Chapter 5: Sustainable Economic Models PDF

Chapter 5: Sustainable Economic Models Sustainable Business Management The Doughnut Economy • In this new model by Kate Raworth, we see that our economy is no longer visualised as a standalone entity. • In the embedded economy, the economy is embedded in our society which is in turn organised on...

Chapter 5: Sustainable Economic Models Sustainable Business Management The Doughnut Economy • In this new model by Kate Raworth, we see that our economy is no longer visualised as a standalone entity. • In the embedded economy, the economy is embedded in our society which is in turn organised on our planet. • If we take this bigger picture into account, we can also see that the fundamental flow in an economy is not money, but resources and energy. Sustainable Business Management The Embedded Economy • Earth • Our economy draws resources and energy of the earth while expelling heat and matter (usually waste) back into it • Waste is a huge leak in our economy • Business cost • Impact on the next generations • We are using more resources than the earth can replenish • Energy is becoming a very valuable resource • Society • By visualising the economy embedded in our society, we can broaden the concept of added value as it no longer only means economic value but also social value. • the wealth that is created within social groups as a result of their networks and relationships • the additional value created by all these goods and services that are exchanged without the use of money: volunteers, people taking care of family members, the neighbour who borrows you something… Sustainable Business Management The Embedded Economy • Society • Society and economy have a huge impact on each other. • The economy will create inequalities in society, as not all members of society have the same access to the goods and services that are created or have the same opportunities to participate in the economy • In its turn, depending on the objectives of business in the economy, the economy can also create opportunities for society to thrive or decrease inequalities • Economy • There are 4 actors in the economy: the households, the commons, the market and the state Sustainable Business Management The Embedded Economy 1. The Households • Provide labour, capital and nature to the businesses • Make sure that the worker can go to work everyday by supporting his/her needs • Households are primary responsible for the “caring economy” • the men and women staying (partly) at home to care for the family and the households, but also all tasks done by fulltime workers before or after hours • usually these care workers have not many rights in society 2. The Market • Not seen as the powerful idea of the free market because of it’s shortcomings • If we let the free market run uncontrolled, it will over-stress earth’s resources and absorptive power and it will create more inequalities • Free markets are actually non-existent so there is no need to deregulate the free market but reregulate the existing market: embed the economy in a new set of rules, politics,.... Sustainable Business Management The Embedded Economy 3. The Commons • Shareable resources of society that people choose to use and govern through self-regulation • Fishing pond • Wikipedia • Culture: rituals, common practices,... • Open access is dangerous but usually the community will decide on a set of rules (without governmental intervention) 4. The State • Not that different from the traditional model, should interfere when needed • • • • Provide public goods: education, healthcare,... Support the core caring economy of the households Support the commons by providing laws and institutions that enable their collaborative potential Stabilize the power of the market • Takes risks no companies are willing to take in innovation Sustainable Business Management The Doughnut Economy • The idea of the doughnut economy is to provide an answer to the global ethical trilemma • Kate Raworth (2014) defines an economy which still offers room for growth, but within two important boundaries: the social foundation and the ecological ceiling • Social Foundation: contains eleven areas that are linked to fundamental needs for all people on earth • Ecological ceiling: gives us nine ecological areas that are key to the preservation of our planet and the continuance of life on earth as we know it (planetary boundaries) Sustainable Business Management The Doughnut Economy Sustainable Business Management Creating shared value • In 2006 strategy professor Michael Porter (5 forces model) came up with the concept of shared value creation • The idea was refined in 2011 and led to the following definition: Sustainable Business Management Creating shared value – why should businesses be involved? 1. Businesses and societies are intertwined • Business and society are linked to each other 2. Businesses have the resources to act • Governments and NGOs have less resources • The brightest people are often not working for the government 3. Creating shared value is beneficial to both sides • It’s not the goal to divide the current amount of value but to create more value • Externalities can become internalities as well Sustainable Business Management Creating shared value – A new type of capitalism 1. Traditional capitalism • Solving social problems is a cost and decreases financial value • Trade-off between social value and financial value • Capitalism and growth cannot be reconciled with creating shared value 2. New capitalism • • • • Growth is still possible but needs to be expressed in value Businesses will actively look for opportunities to fulfil human needs (the ‘why’) Change in business education is needed Free market can still exist but equilibrium is between consumers, suppliers and society Sustainable Business Management Creating shared value – A new type of capitalism • A company still needs to fulfil its economic, legal and ethical responsibilities • Once these are met, creating shared value is as important as the other responsibilities • A solid foundation is needed to find a balance • No longer a “pyramid” but an “hourglass” Sustainable Business Management Creating shared value – Practical implementation 1. Reconceiving products and markets • Not only demand, production cost and competition should be assessed when a new business opportunity is valued, but also what need the product/service is fulfilling and if it does that in the best possible way • Products, business models and distribution methods need to change • Also new markets can be accessed, especially those target groups that are usually seen as not interesting 2. Redefining productivity in the value chain • Creating shared value in the value chain: energy use, resource use, employee productivity but also less obvious areas 3. Building supportive industry clusters at the company’s locations • Creating strategic partnerships to share expertise, resources, opportunities,… Sustainable Business Management Creating shared value – Critiques 1. CSV is unoriginal • Concept of CSR has been around for decades and has always been more than a philantropic activity • CSV can be seen as CSR 2.0 as CSR was still often driven by profit creation and CSV is driven by an intrinsic believe that value is more important than profit alone 2. CSV ignores the tension between social and economic goals • In reality aligning these goals is sometimes difficult • Some companies will only invest in easy projects • Profit will decrease but overall value will increase 3. Not all products can be redesigned • Some products deliver negative value to society such as tobacco and weapons • Should these companies exist in a new business climate? Sustainable Business Management Creating Integrated Value • Value creation should be part of every decision made in the company • Until now, a lot of the actions taken for value creation are not integrated • Resources and effort are often spent twice on similar projects • Efforts are often only focusing on one area (social, economic, ecological) • Goals are incremental but not transformational Sustainable Business Management Creating Integrated Value Sustainable Business Management Trading For Good • Christian Felber proposes a sustainable model for international (free) trade • The current model of free trade is based on the concept that each country will dedicate its resources to create goods and services that provide that country with a comparative advantage over other countries • Comparative advantage • A country is able to produce a certain product or service at a lower cost compared to another country • A country should not produce what its best at, just what it can produce at a lower cost • All other products should be imported • This should be the most beneficial to everyone (thus serving the greater good) Sustainable Business Management Trading For Good • The current model of international free trade has some shortcomings: 1. There is a difference between economic thinking and chrematistics • • • • Economy means “management of the household” Money was a means to do good management In the current system, money became the goal itself Comparative advantage might work in an economic mindset but not in the mindset of chrematistics 2. There is no global planned economy • Global alignment is needed to ensure that every country only produces according to their comparative advantage Sustainable Business Management Trading For Good 3. Capital is not national • All resources in a country (also capital) should be dedicated to producing products with a comparative advantage • Capital does not stay within borders 4. The playing field is not the same in every country • Comparative advantage calculation means that the same rules should apply in every country • Transaction costs are not included • Exchange rates Sustainable Business Management Trading For Good 5. Free trade raises inequality • Not all countries were equal at the start of the free trade agreements • Poor countries have to abide to the same rules as rich countries • There is a higher import tariff on finished products than on raw materials • Export is mainly in the hands of Northern trading companies 6. Free trade creates fierce competition • Free trade creates competition between locations • Some countries push the boundaries on laws and regulations to win business 7. Companies make the rules, not countries • Concentration of global power within a few business groups Sustainable Business Management Trading For Good • Sustainable (ethical) world trade • Trade should result in a well-managed society • Value creation instead of profit creation • Trade balances should also incorporate other measuring factors beside the GDP and financial factors • A global institution should govern international trade • WTO only takes into account commercial values • UN could take this role • Import tariffs could be calculated based on different (sustainable) factors • Countries that do not comply will face really high tariffs • A small group could lead the way Sustainable Business Management Trading For Good • Following factors could influence an import tariff: 1. Human rights • Ratification of the universal declaration of human rights • Recognition of a world court of human rights 2. Labour standards • Ratification of the UN Covenant on Economic, Social and Cultural rights • Ratification of the standards of the International Labour Organisation 3. Environmental agreements • Ratification and active participation in for example the Paris Agreement Sustainable Business Management Trading For Good 4. Rights of nature • Recognising the legal rights of nature • Participating in a system of ecological human rights: every human has a certain amount of ecological rights that can be used to buy goods and services. 5. Cultural diversity • Ratification of the UNESCO convention on the Protection and Promotion of the Diversity of Cultural expression 6. Taxation • Equal tax regulations globally with global coordination and reporting • No more tax havens Sustainable Business Management Trading For Good 7. Global antitrust authorities • Limit the power of one company • No company may hold more than 1% market share • No company may have a turnover greater than 50 billion dollars • No company may have a balance sheet total greater than 30 billion dollars 8. Insolvency law for states • Allow countries to go bankrupt, same as companies • This will cause the creditors to be more careful 9. Bretton Woods 2 • Fine countries with a too negative or too positive balances • Even the trade balance for the whole union Sustainable Business Management Sustainability worldwide • Sustainability is not perceived and implemented the same way globally • The UN sustainability report shows that the top 20 countries when it comes to implementing the SDGs are all European, with the exception of Japan in 19th place • Positive movement in Asia and Africa as well • Asia: local companies feel the shift due to the guidelines on transparency and reporting in Europe and the US • Africa: the population experiences the consequences of climate change first hand Sustainable Business Management Case: The Kellog Company (p.167-168) 1. Do you think the vision and purpose of the Kellogg Company are agile enough in these changing times? 2. What do you think of the initiatives/results of the Kellogg company? Are these examples of shared value creation or simple philanthropy? 3. What would you advise to the CEO of the Kellogg company if the company wished to shift their business model to creating value instead of profit? Sustainable Business Management