Chapter 2 From Profit to Prosperity PDF

Chapter 2: From Profit to Prosperity Sustainable Business Management The Economic Dimension of Sustainability • Sustainability is more than « green » alone • People, Planet and Profit • However: talking about profit here can lead to the understanding that the economic part of sustainability is ma...

Chapter 2: From Profit to Prosperity Sustainable Business Management The Economic Dimension of Sustainability • Sustainability is more than « green » alone • People, Planet and Profit • However: talking about profit here can lead to the understanding that the economic part of sustainability is making profit while taking into account people and planet • The economic dimension is as important as the ecological and social dimension • Value creation instead of profit creation • Doing business without harming stakeholders • Economic growth is no longer the main factor for succes Sustainable Business Management The Limits to Economic Growth • GDP is still seen as the number one parameter to determine the wealth of a country • Policymakers and decision makers often ignore the shortcomings of the traditional economic model Sustainable Business Management The Limits to Economic Growth – The traditional economic circular flow model • The traditional economic flow model gives an overview of all the flows of money that are going around in the economy • The different actors in the economy are pictured, who interact by exchanging money Sustainable Business Management The Limits to Economic Growth – The traditional economic circular flow model • Households • Families who provide labour, capital and nature • Pay for goods and services and receive income, pay taxes and save money • Businesses • Create goods and services • Sell these goods nationally and internationally • Invest and receive funds to support their growth • Government • Collects taxes from households and businesses • Invest, spend and provide public goods Sustainable Business Management The Limits to Economic Growth – The traditional economic circular flow model • Financial markets and institutions • Provide loans and invest in businesses • Provide funds to the government in case of a budgetary deficit • International markets • Sell and buy goods and services to/from national businesses and households • Invest in national businesses Sustainable Business Management The Limits to Economic Growth – The traditional economic circular flow model • The economic circular flow model is a simplified version of the thruth in an attempt to turn economy into an exact science • In reality the economy consists of billions of actors, who are all influencing the outcomes • By leaving out all the parameters, the circular flow model is not even close to reality anymore • The economic circular flow model has many shortcomings Sustainable Business Management The Limits to Economic Growth – The traditional economic circular flow model 1. Not all transactions in the economy involve money • • • • Only goods and services that have a price are taken into account Public goods do not have a correct market price and are therefore undervalued External effects will lead to prices that are under- or overvalued Not all goods and services in the economy are paid for 2. The economic flow model is created on a social island • The model does not provide us with a view on the society the economy is happening in or on the rules and regulations of that society • We do not know if the society is fair, with a fair government and how tax money is spent • The model does not tell us if the society is equal or unequal Sustainable Business Management The Limits to Economic Growth – The traditional economic circular flow model 3. The economic flow model does not take into account where the resources are coming from • The economy exists within the boundaries of our planet • The flow model does not tell us where the resources needed to create the money flows are coming from • The damages done to the planet and society are not taken into account è The economic flow diagram only addresses the economic part of the ethical trilemma Sustainable Business Management The Limits to Economic Growth – GDP Growth • Economic growth is usually defined as the growth of the GDP • The GDP is a snapshot in time which tells us something about the amount of goods and services that has been produced in a country in a certain period (usually a year) • The GDP per capita is used to compare the welfare of countries to each other Sustainable Business Management The Limits to Economic Growth – GDP Growth Sustainable Business Management The Limits to Economic Growth – GDP Growth • Economic growth is still needed to ensure innovation and enterpreneurship and to provide for the ever growing population • However, only looking at GDP growth to determine the welfare of a coutry is shortsighted Sustainable Business Management The Limits to Economic Growth – GDP Growth 1. The GDP per capita forgets about inequality • The GDP per capita is calculated by simply dividing the GDP by the number of inhabitants • It does not tell us how the GDP is actually divided 2. The GDP is calculated based on market prices • A lot of goods and serviced do not have a correct price: public goods, external effects, voluntary work • The GDP only tells us something about goods and services that have a price • The unit used for calculating the GDP is money to simplify the reality but money does not equal value in society Sustainable Business Management The Limits to Economic Growth – GDP Growth 3. The growth of the GDP is a self-fulfilling prophecy • Economic theory states that the GDP will always grow in the long term • All economic decisions are made based on this expectation and so the GDP will continue to grow 4. The GDP does not measure happiness • The GDP growth measures economic welfare, but it does not tell us how happy people are in a country • The circumstances of the economic activity also influence hapiness • 35-hour work week vs. 50-hour work week Sustainable Business Management The Limits to Economic Growth – GDP Growth • Easterlin paradox 1 - Within a society, rich people tend to be much happier than poor people. 2 - Rich societies tend not to be happier than poor societies (or not by much). 3 - As countries get richer, they do not get happier. Sustainable Business Management The Limits to Economic Growth – External Effects • Classical example: pollution • The costs of the effects of pollution on the community and society are not taken into account in the market price • The government can tax these products to lower consumption and production Sustainable Business Management The Limits To Economic Growth – External Effects • If we use value instead of price to look at the worth of a product, the external effects would be taken into account as negative value would also be internalised Sustainable Business Management Stakeholder Theory – Definition • Milton Friedman: “The first priority of a business is to its shareholders” • Prioritising profit • Dominant view during capitalism • The last years, the focus has shifted to stakeholders • Taking into account all groups that are influenced by or could influence the business Sustainable Business Management Stakeholder Theory – Definition • Stakeholders can be internal or external • Internal stakeholders: individuals or groups that are part of the company such as employees, managers and owners • External stakeholders: indiviuals or groups that are outside the company such as suppliers, customers, government, shareholders and society • Shareholders are usually on both sides • Every decision will impact their dividen • They have voting rights which means they can influence business decisions • Traditionally shareholders were the only stakeholders that were really taken into account but this approach has changed over the last decades Sustainable Business Management Stakeholder Theory – Categories of stakeholders • A stakeholder will fall in a certain category depending on which of the three attributes that stakeholder possesses: • Power: This defines the bargaining power of the stakeholder: can a stakeholder influence the decisions of the company? • Urgency: This defines the sense of urgency of a stakeholder: does the stakeholder need his claims to be acted upon immediately? • Legitimacy: This defines the validity of the stakeholder’s claims: is the stakeholder’s claim supported by a legal or social argument (law, norms, values, beliefs)? Sustainable Business Management Stakeholder Theory – Categories of stakeholders 1. Dormant stakeholders • Only has the power to influence business decisions but does not have the urgency or support to do so • Owner of the company • Management needs to assess this stakeholders as potential risks 2. Discretionary stakeholders • Only has the legal or social support to claim something of the company but does not have the power to force the company to do something about it, nor the urgency to have its need addressed quickly • Charity • Management can decide how to deal with these stakeholders Sustainable Business Management Stakeholder Theory – Categories of stakeholders 3. Demanding stakeholders • Only has the urgent need to have his claim addressed but has no power or support to make this happen. • Serial complainer • Management can ignore these stakeholders as long as they don’t file a lawsuit or gain legal support 4. Dominant stakeholders • Has both the power and the support to have his claim addressed. • Government • Management has to maintain a good relationship with these stakeholders Sustainable Business Management Stakeholder Theory – Categories of stakeholders 5. Dependent stakeholders • Has a right to claim something from the company and wants it addressed as soon as possible • Resident who lives near a plant and is harmed by pollution • Management can ignore these stakeholders as long as they don’t gain external support or unite themselves 6. Dangerous stakeholders • Has an urgent need and has the power to force the company to address this need • Unions • Management has to monitor these stakeholders and mitigate possible risks Sustainable Business Management Stakeholder Theory – Categories of stakeholders 7. Definitive stakeholders • Has power, legitimate support and a sense of urgency when it comes to its claims • Usually a dominant, dependent or dangerous stakeholder who attains a third attribute • Management has to deal with these stakeholders as a priority 8. Non-stakeholder • Individuals or groups that do not possess any of the attributes • They can become stakeholders if they acquire an attribute over time • Stakeholder management is not a static discipline Sustainable Business Management Age of greed vs. Age of responsibility 1. Age of greed • Executives wanted to maximize the shareholder’s and their own profit • Banks were optimizing profit by giving easy loans and creating money • Financial markets became gambling stages to increase profits without caring about the losses • By making companies a legal “person” leaders can pursue their own interest without having to deal with the consequences • Capitalism justifies maximizing profit as the highest goal Sustainable Business Management Age of greed vs. Age of responsibility 2. Age of responsibility • • • • • After the financial crisis in 2008, it became clear that things had to change Banks were responsible for a lot of losses, in businesses and personal Leadership changed in companies Governments became more involved in regulating greed New goals and KPIs were established Sustainable Business Management New Economic Concepts – Profit vs. Value • In the classic economic theory the concept of value is purely financial value • Not all goods and services have a correct price • External effects are not taken into account • If we use a broader defintion of value (and add social and environmental value) most shortcomings can be solved • This also could give us a new understanding of economic growth • If other types of value are acknowledged, we can lower financial growth without comprimising innovation and enterpreneurship • Businesses should aim to create more than financial value and add this to their KPI’s as well Sustainable Business Management New Economic Concepts – Profit vs. Value • If we start measuring the growth of the company in terms of value creation instead of pure profit, we will have a different view on the succes of companies • Investors will look differently at companies when looking for an investment • Companies will add different targets to their strategy • This will result in a little less profit for the big companies but will mean a gain in overall social and environmental value Sustainable Business Management New Economic Concepts – Ecosystems 1. Ecosystems create new ways to address fundamental needs and desires 2. Ecosystems drive new collaborations to address rising social and environmental challenges 3. Ecosystems create and serve communities, and harness their creativity and intelligence 4. Ecosystems often exist on powerful new business platforms 5. Ecosystems accelerate learning and innovation Sustainable Business Management New Economic Concepts – Ecosystems 1. Ecosystems create new ways to address fundamental needs and desires • It is essential to offer products and services that fulfil a fundamental need of the customer • When a customer buys a car, he actually needs mobility and when parents are looking into university programs for their kid, they really want their kid to be successful in life • In most cases, we see that ecosystems are created to address these expectations by addressing fundamental needs or desires in an entirely new way Sustainable Business Management New Economic Concepts – Ecosystems 2. Ecosystems drive new collaborations to address rising social and environmental challenges • Collaboration between different actors such as businesses, organisations and governments • Usually, ecosystems are created to address rising social and environmental challenges, as businesses struggle to address these challenges on their own 3. Ecosystems create and serve communities, and harness their creativity and intelligence • Ecosystems usually create a community or bring people together in a way that they have not been doing before. • People in an ecosystem also start to share their ideas, opening new ways to be creative and share knowledge and expertise Sustainable Business Management New Economic Concepts – Ecosystems 4. Ecosystems often exist on powerful new business platforms • Ecosystems can exist because there is a shared platform that allows its members to interact, share and collaborate. • The rise of the internet and technology has created the opportunity to unite actors from all over the world, without the need to travel 5. Ecosystems accelerate learning and innovation • Ecosystems bring people together which will automatically lead to sharing ideas, concepts, expertise and knowledge • Learning and innovation will happen much quicker, not only within the ecosystem but also in other businesses around the ecosystem • Ecosystems are often disruptive as they address fundamental needs in a radically new way, leaving traditional business behind if they do not decide to innovate Sustainable Business Management New Economic Concepts – Ecosystems • ‘The Alliance to End Plastic Waste (AEPW) is made up of nearly fifty major global companies. They have committed over $1.0 billion with the goal of investing $1.5 billion over the next five years to develop, deploy and bring to scale solutions that will minimize and manage plastic waste and promote post-use solutions. These can be recycling, reuse and repurposing of plastic to keep it out of the environment. A collaborative effort of companies, governmental and nongovernmental organizations as well as civil society is necessary to address the globalchallenge of mismanaged plastic waste.’ (www.basf.com) Sustainable Business Management Case: Baby Pia (p.69-71) 1. Do you agree with the way Novartis has set its price for the drug? 2. If Novartis would take the value-over-profit approach, how could they change their business model to maximise their value? 3. What do you think of the lottery system Novartis came up with? Sustainable Business Management