AS FACULTY at Harvard Business School, we serve in an organization devoted to improving the leadership of business enterprise. Our school’s mission is “to develop leaders who make a positive difference in the world.” We do that with research that builds and communicates concepts useful to the managements of firms, by training the MBAs who go on to careers as business leaders, and by providing midcareer development programs for the top executives of companies.
In all this work, the faculty share a common, underlying set of beliefs that motivate our diverse approaches to our mission. Managers make their contribution to our society by guiding the organizations that provide goods and services to customers. For this contribution to be sustainable, the organizations must operate at a profit in the face of competition and a changing environment within the constraints of relevant laws and societal norms. Competitive markets—the invisible hand—insure that when firms behave this way, they are doing the best they can for society. That is the glory of the capitalist market system.
In that context, this book sets forth a radical proposition. We believe that the role of business needs to change. The capitalist market system has generated enormous wealth in recent decades, but if the system continues to operate more or less as it has been operating, then it is vulnerable to breaking down in serious ways. As we will discuss, plausible forecasts point to challenges on multiple fronts. To stanch these potentially disruptive forces and ensure that the system continues to function in an effective manner, we believe business must stop seeing itself as merely a self-regarding participant in a system that is largely “given”—or shaped and maintained by others—and start seeing itself as a leader in protecting and improving the system that gives it life.
We will argue that business must begin taking a more active role in assuring the market system’s ongoing health and sustainability. Much as we might wish to believe that the system will take care of itself through the magic of the invisible hand, we cannot in good conscience claim that narrow self-interest and competitive forces alone will ensure the system’s performance for society. But, unlike many writing in the aftermath of the financial crisis, we do not see government as the system’s savior, either. Good government is crucial, to be sure. But government, we will argue, needs the support and engagement of business to function effectively.
In the chapters that follow, we will share the research and reasoning behind our view and spell out the practical implications for companies and their leaders. We will offer concrete examples of what we have in mind when we call for business to take a leadership role in protecting and improving the system. We believe that today’s global enterprises—large and small, but especially large—are uniquely positioned to help address many of the most pressing challenges. Some of these challenges may lie beyond the current capabilities of most companies, but we are confident that with suitable leadership, they can acquire new knowledge and bring their talent and resources to bear on developing and implementing innovative solutions.
This book is the result of a project we launched as part of Harvard Business School’s centennial celebration. Initially, we viewed the approach of its hundredth birthday as a time to reflect on what the school had accomplished since its founding in 1908 as a training ground for managers of the railroads and other large industrial concerns that had arisen in the late nineteenth century. As envisioned by the university’s president and the prominent alumni who had urged the school’s creation, the school would prepare young men (young women were not mentioned) for a wholly new role in U.S. society—that of the professional manager. After a bumpy start and some trying periods, the school evolved as a source of training, research, and communication that eventually catalyzed the widespread growth of business schools across the United States and then, after World War II, around the globe.
Reflecting on the school’s past, we very quickly realized that in terms of the original vision, the school had far outstripped the imagination of its founders. By the fall of 2008, Harvard Business School had conferred the MBA degree on nearly fifty-six thousand aspirants, both male and female, including many who have gone on to head prominent companies in the United States and elsewhere around the world—as well as an array of government agencies, nonprofit organizations, and even countries. Whether or not management could be called a profession, knowledge had accumulated and pedagogy had progressed so that graduates came to their calling far better equipped to fill roles as general managers of companies and other organizations. One striking example lay in the contrast between the success rate of entrepreneurs with MBA training and those without. A study of ventures started by HBS MBAs found that they had a 50 percent chance of success, compared with the average of 10 percent.1 Moreover, although Harvard’s approach to teaching and research was unique in its commitment to case teaching and field research, many other business schools were developing capable graduates as well.
We concluded that an inquiry into what was on the minds of outstanding alumni would be more useful—and more interesting—than a self-congratulatory reflection on the past. As these leaders looked at the world around them and then ahead, what challenges did they see facing business that ought to provide the agenda for our school? In effect, if we were building a new school today, what areas would require attention? While that question is often asked by faculties when they are engaged in strategic planning, the answers they give typically reflect a subtle reframing of the question. They study what problems they should address, given the skill set of their faculty. We wanted to ask a different question: What did the best business leaders around the world think was important, and how did they view the health of the global market system? And since we were fortunate enough to be based at Harvard Business School, we had access to some of the very best business leaders and the resources to go talk to them. So we did.
We are longtime colleagues in the general management area at Harvard Business School, but we brought very different perspectives to this project. Joseph Bower and Herman “Dutch” Leonard are trained as economists; Lynn Paine’s formal training is in law and moral philosophy. Although we are all students of leadership, we have pursued this topic from different angles: Joe’s research has focused on corporate strategy and resource allocation; Dutch’s on business-government relations and corporate citizenship; and Lynn’s on ethics, culture, and corporate governance. In addition to teaching in the school’s educational programs, where we have interacted with thousands of MBA students and executives from all parts of the world, we have all worked as consultants to companies and served on corporate boards. Despite our diverse backgrounds, we all came to the project with a belief that as faculty members, we needed to lift our sights and take a dispassionate look at the future of the market capitalist system that has been the source of prosperity and wealth for so many during Harvard Business School’s first century.
In this spirit, we organized a series of forums in Europe, East Asia, Latin America, and the United States. We called on close business friends to recommend invitees, and in each region, we had a cohost who helped encourage participation. In the end, forty-six leaders took part in the meetings. Mostly CEOs (some had retired and taken other roles), the participants included Bertrand Collomb, longtime chairman of Lafarge; Sir David Scholey, CEO of S.G. Warburg and later vice chairman of UBS; Nancy Barry, CEO of Enterprise Solutions to Poverty; Victor Fung, chairman of Li & Fung; Ana Maria Diniz, president of Sykue Byoenergia; Jaime A. Zobel de Ayala, chairman of Ayala Corporation; Jorge Paulo Lemann, founder of Garantia and AmBev; Elaine Chao, U.S. Secretary of Labor; Carlos Cáceres, president of Instituto Libertad y Desarrollo, Chile; Jamie Dimon, chairman and CEO of JPMorgan Chase & Co.; and Jeff Immelt, chairman and CEO of General Electric. The full list of participants is provided in the appendix. Two other executives provided their views outside the forums proper.
The sample was certainly not random, and we did not even touch some important parts of the world, such as the countries of the former Soviet Union and Africa. What’s more, we were speaking with what some might call a biased sample, the winners in the past pattern of global progress. We did this, however, for a reason. We were asking a very specific question: If we stipulate that the system of market capitalism has been the source of remarkable economic growth, what problems might undermine that growth in the future? What aspects of the system at the level of firms, industries, nations, or multilateral institutions might cause serious difficulties? The people we were asking understood the system well and were viewing it from perspectives as varied as New York, Caracas, Turin, and Brunei. Each individual had decades of experience with global markets as well as considerable interaction with government leaders. They understood what they needed in order to function.
Before describing the forums, we should perhaps say something about our definition of market capitalism, since it is the future of that system that we are examining. (We will take up this topic at length in chapter 4.) In general, we have in mind an economic system characterized by these key features:
As will become clear in chapter 4, we also include important facilitating conditions such as:
Different countries have developed a variety of arrangements for providing these elements. The United States, for example, takes a highly decentralized approach, relying heavily on the fifty states to make laws and provide services to the populace. Moreover, the U.S. Constitution provides for a unique degree of individual liberty. This approach has led historically to the delegation of schooling to the states, but also to political suspicion of centralized economic intervention, for example, in resistance to the creation of a national bank. From Andrew Jackson’s presidency in the early nineteenth century to today, there has been fierce political resistance to both central direction and strict regulation of the banking system. At the same time, the United States has a long tradition of federal support for enterprise, going back more than two hundred years. “No taxation without representation” was as much a reaction to the British unwillingness to support American land speculators against the French in the Ohio territories and beyond as it was a reaction to taxes on tea.2
In contrast, France, Germany, and Japan all have strong central governments that are deeply involved not only in education and health but also in banking and industrial policy. Furthermore, ownership of enterprise is more complicated, given the importance of large complexes of enterprise with interlocking holdings. Through their various holdings and other relationships, companies such as Banque Nationale de Paris, Allianz, and Mitsubishi have had outsized influence in the management of their economies. How that influence is used, however, is considerably constrained by a communitarian ideology that many in the United States would find … well, foreign.
When we consider the so-called BRIC countries—Brazil, Russia, India, and China—the picture gets even more complicated. In these nations, state ownership of enterprise remains an active element of national economic strategy rather than a vestige of past arrangements. China has identified a group of national champions such as CNOOC, Ltd., and Haier; these companies look like independent enterprises but are partially owned by elements of the state and have the full backing of the state as long as their objectives align with those of the nation. Other companies, such as Baosteel, China National Building Materials, and China Mobile, are wholly owned by the state but have subsidiaries that are partly owned by the shareholding public. Brazil and India provide different versions of a mixed approach to ownership and regulation. Finally, Russian heavy industry is either privately owned by politically subservient oligarchs or, like Gazprom, state owned. Just as the United States controls where its high-tech firms sell their advanced technology products, Russia controls the terms on which Gazprom sells gas.
As these examples suggest, drawing sharp boundaries around what is—and is not—market capitalism in practice is not a straightforward exercise. Key elements are present to a greater or lesser degree in different countries, and some observers would argue that the rules of market capitalism are themselves in flux. Some countries are clearly outliers, embracing some features of the market system but rejecting others and at times behaving in ways that challenge the system. But even countries strongly committed to market capitalism will override market principles from time to time. National economic arrangements are inevitably embedded in a national political system that modifies those arrangements to reflect what its political leaders consider necessary for political stability. For example, George W. Bush’s administration—ideologically committed to free markets—imposed new barriers to trade with Canadian lumber producers and supported old barriers against Pakistani textiles in order to maintain political majorities in the United States, despite strong ideological and foreign-policy reasons to do neither.
When we talked with business leaders about the future of market capitalism, we did not get very specific about definitions. There seems to be a widespread consensus that independently managed enterprises that set their own goals, policies, and programs so that they choose which products to produce, when and where to sell them and at what prices, in the context of a stable but decentralized banking system and a trading system with open borders lie at the heart of market capitalism. The market determines success or failure.
As noted, however, the consensus definition leaves much room for interpretation and variation in political and economic arrangements. Today’s debate centers on the “Chinese system” versus the “U.S. system.” But in the 1980s, many people were enamored of the Japanese system (“Japan Inc.”) or the German system (“Germany AG”), both of which involved significant government involvement in the economy. Of course, in keeping with the practice of intervening when useful for domestic political purposes, the U.S. government is also deeply involved with the economy through fiscal and trade policy (e.g., the housing interest deduction and the protection of industrial agriculture) and government-funded research by agencies such as the National Institutes of Health and DARPA (the Defense Advanced Research Projects Agency, an arm of the Defense Department). A prototypical example is DARPA’s development of the ARPAnet, the precursor to the internet. And it was a Republican president who built the national highway system in the 1950s and promoted the study of national goals.
Since we wanted to learn from business leaders with diverse perspectives and experiences, we approached our forums with an open definition of a market capitalist system and a broad view of the territory we were examining.
The meetings started with a working dinner and lasted through lunch the next day—and so involved about eight hours of discussions. The sessions were off the record, but we asked individuals to take part in one-on-one, on-the-record interviews in which they offered their views. To provide focus for the discussion, we gave participants a briefing book consisting of exhibits and very brief explanatory text that we drew from a then just-published World Bank study that provided a scenario for the world economy in 2030.
The study, which is referenced heavily in chapter 2, provides a carefully worked-out set of projections of what the world will look like if events proceed in the same general fashion as the last several decades. It is not a straight extrapolation, but the many models used to develop the projections assume no major war, no serious pandemic, no breakdown of the financial system, and no environmental disaster of global magnitude. The study presents a fine-grained scenario that permits the exploration of growth rates and income distribution in many countries, as well as patterns of trade and migration. Environmental factors such as climate change and water usage are also discussed.
The briefing book served as the “case” for our discussion. Just as our going to business leaders to learn their views reflected a Harvard Business School approach to identifying research issues, so too was the use of a common set of data as a basis for discussion. Far from biasing the discussion toward one set of conclusions, the data freed members of the group to take what they could agree were almost certainly the kinds of problems that lay ahead as a starting point for a debate about causes and solutions. We present a summary of this data in chapter 2 so that as we share the views of our forum participants with you, you will know precisely the set of projections from which they were working.
We opened the forum discussion by reviewing the remarkable economic progress of the last half century and outlining the core themes of the World Bank’s projections. We then asked the participants what if anything in the projections concerned them. Many were already familiar with the data from the studies their companies had made in planning their growth and long-term development. For example, at GE, Jeff Immelt has turned the focus of that huge organization to the opportunities posed by infrastructure growth in emerging markets and by the need for more efficient management of energy production and consumption. At Lafarge, Bertrand Collomb had led a steady expansion of the company’s facilities in developing markets. And Victor Fung has presided over the building of the world’s largest network of textile and apparel suppliers and consumers. From his base in Brazil, Jorge Paolo Lemann has built the world’s largest beer company. For these leaders, the questions we were addressing were fundamental to the progress of their companies. The executives had not always looked at these issues in the way that we were doing collectively; nor did they all agree on what the implications of the questions might be, but this was their world and they took it very seriously.
The problems that the leaders identified at the evening session provided the agenda for the morning discussions. We asked them to tell us why the problems were important, what the consequences might be if the problems continued to develop as forecast, and what they thought should be done about them by individual firms, by business leaders, by industry (or other business) associations, and by government.
Perhaps surprisingly, we found that many of these business leaders were concerned about the very same issues that agitate critics of globalization—but for different reasons. As we describe in chapter 3, where we quote extensively from their comments, many are concerned that rising incomes are often associated with growing inequality and that global growth is contributing to environmental degradation and climate change. They worry about the destabilizing impact of millions of people migrating from poor countries to rich ones and about the rise of protectionism in many nations. They are troubled by the lack of transparency and by the fragility of the global financial system. And many question society’s ability to address these and other first-order problems, citing weaknesses in governance at the level of firms, industries, nations, and international institutions.
The difference between our business leaders and the critics of globalization is that our leaders see a healthy system of market capitalism not as the problem but as the solution to these ills. Indeed, some leaders see remedying these problems as business opportunities. Still, as we probed for what could be done to mitigate these disruptive forces and ensure the health of the system, we uncovered a range of views and some substantial disagreements. In particular, our discussions revealed deep philosophical disagreements about the appropriate role of business in this effort. We address these differences at length in the second part of the book as these discussions have led us to conclude that the business community and Harvard Business School have a good deal of work to do.
As a first step, we decided to write this book to share what we had heard from business leaders around the world and to offer our own perspective on the role of business in ensuring the market system’s health. Some readers will, no doubt, find our perspective problematic and fault us for not offering a fully worked out vision of how this perspective will ultimately play out in practice. But we think a discussion of the role of business is sorely needed now. We offer our views in the hope of loosening the ideological straitjackets that all too often impede fresh thinking and authentic debate about this critical issue. The remainder of the book unfolds as follows.
We begin in chapter 2 as we began our forums, by setting the context for our inquiry. We review the remarkable economic progress of the last half century and describe key elements of the world economy in 2030 as forecast by the World Bank.
In chapter 3, we present what we learned from our discussions and lay out ten potential disruptors—ten forces that could severely disrupt the market system’s functioning in the decades ahead. We quote extensively from participants in our business leader forums and draw on data from the World Bank and other sources to argue that the global market system is vulnerable to serious breakdown if it continues to operate more or less as it has in the past.
Chapter 4 builds a framework showing how these disruptive forces are related to one another and to the market system as a whole. We argue that the market system is itself a subsystem of a much larger sociopolitical ecosystem that supports and legitimizes it—and that the market system’s effective functioning and sustainability depend on the health of this larger ecosystem. We conclude that insufficient attention is being paid to mitigating the potential disruptors and maintaining the health of this larger ecosystem. But we are then left with a question: Who is responsible for looking after the system as a whole?
Chapter 5 considers what role business, in particular, should play in combating potential disruptors and ensuring the system’s health. We examine four views that emerged in our forums: business as bystander, business as activist, business as innovator, and business as usual. We then propose a fifth view—business as leader—that builds on what we heard. We argue that companies can and must do more to advance the healthy functioning of the system both as innovators developing new business models and strategies, and as activists for good government and more effective institutions.
In chapter 6, we elaborate the argument that individual companies can make a difference by developing innovative strategies and business models. We offer four detailed examples of companies that are pursuing the types of innovations we have in mind and distill some general observations on the leadership capabilities needed to drive these efforts. Our examples illustrate four generic approaches to helping sustain the system: amplifying its positive consequences, mitigating its negative consequences, counteracting exogenous threats, and strengthening its necessary antecedents and preconditions.
Chapter 7 examines business-led innovations in the broader institutional environment and explores the possibility of a more constructive relationship between business and government. We offer some historical examples—both negative and positive—to illustrate how business can help strengthen the market system by mobilizing others and engaging across sectors at the community, national, and international levels. Drawing from these examples, we discuss the challenges presented by this idea and outline the changes in thinking and other skills required for business to take on a larger role in this arena.
We conclude, in chapter 8, by reviewing the central argument of the book—that business must take a more active role in sustaining the system—and considering some of the new leadership and organizational capabilities that may be required to play this role effectively. We then offer a set of questions that companies and their leaders can ask to inspire practical ways to implement the book’s core idea and better align their strategies and activities with the needs of a sustainable market system. We conclude with further illustrations of what companies can do to tackle the pressing problems and challenges facing the system today.
In developing our argument, we often quote the business leaders who participated in our forums. As noted earlier, these meetings were off the record, but some participants provided us with one-on-one interviews that they gave us permission to quote. Most comments are cited anonymously with reference to the forum from which they came (to provide regional context). While we were writing, we were mindful of a comment made during the U.S. forum in New York by Elaine Chao, an HBS alumna and U.S. Secretary of Labor at the time of our discussions:
I think Harvard Business School, being the beacon of capitalism or the beacon of free enterprise, really needs to look forward to the next one hundred years and talk about its role in our society, and its value to the world community again, because we are now part of a globalized world economy. There are many detractors to the free-enterprise system who believe that captains of industry are selfish and that they only hew to the interests of the shareholders.
With this book, we invite you to join the discussion that began in our business leader forums and that led to our proposal for rethinking the role of business. Whether or not you agree with our analysis and conclusions, we hope you will find the ideas in this book provocative. We hope they will help you sharpen your own views on the role of business in maintaining and improving the market system’s performance for society.
Even more important, we hope the book will inspire fresh thinking and experimentation with innovative business models, new organizational forms, new institutional arrangements, and other new approaches to collaboration within business and across sectors. We are optimistic that the challenges we have outlined can be addressed—if only we tap into the creative energy and entrepreneurial drive that have brought society this far. Of course, we recognize that entrepreneurs around the world are already working to develop new products and technologies to address the cost of food, the waste of energy, and the threat of disease. We applaud these efforts with enthusiasm. But our argument is different. We think a comparable level of energy and creativity should be brought to the strategies and institutions that drive the larger system—and to addressing the challenges to the very core of that system.
To give you a more concrete idea of where this book is headed, we conclude this chapter with a brief case study:3
In underserved, overexploited rural India, the Indian conglomerate ITC identified an opportunity to transform the lives of many rural Indians while at the same time solving some of its own problems. Continually plagued by an inefficient supply chain in rural agriculture, ITC implemented what it called the “e-Choupal” initiative in 2000. (Choupal is Hindi for community meeting place.) Under the initiative, ITC set up Internet kiosks in villages where small farmers could get direct access to information about the weather, crop prices, productivity improvements, and markets and learn about the prices ITC was offering for their produce. By establishing a direct and transparent channel between the farmer and ITC, e-Choupal significantly reduced the role of the traditional middlemen, or mandi, in getting farmers’ produce to market. The result: a higher return and greater access to markets for farmers and a more efficient and higher quality agrarian supply chain for ITC (as well as new and better-paying jobs for some former mandi). By January 2007, ITC’s e-Choupal system was facilitating the purchase of agricultural commodities from some 4 million farmers in nearly forty thousand villages.
Although e-Choupal was conceived as ITC’s answer to its supply chain woes, the company was quick to realize that it had discovered the delicate balance between achieving corporate profitability and making a social contribution. Aware of the multitude of challenges faced by impoverished rural Indians, ITC extended its e-Choupal framework to deliver other core services such as access to health care, education, and information. ITC saw the opportunity to coordinate with other companies, including fast-moving consumer goods companies and finance companies, to deliver to Indian farmers products and services that had previously commanded huge premiums or were simply unavailable—from motor bikes to health insurance. With the addition of these new sales and distribution capabilities, e-Choupal was evolving into a platform for community development, helping reduce poverty and chipping away at rural isolation while improving the efficiency and functioning of ITC’s own procurement and distribution systems.
In 2010, ITC announced plans for a new version of e-Choupal to be launched in 2012. Designed to offer personalized crop management services, the new version was expected to extend ITC’s reach from four million to twenty million rural farmers, thus strengthening the company’s competitive position relative to the many imitators that had entered the field and bringing millions more into the modern agricultural system.
In this case, the company was able to open up the large market comprising India’s huge population of rural farmers only after constructing many aspects of a modern market system. ITC drew on its resources and distinctive capabilities as one of India’s major conglomerates to provide the necessary information, distribution, and financing. With those essentials in place, the company could provide other products and services, thus bringing a previously marginalized and exploited population into the market system as active and vital participants.
This example may seem idiosyncratic or its lessons particular to India or to agribusiness, and it might therefore be tempting to narrow it down and interpret it (or dismiss it) as a mere single instance. But we think this example holds greater possibilities—possibilities we will see repeatedly in this book. The e-Choupal example shows a business:
We have found that forward-looking companies across the spectrum are thinking creatively and learning how to address what have hitherto been regarded as problems for governments and nongovernmental organizations (NGOs) by developing strategies that enhance the prospects for sustaining the market system and often generate financial benefits for the company at the same time. For us, what is important about the e-Choupal example and others like it is that in the face of major challenges to the functioning of the market system, business took on a new stance. In this case, it was principally one business, and the company had at least some short-term financial incentives to take a new position as a market facilitator. In other cases, an individual business leader, a group of leaders, or a network of businesses might redefine its position as a player in the market system. And these actors might do so without a well-developed prospect of immediate financial returns but with the recognition that it is in their self-interest to be part of a well-functioning system.
The most promising examples show business leaders taking a system perspective to their entrepreneurship and creatively redesigning the role that business plays in maintaining and enhancing the wider system in which it operates and on which it depends. This book is grounded in the belief that such creative redefinitions and entry into new roles are both necessary and possible.