Stuart L Hart shot into fame when he co-authored with C K Prahalad the gamechanging article titled ‘The Fortune at the Bottom of the Pyramid‘. Going further, he has emerged as an influential authority on the role of sustainable development in business strategy. Today, the professor of management at Cornell’s Johnson Graduate School of Management consults with leading companies like DuPont, Hewlett Packard, GE, Shell and Procter and Gamble.
In the updated and just released new edition of his acclaimed book, ‘Capitalism at the Crossroads: Next Generation Business Strategies for a Post-Crisis World’ (Wharton School Publishing), Hart argues that MNCs, more than any other institution including governments, are in a position to innovate to lay the foundations of a sustainable form of global capitalism and also profit in the process. He quotes the example of the Tatas amongst others to drive home his point. Excerpts from an interview with FE’s Rajiv Tikoo:
What would you single out as the highlight of the new edition?
The new edition highlights how issues like rising oil prices, the subprime crisis and the global financial meltdown are pieces of the larger puzzle of the fundamentally unsustainable path that we are pursuing and how to craft sustainable business strategies. The new edition also includes many new cases and examples of emerging strategies for a post-crisis world.
The book also says that businesses are uniquely positioned to create a sustainable world. Isnt there an inherent contradiction in this premise, considering that businesses have led to an unsustainable world in the first place by profiting from environmental exploitation?
Yes, it’s a paradox. Thats how it is, particularly when you look at the recent examples of BP and Toyota. The point I am tying to make is that the institutions of capitalism have been captured by large incumbent firms and democratically elected governments are complicit in it. But at the same time, there is a growing public recognition that there is something fundamentally wrong. Its accompanied by a growing unwillingness to let it persist. All of that feeds into the argument in the book that capitalism should be about creative destruction, entrepreneurial creativity, and creation of what comes next. It should be about solving real problems that people have. But capitalism has lost its way and that’s why it is at the crossroads. Unless entrepreneurs and intrapreneurs within large corporations recognise the signals, read them clearly and sense the opportunity, which lies in developing business solutions to solve real problems while making profits, they cant last much longer. Its also time to recognise that there is no inherent trade-off between social good and profitability.
Why do you expect companies to be interested in the creation of a long-term sustainable global economy when the tenure of CEOs is getting shorter and shorter?
This is a chicken and egg situation here. One of the reasons why the tenure of CEOs is becoming shorter may be because only a few CEOs have been able to figure out how to really optimise the value for all stakeholders. There are some long tenure CEOs. If you look at those people and their companies and see how they have behaved over an extended period of time, you may find out that they have been typically more successful than others by optimising the outcomes for a broad set of constituencies, including investors. The idea is to figure out how to optimise returns, but not by cutting employee wages or degrading the environment to shore up the bottomline in the short term. In the short term, you can make money any which way, but eventually negative feedback will come around and hit you. That is what the subprime crisis was all about.
How feasible is it for businesses to change themselves from within when the externalities are status quoist or changing slowly If forward looking companies do so, will they face the risk of first mover disadvantage when regulation comes in?
I know it’s difficult to expect change to come from within when we dont have a regulatory regime in place. But at the same time, I dont think governments are in a position to become a driving force.
Its unlikely that democratically elected governments dependent on corporate money to finance political campaigns will be able to put in place consistent policies to encourage the transformation that we are talking about. I don’t see that happening any time soon, certainly not in the US. May be it can work in a country like China, which may be perhaps in a position to formulate internally consistent policies that can really drive sustainable businesses. Elsewhere it’s really for entrepreneurs to figure out how to crack this code because they have an incentive to do so. And entrepreneurs invariably think ahead of regulations.
You also talk about the role of financial crisis in the transformation into sustainable enterprises. Does it not apply to only big and profitable or small and radical companies, both of which comprise only a minuscule of all businesses?
From my point of view, I am completely agnostic as to which types of companies have a better chance of becoming sustainable enterprises. I work with a range of corporations and some of them are showing the ability to engage in the sort of disruptive innovation that is needed, irrespective of their size. If it does not come from large corporations, it will come from start-ups or growth oriented small and medium-sized companies. And I think especially it would come from emerging market companies, which have different cultural underpinnings and different governance structures. In India, think about the Tatas. Its a very different kind of business group than any typical US-based MNC. May be the Tata group is positioned in a way that allows it to come up with the sort of leapfrog innovations that we are talking about and if those turn out to be important innovations for the future, then the group will thrive in tomorrows marketplace.
What would you say is the learning for global MNCs from the Tata Nano example?
I think the Nano is a really interesting case. There is a lot that can be learnt from it in terms of sustainability, innovation and business modelling. How many auto companies in the world could possibly figure out how to create a car platform that passes all the European safety tests, gets 55 miles a gallon and costs $2,500 What the Tatas have done is to turn the entire auto industry upside down. You hold the Nano up against the Toyota Prius. Though many hails the Prius as a green car, the Nano gets better mileage and costs one-tenth of the Prius. But yet the Nano takes a lot of abuse from environmentalists, who say that it’s going to encourage more driving and discourage mass transit in India. There may be validity to some of those arguments, but nothing is perfect. We dont live in a perfect world and even great business ventures have problems. Even if they show positive attributes, there will be some negatives, too. But, from my perspective, I think the positive side of the innovation equation outweighs the negative side in the case of the Nano. While every innovation solves problems, it also creates new problems. I think the Tata management is fully aware of the negatives. They are very much aware of what the criticism is and what some of the negative consequences are. In fact, the group is even in a position to do something about it. They are also in the bus business. They can certainly take a public position to promote mass transport in India.
In his endorsement of the book, Ratan Tata says that the central message of your book is that global business needs to be caring and be committed to preserving the globes ecological integrity. The ongoing economic slowdown brought about by rampant capitalism, the lessons from which this new edition of the book factors in, has only served to emphasise the urgency for business to adopt the radical transformation of strategy. What do you make of the two messages that he is sending out?
Those are his words. I can only interpret what he is trying to say. I know the man a bit. I know where he is coming from. He has a very strong sense of moral purpose and what the responsibility of the business is towards the world. I think that comes through in his statement when he says that global business needs to be caring and committed to preserving the globes ecological integrity. That is really the man speaking from his heart. And I think he really believes in that. When he talks about radical transformation of strategy, its the businessman talking. The idea is that you can create competitive advantage for yourself while being caring and committed to ecological integrity. The point is that there need not be a trade-off. The cornerstone of the book too is how to overcome the trade-off. The future of capitalism will be found in the companies that figure out how to solve social and environmental problems in a profitable way. It is really about creative destruction. The problem is that incumbents are too busy preserving their existing positions rather than fuelling the process of creative destruction, but I think now we are in a period where creative destruction will roll.
Source: The Financial Express
Published on 12 July 2010