Reframing An Old Debate On The Beating Heart of Business
Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistake — George Soros
In the March-April 2018 issue of Harvard Business Review, Kenneth Frazier, CEO of Merck had this to say about business:
“Businesses Exist to Deliver Value to Society.”
There comes a time in the life of every big business when it becomes its own worst competitor. Its core competency becomes a good or service with diminishing marginal utility. In fact, society ends up criticizing the business for its detrimental effects on people. It is hard for a business at that stage to escape negative publicity simply because it stands alone as a monopoly. Case in point — Facebook. Amidst a lot of controversy, Facebook witnessed a slowdown in user growth.
As per TechCrunch, Facebook now has 1.4 billion daily users, up 2.18% compared to growing 3.8% to 1.37 billion users in Q3. That’s a sizeable slow down, and the lowest quarter-over-quarter percentage daily user growth ever reported by the company.
This article explores the original concept of core competency and attempts to reframe it in the context of the latest clamor by CEO’s for greater accountability of business towards society. Kenneth Frazier, CEO of Merck, is a strong voice on the matter along with Paul Polman of the Anglo Dutch consumer goods giant Unilever and others.
Although intuitive, core competency as a concept was formalized in 1990. As per wikipedia, a core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel. It can be defined as “a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace” and therefore are the foundation of companies’ competitiveness.
Core competencies fulfill three criteria:
1. Provides potential access to a wide variety of markets.
2. Should make a significant contribution to the perceived customer benefits of the end product.
3. Difficult to imitate by competitors.
No Escaping Capitalism
Last year, as I gained a new found appreciation for not-for-profit institutions and non governmental organizations (NGO’s), an encounter with the founder of such an institution brought me back to a stark reality. I was attending a local conference — a gathering of sorts of intellectuals in the city of St Louis.
I went over to congratulate the founder of a not for profit for great presentation on his organization. As I was deep in conversation with him, another person joined our conversation. As soon as the entrepreneur saw this newcomer, he asked if the newcomer knew anyone that could donate a large sum of money to his not for profit.
It led me to the common sense realization that even not for profits need capital to work on their more nobler goals. Without a corpus of capital, it is hard to execute an altruistic plan.
A Dreamer and An Execution Ninja
I have often tried to pick the best words to describe a businessman. While I have come short of the right vocabulary, I have realized some key ingredients of one.
Aligning business with social goals is a challenge for any CEO let alone a soda manufacturer like PepsiCo. However, over the years, I have observed Pepsi evolve into a much more health conscious company.
More than a decade ago, it launched the “Performance With Purpose” campaign. As per PepsiCo:
“…It’s what led us to reduce the added sugars, sodium and saturated fats — and dial up the nutrition — in many of our foods and beverages; curb our environmental footprint..”
As it follows, a good CEO must be a dreamer and also great at executing those dreams. Social responsibility is a very tough dream to achieve when your company’s stock price is a function of quarterly profits.
Reframing The Dialogue
The pendulum swings both ways. When businesses digress from their core competency by taking on more risk than they can handle, there is a crisis not much different from the 2008 financial crisis. It starts with a pendulums that was hovering around stability. Very soon, businesses get tired of stable profits and start searching for outsized gains. As the old aphorism goes, no gain without pain. When outsized risks result in reckless business decisions, a bubble develops. Risky behavior is the norm and the fiduciary responsibility towards society becomes subservient to the pursuit of pure profit.
From the ashes of the crisis, the realization of collective folly becomes apparent and regulators remind businesses of their responsibility towards society.
While this is called learning by experience, businesses would be wise to learn from history. Straying from their responsibility towards society will negate all other core competencies.
Looking Through a Different Lens
Most crises are precipitated by a continuous preoccupation with greed rather than core business principles and ignoring the interests of society at large.
Imagine investing pension funds of the elderly in an extremely volatile cryptocurrency. Why would any business do that? Only if the incentives of the manager of that business are structured in such a way that making disproportionate gains is considered fair play without acknowledging the risks involved (in this case fees as a % of value of portfolio).
While a lot of CEOs have come out openly and said that businesses should serve society, these statements are not new. Before the pendulum starts hovering towards another crises, these statements are a reminder that the core competency of any business is to be better than its competition in serving the needs of society.
At the end, all businesses operate within the confines of society. As long as they add value to human life, society will take care of businesses. When memories are fickle, reminders can be the difference between disruption and stability.
Businesses have always been concerned with utilizing their core competency to generate profits, grow market share and become a monopoly.
Core competency was never about any of those things. Profits, market share and building a brand were always byproducts of a core competency called serving the society we so call home.