Creating Shared Value: The New "Old" Big Idea

In the January-February 2011 issue of Harvard Business Review, Michael Porter and Mark Kramer published an article saying that we could unleash a wave of innovation and growth by reinventing capitalism. Their proposal is to update our view of the way companies create value from one of optimizing short-term financial performance to one of what they call "shared value." They define this as "creating economic value in a way that also creates value for society by addressing its needs and challenges." By developing policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions of the communities in which it operates, this concept of shared value focuses on identifying and expanding the connections between societal and economic progress. The authors go on to say that the purpose of the corporation must be redefined as creating shared value for the company and society, not just profit for the company.

This "new" proposal for how to reinvent capitalism appears to be very similar to one of the common operating principles of most of the 100-year-old companies I have studied. These companies see themselves as part of an integrated web of relationships with their community and the other partners in their value chain; their purpose is generally described in terms of the broad value they provide rather than profitability. As Danny Miller and Isabelle Le Breton-Miller argue in their book Managing for the Long Run, "The same attributes that have long been vilified as weaknesses of [these] businesses....have actually created formidable competitive advantages for these firms." It seems we have much to learn from these old companies: Even if their practices are not what we have been teaching in our business schools, some of our leading business strategists are now identifying practices very much in line with how they have been doing business for decades.

Can A Company "Die" Prematurely?

This question was asked in a recent Wall Street Journal management blog. The author said that economists generally answer that institutions die when they deserve to die - that is, when they have shown themselves incapable of fulfilling stakeholder demands. But then the blog went on to say that this assessment misses an important point: that just as a person's death can be untimely, so too can corporate death, at least from the perspective of society at large. The author posits that organizations grow and prosper by turning simple ideas into complex systems and that complexity takes time - a reason to encourage organizations to adjust their strategies to pursue a long-term mission.

This blog reminded me of the book that got me started on my study of old companies, Arie de Geus' The Living Company: Habits for Survival in a Turbulent Business Environment. In the prologue to his book, de Geus states that if you look at corporations in light of their potential longevity, most are dramatic failures - or, at least underachievers. The large, multi-national companies, he says, live an average of 40-50 years. Other studies on life expectancy of firms regardless of size indicate an average of 12.5 years. Knowing that companies can survive for well over 100 years, the implication is that a gap exists that represents wasted potential. De Geus maintains that no living species endures such a large gap between potential life expectancy and average realization. Moreover, few other types of institutions (such as churches or universities) seem to have the abysmal demographics of the corporate life form.

Why should we be concerned about premature corporate death? As de Geus comments: "The damage is not merely a matter of shifts in the Fortune 500 roster: work lives, communities and economies are all affected, even devastated, by premature corporate deaths." He, too, speculates that the reason for premature corporate death is because management focus is too narrow and short-term, forgetting that the organization's true nature is that of a community of humans in pursuit of a long-term mission.

"Little Bets" Innovation

I just heard author Peter Sims talk on a business news show about his new book "Little Bets." Little bets, he explains, are a low-risk way to explore and develop new ideas. He maintains that most successful people and businesses in vastly different fields use this basic method of making lots of little bets, rather than bet-your-company, big bets. What caught my attention about this interview was that he was describing one of the common factors my research has uncovered in 100 year old companies. To quote from my presentation at the Forbes Business Leadership Forum earlier this month: "These companies ARE innovative, but they do so in a very interesting way: through constant, small experimentation."

These "old" companies are very aware of their changing external environment and are constantly on the outlook for adaptations they may need to make. These companies are tolerant of (and often encourage) activities "on the margin" - experimentation within the boundaries of the firm's cohesive sense of mission and purpose. When large scale innovation and change are needed, they plan and implement it very carefully based on what they have learned from the "little bets."

Sims says in these "uncertain and rapidly changing times .... little bets must become a way to see what's around the corner, or we risk stagnating." Companies that have survived over 100 years have discovered this is the way to survive throughout the times.

Doesn't Leadership Matter?

The most frequent question I receive regarding the common practices of companies that have survived over 100 years is "Why don't you have good leadership as one of the factors?" The simple answer is because it didn't show up in the studies. These companies have survived because of their strategy, culture and practices that transcend individual leaders. Though most of them revere their founder and have stories about leaders who navigated the organization through a crisis of some sort, no common leadership traits emerged. Obviously leadership matters and these companies thrive under good leadership. But they also survive under poor leadership. What they can't appear to overcome, however, is a leader who tries to steer the company away from its strengths rather than building on them: when old companies fail, the leaders have not been following the practices that enabled them to survive for the past 100 years. What a shame.

What You Know vs. What You Do

I am happy to report that my presentation on 100-year-old companies was met with great interest at the recent Forbes Business Leadership Forum/IBM Impact Conference. I was also very pleased to find many examples I could use for the key "survival" practices of old companies from the talks of other speakers at the conference, even though their topics were completely different. IBM started with a slide show titled "100 Years of Innovation in 100 Seconds;" the CIO of Caterpillar talked about the 83 year partnership they have had with IBM; "culture eats strategy for lunch" so you'd better have a good one; Forbes publisher Rich Karlgaard listed "real purpose" (a moral foundation - not financial) as one of the things that are needed for a company to survive in the new economy. One speaker began his talk by asking how many people in the audience believe that regular exercise is good for your health. Of course, most of us raised our hands. Then he asked how many of us regularly exercise. Far fewer hands were raised. His point: knowing what needs to be done is the first step, but doing is necessary and may require changing old habits. The life expectancy of people living in the United States increased by 80% in the 20th century by knowing what factors increase longevity and by acting on them. Now that we have identified some common factors in companies that have "lived" for over 100 years, perhaps in the 21st century we can increase the life expectancy of companies. But it will take changing some old habits.

"My" Old Companies

In preparing my presentation for the IBM Impact/Forbes Business Forum, I've been looking for examples of 100-year-old companies and started with the companies I know best: those I have worked for. Can't believe I didn't realize until now that all the organizations I have worked for in my adult life are over 100 years old. Some of these companies you have heard about: General Electric (1878) and Herman Miller, Inc. (1905), but the small local bank at which I worked throughout high school (The Bank of Birnamwood, now Banner Banks) is also proud of its history beginning in 1900 and not closing during the 'great depression' or after the head teller was killed in a bank robbery. My current employer, little Hope College in Holland, Michigan traces its history to 1851. Perhaps my interest in old companies is rooted in my own positive personal experience with these outstanding institutions.

IBM Impact/Forbes Business Leadership Forum

One week from today I will be presenting results of my research on 100-year-old companies at the Forbes Business Leadership Forum within the IBM Impact conference in Las Vegas. Cindy Cheng from IBM discovered my blog as she was researching IBM's 100th anniversary and invited me to speak at the conference next week. I am very excited to share this information with many of today's business leaders.