Kirschenmann: Two wake-up calls

By FRED KIRSCHENMANN, Leopold Center Distinguished Fellow

The traditional playbook calls for companies to commoditize and exert maximum bargaining power on suppliers to drive down prices—even when purchasing from small businesses or subsistence-level farmers. More recently, firms have been rapidly outsourcing to suppliers in lower-wage locations. Today some companies are beginning to understand that marginalized suppliers cannot remain productive or sustain, much less improve, their quality … As suppliers get stronger, their environmental impact often falls dramatically, which further improves their efficiency. Shared value is created. -- Michael E. Porter and Mark R. Kramer

We’re facing a future of higher prices and not-so-abundant resources, according to two recent wake-up calls. As suppliers to companies that operate on the world market, farmers would do well to be alert for the opportunities that could come about.

The first wake-up call comes from economic investment manager Jeremy Grantham. He sounded the alarm bluntly in his April 2011 newsletter when he suggested it is “time to wake up” regarding our investment decisions because the “days of abundant resources and falling prices are over forever.” He summed up his analysis of our new future by reminding us that “the world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value. We all need to adjust our behavior to this new environment. It would help if we did it quickly.”

Here are some of the points he used to summarize the future we now must “wake up to”:

The rise of population, the 10-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land and water.

Despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5 percent in the 1960s to 1.2 percent today.

The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).

The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.

These are important observations. Unfortunately, Grantham uses them to encourage investors to take advantage of the short-term investment opportunities that these new realities pose for increasing personal wealth. Those of us interested in long-term sustainability would rather focus on the development of resilient systems that will sustain future generations—not only future generations of the human species, but all of the biotic community, the health of which is essential to the self-renewing capacity of the earth on which we all depend. That said, it was heartening for me to see Grantham, from the financial world, identify so many of the important challenges that all of us (and especially those of us in research and education institutions) need to take seriously.

A second wake-up call is from the January/February 2011 issue of Harvard Business Review, where Michael Porter and Mark Kramer address many of the same challenges but from a radically different perspective. Porter and Kramer see an opportunity to “reinvent capitalism and unleash a wave of innovation” that can not only reinvigorate business but also revitalize communities and improve environmental quality. This already is being done by companies that have transitioned to a new business model of “creating shared value.”

Shared value involves “creating economic value in a way that also creates value for society by addressing its needs and challenges.” This new business model recognizes two very important business realities that 1) markets can be defined by societal and ecological needs as well as economic needs, and 2) social and environmental harms very often end up creating “internal costs” for businesses thereby causing economic losses.

Porter and Kramer argue, therefore, that it is in the long-term business interest of companies to take advantage of shared value opportunities in their own communities and incorporate ecological restoration and social revitalization into their business plans. Continuing the practice of commoditizing production and externalizing costs in the interest of short-term economic profits is no longer in their best business interests. Shared value, in other words, invites companies to focus on “the right kinds of profits,” e.g., profits that foster social and ecological benefits rather than diminishing them.

This shared value model, as Porter and Kramer point out, is very different from the corporate responsibility model. The corporate responsibility model is based on the principle of “doing good.” Companies engage in it primarily to enhance their reputations, and it has very limited effect on the success of their economic performance. Consequently, it often is difficult for companies to economically justify following this model in the long term. While no one wants to discourage companies from operating by these ethical principles, Porter and Kramer suggest that corporate responsibility by itself will not likely result in the kind of ecological and social restoration that we desperately will need to face future challenges.

Farmers have, of course, long experienced the negative consequences of being suppliers to companies that operate under the old model of commoditizing production and exerting maximum bargaining power to drive down prices. Given the future challenges that Grantham describes, we can ill afford to push more farmers out of business. To do so would jeopardize not only our food security but also the business success of the companies themselves. It seems like a good time to explore the shared value business model that Porter and Kramer propose. Farmers and rural communities need to share in the value of their production so they can care for their land and their people; not doing so would be to the economic detriment of the companies that depend on them for long-term economic success.

Perhaps we are on the cusp of another moment in history when crises can turn out to be opportunities to develop a more sustainable future.

References
Jeremy Grantham, April 2011. “Time to Wake Up: Days of Abundant Resources and Falling Prices are Over Forever,” GMO Quarterly Letter.

Michael E. Porter and Mark R. Kramer, January/February 2011. “Creating Shared Value,” Harvard Business Review.

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Kirschenmann: Two wake-up calls