competitors you didn’t want or ask for. But if you’ve done your homework and established dominance on your criterion of purchase, me-too competitors will be putting themselves in an unfavorable position if they choose to follow you.

Surprisingly, you have more say in determining who your competitors are if you’re a later entrant in a marketplace than if you break new ground. A later entrant can choose to compete directly with an incumbent or to differentiate, whereas an incumbent is subject to the decisions of later entrants. But an incumbent is not helpless: It can stay ahead of competitors by continually redefining the market and introducing new criteria of purchase.

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Chrysler

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So instead of offering a price reduction, Hyundai devised a risk-reduction guarantee to target that concern directly: “If you lose your job or income within a year of buying the car, you can return it with no penalty to your credit rating.” Called the Hyundai Assurance, the guarantee acted like a put option, addressing the buyer’s primary reason for holding back on the purchase of a new vehicle. The program was launched in January 2009. Hyundai sales that month nearly doubled, while the industry’s sales declined 37%, the biggest January drop since 1963. Hyundai sold more vehicles that month than Chrysler, which had four times as many dealerships. Competitors could easily have matched Hyundai’s guarantee—yet they didn’t. They continued to slash prices and offer cash incentives. The Hyundai Assurance was a downstream innovation. Hyundai didn’t innovate to sell better cars—it innovated by selling cars better.

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Reducing costs and risks for customers is central to any downstream tilt—indeed, it is the primary means of creating downstream value. Not surprisingly, many of the cases we’ve examined illustrate this: Facebook reduces its customers’ costs of interacting with friends; Orica reduces quarries’ blast risks; Coca-Cola reduces the customer’s costs of finding a cool, refreshing drink the moment she’s thirsty.

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Is the Pace of Innovation Set in the R&D Lab?The product innovation treadmill is an upstream imperative. In fact, technology innovations are sometimes thought to be the greatest threat to competitive advantage. But such changes in the market are relevant only if they upend downstream competitive advantage. You don’t need to sweat every product launch and every new feature introduction by a competitor—just those that attempt to wrest control of the customers’ criteria of purchase. After all, it was not the advent of digital photography that ultimately doomed Kodak—it was the company’s failure to steer consumers’ shifting purchase criteria.

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By contrast, after more than a century of shaving technology innovation, Gillette still controls when the market moves on to the next generation of razor and blade. Even though for the past three decades competitors have known that the next-generation product from Gillette will carry one additional cutting edge on the blade and some added swivel or vibration to the razor, they’ve never preempted that third, fourth, or fifth blade. Why? Because they have little to gain from preemption. Gillette owns the customers’ criterion—and trust—so the additional blade becomes credible and viable only when Gillette decides to introduce it with a billion-dollar launch campaign. Four blades are better than three, but only if Gillette says so. In other words, technological improvements don’t drive the pace of change in the industry—marketing clout does.

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Market change can be evolutionary, generational, or revolutionary, and each type can be understood in terms of consumer psychology. Evolutionary changes push the boundaries of existing criteria of purchase: higher horsepower or better fuel efficiency for cars, faster processing speeds for semiconductor chips, more-potent pills. Generational changes introduce new criteria that complement old ones, often opening up new market segments: sugar-free soft drinks, hybrid vehicles, pull-up diapers, once-a-day medications where multiple pills were previously required. Revolutionary changes don’t just introduce new criteria, they render the old ones obsolete: The new video-game controllers from Nintendo Wii changed how people interact with their games; touch screens and multitouch interfaces changed what customers expect from a smartphone; a vaccine for tuberculosis, AIDS, or malaria would make current treatments almost redundant within a couple of decades.

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The power required to push a revolutionary change through the market is greater than that required to move a market through a generational change, and that power in turn is greater than the market muscle required to introduce an evolutionary change. In each case, the quality of the product innovation—the increased benefits relative to current products—helps move the market, but it does not guarantee a shift. High failure rates for new products in many industries suggest that companies are continuing to invest heavily in product innovation but are unable to move customer purchase criteria. Technology is a necessary but insufficient condition in the evolution of markets. It’s the downstream activities that move customers through evolutionary, generational, and revolutionary changes.

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downstream value creation

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Tilt An ongoing downstream tilt in industry after industry calls into

question many ingrained assumptions about business—in particular, those about competitive advantage, competition, and innovation.

The downstream tilt has particular resonance for three kinds of companies: The first is companies that operate in product-obsessed industries, such as technology and pharmaceuticals. The possibilities of downstream value creation and the potential for building competitive advantage in the marketplace tend to be eye-opening for such firms. The second is companies operating in maturing industries whose products are increasingly commoditized. These firms are keen to find sources of differentiation that do not rely on easily replicated products or production advantages. The third is companies seeking to move up the value chain. Downstream activities provide a way to build new forms of customer value and lasting differentiation.

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The critical locus of both value and competitive advantage increasingly resides in the marketplace rather than within a company. Activities that attract customers by reducing their costs and risks and repel rivals by building unassailable sources of differentiation represent the key to competing downstream. The downstream playing field has its own set of rules, and managers who learn to play the game achieve an early advantage.

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"I call it controlling the Labor Market by the Invisible Hands (the HR Analytics, the Statistical Tools")." -- CC Tan (2013).

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The HR Trend on "Hired by the Data, Fired by the Data" is getting its momentum fast from the West to Thailand and Asia. While I loved and had used HR Analytics and Statistical Analysis to help on devising HR Strategies, but I was one of the...m who saw the "failing ethical issues" that caused so much Emotional Pains on employees. Now I am afraid our world is going to be Badly Hurt by this so-called New Trend who control the Labor Market by the Invisible Hands (Comments: CC Tan, November 23, 2013).

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Here is the abstract of the Article from the Business Harvard Review:

The term Big Data, admits writer Don Peck, "has quickly grown tiresome." But the power of analytics as a mechanism for making decisions about hiring and firing is still growing, and the "application of predictive analytics to people’s careers … is enormously challenging, not to mention ethically fraught." Indeed, the idea that stats may determine whether we'll flourish in careers or be temps forever is both promising and deeply concerning. Peck traces the history of hiring in America, noting that attempts at psychological testing based on "science" in the 1950s were largely abandoned in favor of ad hoc interviews. But we know that favoritism and bias are all too common in these situations. Now that science is making a comeback, Peck explores some of the new ways in which companies will be able to make some of their most important decisions.

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One is a start-up called Knack, which uses video games to measure how people function neurologically when it comes to skills like problem solving; the game has been used by Royal Dutch Shell. In 2010, Xerox started using "an online evaluation that incorporates personality testing, cognitive-skill assessment, and multiple-choice questions about how the applicant would handle specific scenarios that he or she might encounter on the job." The color-coded rating (red, yellow, or green) generated by an algorithm helps guide the company in its hiring decisions. The attrition rate fell by 20% in the initial pilot period, and over time, the number of promotions rose. Then there's GILD, which uses data to search out software engineers who might have been missed by traditional forms of recruiting.

In the end, Peck surprises himself: He now believes "that we’re headed toward a labor market that’s fairer to people at every stage of their careers." That is, one that isn’t based on who you know or what kind of degree you have.

Business ethics (Strategic Dimension)

Business

Transcript of Business ethics (Strategic Dimension)