New Models of Business in Society

Week 1: Business in Society: The Problem

Week 1 Syllabus
1.1 Course Overview 1.2 The Dominant Story of Business 1.3 Four Flaws in the Dominant Story 1.4 The Fourth Flaw 1.5 The Global Financial Crisis 1.6 A New Story is Emerging

1.1 Course Overview

Exciting time to be involved in business. Lots of change going on all around the world. More and more people becoming entrepreneurs. And, most of alllots of ways to do business. And, I believe that you can make a difference. Were going to explore some new models of business that have emerged in the last 25 years. And, were going to talk about why the current story or narrative is mistaken. Best of all were going to explore how you can figure out a new business idea that both makes money and makes the world a better place. And if you dont want to start a business, well help you figure out how you can make a difference as a customer, or an employee or an investor or community member.

1.1 Course Overview

Week 1: Whats the Problem? Week 2: Some New Models (that are partial solutionsgood but doesnt go all the way)
CSR; Corp Philanthropy; Shared Value, Etc.

Week 3: Environment as a Driver of New business models Week 4: Conscious Capitalism and Stakeholder Theory Week 5: Focus on how to develop a business idea that makes money and makes the world better. Then well summarize where weve been.

1.1 Course Overview

At least 4 ways to learn: # 1: Watch the videos # 2: Watch the videos and participate by answering the questions that will be at the end of the videos. If you do this, well report on the answers during the course, and you will help everyone learn more. # 3: You can participate in the discussion forums, and the electronic office hours well be holding. Ill be participating in this process, as will my team here at Darden. The more engagement we have with you, the more learning that takes place for you and for us. #4: You can do more of the suggested readings, visit the suggested web sites, and watch some of the supplementary videos, for each week. That will deepen your knowledge and help make the interactions with me and others, even better. I want to thank you personally for participating. This is an experiment. Not everything were going to do is going to work for you. Take what works and leave the rest. At the end of each video there will be some questions to engage you. Talk about these questions in the discussion forums. Remember that anything you write on the forums becomes public knowledge.

New Models of Business in Society

Week 1: Business in Society: The Problem
1.2 The Dominant Story of Business

1.2 The Dominant Story of Business: The Opportunity Awaits Us

We can be the generation that makes business better. But, we need a revolutiondont worry no guns.we need a conceptual revolutiona different way to think about business. One that enables us to be at our best. The Overall Argument in this video: The Standard Story of business that is dominant isnt very useful anymore. 4 flaws in the current approach. Well talk about these in the next videos. Suggest that we go in a different direction, but first I need to tell you what I think the Standard Story is.

1.2 The Dominant Story of Business: The Opportunity Awaits Us

What is a Standard Story? What is a Dominant Narrative? Why are they important to realize? Think about the old narrative about the Role of women in US society, as an example. Emotional Role was only in the home Couldnt be trusted to make Important decisions like politics. Began to question, and gradually changed over the years. It reached perhaps a tipping point when women began to vote, and perhaps another with the technology of birth controlThe 20th Century in the US was partially a Century of the liberation, growth and development of women. Changing a dominant narrative takes time, repetition, and the willingness on the part of many people to challenge continuously to find a better way.

1.2 The Standard Story of Business has at least 6 key assumptions

1. Business is primarily about economics: making money and profits, not about being connected to many other societal institutions. 2. The only constituency that really matters are shareholders. 3. We live in a world of limitless physical resources, so we dont need to pay attention to our impact on the environment. 4. Capitalism works because people are completely selfinterested, and will only act for others if they have the proper incentives. 5. Given the opportunity, business people will cheat or cut corners. 6. Business works because people are competitive and greedy, and as if by an invisible hand: the greatest good emerges. Read the papers, listen to the news. Youll hear this story.

1.2 Engagement Question

What do you see as wrong with the standard story of business? Whats right with it? What changes in business have you seen from your point of view, wherever you are in the world. Talk about these questions in the discussion forums.

New Models of Business in Society

Week 1: Business in Society: The Problem
1.3 Four Flaws in the Dominant Story

1.3 The Standard Story has at least 4 Flaws

1. Business is just about economics and the money
Purpose analogy

2. The idea of business ethics as oxymoron 3. People are just motivated by money 4. In the next video Ill talk about globalization and change:
There has been a lot of change in business, the business world is no longer stable and predictable.

I want to take each one in a bit more detail

1.3 The Standard Story has at least 4 Flaws: Old Story Flaw #1
Business is just about economics. Money is all that matters. This gets dressed up as: The purpose of any business is to maximize profits for shareholders. I need to make red blood cells to live but making red blood cells is not the purpose of life. And, business is a part of society, not some isolated activity that is about money and profits. Most entrepreneurs start a business because they are on fire about something. They are trying to make peoples lives (or even their own) better along some dimension.

1.3 The Standard Story has at least 4 Flaws: Old Story Flaw #2
Business Ethics is an oxymoron like jumbo shrimp. Tell people that you teach business ethics and they have to manage not to laugh, or else they tell you a stale joke:
I didnt know business had any. Must be a short course. A strictly theoretical subject isnt it.

This is a real problem. Most business people want to and actually do act ethically.

1.3 The Standard Story has at least 4 Flaws: Old Story Flaw #3
People are simple, and motivated by money or self interest. Levinsons question: What animal comes to mind between a carrot and a stick? Its worse. Treat people like jackasses and they will start to act like jackasses. Human beings are complicated and complex creatures.

1.3 Engagement Question

Think about the organizations you are involved with. Maybe they are businesses, or schools, or religious organizations, or civic groups, or governments. What is their purpose? Do they act on that purpose most of the time? Is the purpose ever misunderstood?

New Models of Business in Society

Week 1: Business in Society: The Problem
1.4 The Fourth Flaw

1.4 The 4th Flaw in the Standard Story: The World Has Changed
Last time we talked about 3 flaws in the old story.
Business is just about economics and the money Business and ethics dont mix People are simple economic maximizers

Globalization New Political Realities Changes in the micro relationships that companies have Most driven by IT.

1.4.1 Globalization
Globalization is not new Human beings have always traded around the world from ancient times. Nonetheless, today it is undeniable. When Im traveling around the world, I put it as even Americans understand Globalization. National Geographic has given a great example of globalization by calling our attention to the simple pencil.
The graphite is from Brazil and Mexico, the softwood is from Sweden and south Africa, the rubber is from Thailand and Malaysia, the metal is from China and Mozambique, and pencils are pretty simple to manufacture.

Ideas travel around the world quickly, supply chains are globalized, and businesses can no longer pretend that what happens in one society will not affect their own society.

1.4.1 Globalization
Todays businesses like Toyota operate in multiple countries, and they must have a strategy that makes as much sense in Tokyo as it does in Tennessee, in Mumbai and Rio. And, they have to operate in a way that their philosophy, processes, how they treat people are tied together all over the world. At Toyota they have a very famous philosophy called the Toyota Way, but the company has had to globalize that philosophy so that it makes sense in countries other than Japan.

1.4.1 Globalization
A good example is the emergence of State Owned Enterprises (SOE) in China. SOEs continue to grow and control a substantial part of the business assets in China. They are connected to important families and government officials at all levels, etc. In short, you simply cannot understand how to do business in China without taking SOEs into account. So, if you think that business stands outside of society; that it isnt intimately connected with society and other societal institutions, you wont do very well in China. So, that standard story of business as a purely economic institution just wont do.

1.4.2 New Political Realities*

We have seen a dramatic increase in the number of countries in the world. In 1980 there were 154 members of the UN. In 2011 there were 193 members. The CIA says that there are 267 world entities. With globalization has come new political realities. Break up of the Soviet Union and Iron curtainthe emergence and liberalization of India and China and their growth economies, as well as the fast developments in Africa, the BRIC nations etc. has meant an added pressure and added opportunity to every business. In 1990 there were 69 democracies, while in 2010 there were 116. Global companies have to pay attention to how they are regulated in countries that have very different systems. What happens in a Bangladesh garment factory is news in Berlin, Jakarta, and Los Angelesand almost instantaneously. If you think business can ignore these political and social realities, well, you wont be in business for very long
*The World Factbook (https://www.cia.gov/library/publications/the-world-factbook/)

1.4.3 Information Technology

Much of this change is being driven by radical advances in information technology. Just as Gordon Moore predicted computing power is on an exponential path of increase. We are connected to each other, or at least connectable to each other more so than at any time in history. Think about the changes wrote by the Arab Spring, and the ability of masses of people to self-organize politically. This new IT requires a whole new way of thinking about business.

1.4.4 Changes in Business Relationships

Globalization, New Political Realities, and IT have driven changes in traditional relationships. We buy things on line. We get recommendations from our friends. We rate our transactions with companies, and sites like Glassdoor.com give us insights into how employees see their companies as a place to work. Even product design can get crowdsourced now. Take a look at www.quirky.com

1.4.4 Summary
Go back to the standard story. You cant hold a company together by just focusing on the moneyyou need something more like purpose. Ethics issues are front and center. When there is a fire in a supplier factory due to poor working conditions, todays customers and politicians want accountability. Not everyone is the same around the world. Some people may in fact be motivated only by money, but most of what we know is that issues of purpose, autonomy, mastery, and values like family and compassion and wanting to be better for themselves and their societies, are better ways to think about motivation. We must understand business as set firmly in society. Sothe old story just has to go. And, good riddance to it!

1.4 Engagement Question

How have changes in information technology changed your own life? What changes do you foresee in the future and how would these changes affect business.

New Models of Business in Society

Week 1: Business in Society: The Problem
1.5 The Global Financial Crisis

1.5 Global Financial Crisis (GFC)

There are many hypotheses about the GFC and why it occurred:
Rewarding short term gains, Questionable behavior in the financial services industry became normal? Who was responsible when loans were bundled sold off, and companies routinely bet against their customers. Too much high risk lending and inflated credit ratings Some bad apples and lots of folks (maybe you and I) got greedy

Total losses have been estimated at 15-20 Trillion dollars, but thats only an estimate. It doesnt account for the human consequences of the loss of millions of jobs, and the breakdown of many institutions, indeed the fabric of society in places like Iceland, Ireland and Greece.

1.5 Public Trust in Business

There is a trust gap in business. In the US only 21% of people have a quite a lot or a great deal of trust in banks and big business. Small business fares better at 66%. (Gallup) There also is a growing trust gap between institutions and their leaders globally, trust in business is 32 points higher than trust in business leaders to tell the truth; trust in government is 28 points higher than it is for government officials. This trust gap has ethical implications:
Only 21% in the US think that business executives are honest. Only 10% in France trust Business leaders to tell the truth. (the number is 19% globally)

Globally, only 43 % of informed publics trust CEOs as credible spokespeople and only 19 % of the general population trust business leaders to tell the truth regardless of how complex or unpopular the truth is. Trust in NGOs remains high, with an overall 88 % of countries surveyed over 50% & (the highest is Mexico, an emerging market, at 83 %; the lowest is Japan, a developed market, at 37 %). The most notable change over time is in China, where only five years ago trust in NGOs was 48 %; today it is 81 %.
(Edelman)

1.5 Public Trust in Business

So what? The current story isnt working. We need a new one. Regulators often regulate based on the old narrative, hence they are likely to push through reforms which only reinforce the old story.

1.5 Engagement Question

What have been the main effects of the Global Financial Crisis in your country? Has it affected you and your family? What do you think has been the cause? The lessons we can learn

New Models of Business in Society

Week 1: Business in Society: The Problem
1.6 A New Story is Emerging

1.6 The New Story

So, the old story is no longer useful. What are elements of the new story? First, business has to be an integral part of society, and we have to see it as that and expect it to act that way. Second, we need to engage in a conversation about how business can help societies solve their problems. Third, we have to stop separating business from ethics. Fourth, we have to have a much more robust idea of what makes people tick. So let me try and articulate 5 principles that are important in this new story.

1.6 Five Principles for the New Story of Business

1. 2. Business is primarily about purposemoney and profits follow. Any business creates (or sometimes destroys) value for shareholders, as well as customers, employees, suppliers, and communities. Building and leading a business involve getting these interests going in the same direction. Capitalism works because we are complex creatures with many needs and wants, and we can cooperate to create value for each other. Sometimes we act for selfish reasons and sometimes for otherregarding interests. Incentives are important, but so are values. Most people tell the truth and keep their promises, and act responsibly most of the time. And, we need to expect that behavior. Business and capitalism are the greatest system of social cooperation and value creation, ever invented. Competition is important in a free society, since it ensures options. But, the engine of capitalism is value creation.

3.

4. 5.

Lets tell this story and expect it of our businesses and businesspeople. We can see this new story emerging all over the world.

1.6 1.6 But, A New Story is Emerging: A New Story - China

Tencent (social media); Landwasher (environmentally friendly water-free flush toilets); Goldwind Science and Technology (Offshore wind farms); BGI (genetic sequencing) are just a few of the companies that are trying to implement various parts of the new story, making money and making society better. BYD: First company to bring electric to public transportation. The everinnovative Chinese automobile company created the world's first purely electric bus. BYD's e-BUS 12 releases zero emissions, can go for more than 150 miles on a single charge, and uses solar panels located on the roof to convert solar energy into electricity. The buses have been tested in China, Southeast Asia, and Europe; Hertz car rentals will use the buses to transport passengers at LAX. http://www.byd.com/

1.6 A New Story China cont.

Greenbox: Greenbox is also a pioneer in product safety. "Currently, there arent strong safety standards for childrens clothing in China," Wu says, noting that in recent years, apparel containing dangerous levels of formaldehyde and heavy metals have hit store shelves. Needles have even been left inside clothing. "Were working with industry associations and the government to create standards." Wu monitors Greenboxs quality with regular visits to production facilities and also champions the use of environmentally friendly materials and processes. "The fact that Greenbox delivers a brand thats more than just a name and logo, with good design and the use of nonharmful materials," Stocker says, "makes it stand out from many other apparel businesses in China. www.lvhezi.com ; http://www.fastcompany.com/most-innovative-companies/2012/greenbox

1.6 A New Story - USA

REI: Stewardship at REI -REI is more than great gear. Through volunteerism, giving, responsible business practices and more, we connect people to the outdoors and help protect the natural places we love. Every year since 1998, it has been on Fortunes 100 Best Companies to Work For http://www.rei.com/stewardship.html FedEx is pushing energy efficient trucks, planes & envelopes; it is moving the entire industry at a faster pace to minimize environmental impact while increasing customer service http://www.greenbiz.com/blog/2013/02/22/mitch-jackson-pushing-andmoving-envelope Steinway & Sons built the worlds largest parabolic solar installation on its factory roof that operates a chiller that provides the perfect humidity & temperature needed to manufacture pianos http://www.greenbiz.com/news/2013/02/22/black-and-gold-go-greensteinway-sons-journey-sustainability

1.6 A New Story - Europe

Unilever Since launching its ambitious Sustainable Living Plan in 2010, Unilever is buying more sustainable palm oil and cage-free eggs, putting less salt and fat in its tomato sauces and spreads, selling water purifiers to poor people in the global south and rolling out climate-friendly freezers for its ice cream. It is doing more to limit its environmental footprint while improving health and well being and growing its business. Unilevers commitments are wide and deep. Its no wonder that the firm and its CEO, Paul Polman, have become darlings not just of corporate-friendly NGOs like the World Wildlife Fund, but also a favorite of hard-charging activists from Greenpeace and the Humane Society of the U.S. http://www.unilever.com/sustainable-living/uslp/index.aspx http://www.greenbiz.com/blog/2012/04/25/will-unilevers-sustainabilityleadership-pay

1.6 Engagement Question

Can you find some headlines from your own country about how the new principles of business are being implemented? What are some examples of companies that are more engaged in your society?

Further Reading and Resources for Week 1

Jihad vs. McWorld article (http://www.theatlantic.com/magazine/archive/1992/03/jihad-vsmcworld/303882/) Three Ethical Roots of the Economic Crisis article by Thomas Donaldson (http://link.springer.com/article/10.1007/s10551-011-1054-z/fulltext.html) Hot, Flat, and Crowded: Why We Need a Green Revolution and How It Can Renew America, by Thomas J. Friedman