Thick Value vs Thin Value
Are you adding value? Really? What kind and to whom? Does it matter as long as you’re making money?
In his book, The New Capitalist Manifesto, author Umair Haque argues that it does. It is, as I’ve noted in an earlier post, a flawed book. However, the central point is insightful and salient.
While a generation ago the focus among economists was shareholder value, it’s become clear that’s not enough. Businesses have a variety of stakeholders, including employees, customers and society at large. While it may be expedient to overlook such things in the short-term, companies that do will find themselves at a competitive disadvantage.
Net Societal Value
Having a loud party at your house might be fun, but it will probably annoy the neighbors. Polluting the stream next to a factory might be expedient, but it will do terrible things to the community around it. Economists call costs like these externalities, because they are born by parties external to the transaction.
Haque, however, takes the argument further. He points out, quite correctly, that companies do lots of things for profit that harm their consumers to such an extent that the net value is negative.
For instance, telecom companies make us listen to long voicemail instructions so that we use up more minutes. Is net value created by those minutes or value taken away? Clearly, it is merely a transfer of value from the consumer to the vendor and that time could surely be used more productively.
The difference between such practices and polluting a river is one of degree, not of kind. In both cases, companies profit by taking value away from someone else without their consent and in both cases the net costs often outweigh the benefits. That’s what Haque means by “thin value”
There’s No Such Thing as a Free Lunch
Thin value is nothing new. The great industrialists of old such as the Vanderbilts, Carnegies and Rockefellers were, if anything, worse than the multinational titans of today. However, digital technology has changed the game considerably. The world has become more transparent and ordinary people are able to organize protest efforts as never before.
That’s made a difference. Nike faced a boycott in the US over its labor practices in Asia. Microsoft got bogged down for years in an antitrust lawsuit over its hyper-competitive practices. McDonald’s and Coke have been assailed for their contribution to rising obesity. The list goes on.
While it might seem expedient, even strategically imperative, to outsource production to third world sweat shops, bundle inferior products into a dominant operating system and pursue taste without regard to nutrition, the results can be disastrous. In each case, laser like focus on profits resulted in crises that threatened those companies’ very existence.
Due to the criticism, profit driven companies have put forth efforts to be more responsible. Nike has taken steps to improve the lives of their workers overseas. Microsoft has, by all accounts, become a kinder, gentler company and Coke’s Live Positively program highlights the company’s actions on behalf of society as a whole.
All of these efforts have, understandably, been met with some criticism. However, even the fact that corporations have put serious resources behind them represents a paradigm shift.
The New Rubicon
In 49 B.C., Julius Caesar led his army over the river Rubicon that separated ancient Gaul from Italy and proclaimed “the die is cast”. Ever since, the term crossing the Rubicon has been used to describe passing a point of no return. These days, innovative firms have their own Rubicon to cross when new products become widely adopted.
When an innovation begins to gain steam, it attracts a group of dedicated followers who are excited about the possibilities of new functionality. Upstart business struggles to rush out technological improvements in order to satisfy demand and keep ahead of competitors. It’s an all out race for not only relevancy, but indeed survival.
Success brings new types of challenges. As the technology becomes more widely adopted, the basis of competition changes. Later consumers take for granted that the product delivers on performance, they want better usability, convenience and, of course, start asking questions about societal impact. Geoffrey Moore calls this Crossing the Chasm.
Entrepreneurs find this incredibly hard to swallow. In their mind, they have been working hard to meet consumers’ demands and, when they succeed, they discover that they are required not only to put out a great product, but to consider factors outside their direct control. It’s a difficult concept and some firms never quite get past it.
The Silver Lining
Despite the challenges that the new emphasis on thick value presents, there are some undeniable advantages that it bestows on firms who pursue it over and above the avoidance of consumer backlash.
First of all, innovation requires constraints and the new emphasis on societal impact plays an important role in supplying important ones. Public concern over externalities are, after all, a market signal. Moreover, companies that pursue goals such as a lower carbon footprint or better nutrition often discover new efficiencies and expanded market appeal.
Furthermore, as Daniel Pink pointed out in his book Drive, high performing employees are motivated not only by financial compensation, but by a sense of purpose. Uber-consultant Gary Hamel makes a similar argument in The Future of Management. In a marketplace where talent is at a premium, companies that are seen to be contributing to society have a distinct advantage.
So, while the concept of thick value present a dilemma for profit seeking business, they also present opportunities. In a highly connected, global economy we are truly our brother’s keeper and that’s a reality that, increasingly, we ignore at our own peril.