The power of pragmatism
The urgent transformation of economic theory and business science
Doing less harm – that's not good
The avalanche of bad news concerning the environment, poverty, unemployment, human rights violations, and the inaction of policymakers, combined with the usual corporate approach, leaves many citizens worried. The data we have is clear: climate change is progressing, there is no chance of absorbing the hundreds of millions of unemployed young people, while the competitiveness of most nations in the world continues to erode. The only solution economists can imagine for all the problems and wrongs is growth fueled by increased consumption, for which citizens are expected to accumulate more debt.
Much time and effort are devoted to analyzing all available information. While many desperately search for alternative solutions, there are few, if any, that seem capable of reversing the negative trends. There is a blind belief in a single solution: that growth and nations lacking growth must first undergo a period of austerity. Each expert approaches the mass of information from their own perspective, within a well-defined silo, depriving the world of the knowledge needed to create a vision essential for designing a new and effective path forward. This article attempts to broaden our perspectives.
The lack of a deep understanding of how economic and social systems function leaves no room for the wisdom urgently needed to mobilize the best minds and committed individuals to move from analyzing current crises to developing a pragmatic portfolio of initiatives. In my view, too much effort is devoted to analyzing problems, theorizing solutions, and fiercely debating these options as if the dominant theory were dogma. Almost no one focuses on demonstrating on the ground that it is possible to surpass the current growth model and achieve better results—even by its own standards.
In a recent conversation with the Right Honourable Anders Wijkman, Co-President of the Club of Rome and a leading thinker on sustainability policy design, it became clear that few people understand that analysis and theory, concept development, and case studies are powerless against current negative trends without a fundamental shift in the economic model. We need to move away from the logic of economies of scale and cost reduction to a society that uses what it has, prioritizes the basic needs of all, and circulates newly acquired purchasing power within local communities.
Blind belief in growth
The millions of students who aspire to a greater financial reward through their investment in an MBA degree barely realize that they are all learning the same business model that was once conceived at the renowned Harvard Business School. MBAs are as much a product of economies of scale and standardization as the industries they are meant to manage in the future. It all boils down to financial results, market share, economies of scale, and rankings. This dominant model dictates that you sell what you produce, and that growth combined with market dominance will not only deliver the best return on investment for shareholders but will even align performance through reward and bonus management. And if the company faces pollution scandals or social problems, the system will do its best to reduce pollution and social injustice. We know that doing less harm is simply not good enough. Companies must seize opportunities to do much better.
This dominant economic model that has guided the business world is framed by a simple logic: competition based on price and quality. This basic principle has translated into the theory and practice of economies of scale, with a relentless pursuit of ever-lower marginal costs through standardization. This has led to a dramatic concentration of production, with only a few leaders setting market standards. The obsession with cost reduction, particularly the reduction of labor, has resulted in a logic that confirms that companies that merge and lay off thousands of workers are immediately rewarded on the stock market with higher share valuations.
The scale of these mega-mergers leads companies to focus solely on their core business, leveraging their existing skills. They eliminate all external activities through outsourcing and a strict discipline known as supply chain management. Make no mistake: companies are constantly striving for lower costs and continually sacrificing quality to ensure growth through successive sales. And if this strategy is to be pursued through the design of service models, then consultants are available to implement this aspect of the new strategy to generate more profit and a secure cash flow.
The logic of free trade has fostered the rapid globalization of a small number of players through the adoption of this cost-driven business model. Surprisingly, people are willing to buy three refrigerators over 25 years, saving 30% on the first and 50% on the third, without realizing that over a quarter-century, twice their disposable income has been spent on imported goods that are cheaper than those from the "good old local manufacturer" who produced white goods that lasted 25 years and would have offered ongoing maintenance services, while significantly improving resource efficiency and reducing waste.
Sales and marketing strategies have successfully blinded customers with lower prices and the promise of the latest innovation and improved energy efficiency, without realizing that this strategy ultimately leads to the predictable collapse of local industries. Worse still, money that used to circulate within the local economy is now being channeled out of the community, resulting in slowed local development, a loss of competitiveness, and increased unemployment that drains even more purchasing power from the community. This is where the concept of "underdeveloped nations" comes in.
The urgency of change
The fundamental evolution of the business model involves moving beyond the relentless pursuit of cost reduction and adopting a business strategy that generates more value from locally available resources. This fundamental shift requires companies to break free from the straitjacket of focusing on a single product portfolio. This is a significant challenge because it is fundamentally different from what MBAs have been taught to believe is the path to success.
The advantage is that this new business model offers opportunities to generate multiple revenue streams with resources that are readily available to the company and the entrepreneur. The surprising thing is that when you generate several revenue streams from available resources, you can remove your business from the treacherous world of global market prices! Imagine, farmers and miners can look at the numbers flashing on their Bloomberg screens and relax: it's just an indication of one of their income streams, and it's no longer a matter of life or death.
How often are farmers or small producers driven out of the market by foreign competition that can undercut prices, including transportation costs, and that easily partners with local distributors indifferent to building local purchasing power? What would be the remedy? It is quite clear that if workers' compensation is reduced to one dollar a day, European social security is headed for bankruptcy, with all manufacturers clamoring for a more flexible market. But even African and Latin American wages cannot compete with the wage dumping practiced elsewhere in the world. The call
for "labor market flexibility" is a euphemism for demanding reduced labor and social security costs. The sophisticated assessment of national competitiveness is determined by basic business logic, where overall cost performance dictates market position. If this game is played successfully by less than one percent of the world's largest companies, the remaining 99% have virtually no chance of survival. Consequently, consumers are increasingly buying globally sourced materials, nutrients, and energy supplied by a few players who control capital. Europe seems to have accepted the inevitable demise of its social system and is devising solutions based on "more of the same," such as the free trade agreement with the United States, which purports to create a level playing field for 800 million consumers.
First, use local resources
The new business model we have tested in over 100 sectors of the economy will not only generate more value locally, but it also ensures that more money circulates locally. Better still: it outperforms the current globalized model in terms of return on investment, cash flow, poverty reduction, and the ability to meet basic needs, including employment, without subsidies. Governments can now dedicate time and effort to ensuring equal opportunities. We cannot overemphasize the difficulty of implementing a smart and inclusive growth strategy in a region or nation when the economy is constantly drained of liquidity. When the primary and secondary sectors are unable to compete with prices dictated by the international market, hard-earned income leaves the local economy, leading to the unemployment and economic contraction that have become characteristic of most countries in Europe and Japan (and other nations). The only way to reverse the trend of high unemployment and the downward spiral of economic development is to ensure that generating more added value with available resources creates more money circulating within local businesses. While this logic runs counter to the prevailing dogma of free trade at the macroeconomic level and ever-lower costs at the microeconomic level, based on our experience on the ground, we see no other way to extricate societies from the trap of poverty and unemployment.
There is another way, which involves drastically reducing labor costs, even engaging in social dumping and shifting the burden of healthcare, unemployment benefits, and pensions onto the government. This results in an unsustainable increase in public debt, followed by a prolonged period of austerity to limit the tax burden, already too high for a shrinking workforce. Let's not forget that global corporations don't pay taxes, and therefore the entire burden falls on the shoulders of ordinary citizens. If we accept that increased public spending and a public deficit exceeding 3% of GDP are not viable options, then it is urgent to change the rules of the game, because the current correction of misguided spending has only one option: austerity. Thus, the first and foremost rule of the game that must be changed is the shift from "ever-lower costs" to "ever-higher value production" using locally available resources. The ZERI Foundation, which is actually a network of organizations worldwide, has demonstrated through research and practice that this change is not only viable but can be implemented in the short term. We have witnessed the mobilization of €4 billion and the implementation of over 100 projects that have generated 3 million jobs and embrace this logic with remarkable ease. The pursuit of value—rather than the desire to reduce costs—very quickly brings additional products and services to the local market, which can also, and quite easily, compete with internationally traded goods. The local economy then enters a growth spiral that goes beyond the overconsumption of scarce resources. This phenomenon is counterintuitive but easy to explain.
China is the world's leading supplier of photovoltaic panels. The unit cost has fallen so drastically that it is now only a few cents away from competing with traditional fossil fuel sources. However, an innovative technology from Sweden allows for the combination of PV energy with hot and cold water generated by capillary tubes within a PV sandwich. This thicker panel is now robust enough for rooftop installation, provided the base is heat-resistant, ideally made from heat-resistant recycled plastics, creating more jobs by replacing aluminum. The cascade of benefits continues, as the water is now stored at a high temperature, not only to kill bacteria but also to store energy, thus replacing the batteries that too often make renewable energy uncompetitive. The break-even point for local assembly is reached with just 200 units sold per month. The combination of all these advantages results in a cost per kilowatt-hour that is only a fraction of that of solar power. The goal isn't to undercut Chinese photovoltaic system manufacturers on cost, but to win the competition by generating significantly more value! It's no surprise that Solarus won this year's Innovation Award for Process Industries in China!
The coffee issue has been central to our work for 20 years. Recent developments amply demonstrate that this internationally traded commodity has enormous growth potential that extends far beyond the cup of coffee. On the farm and in the city, coffee waste can be transformed into substrate for mushrooms. The used substrate, left over after the mushroom harvest, can be converted into animal feed, generating three income streams instead of one. Now, the cost of protein (mushrooms and animal feed) is lower than the cost of imported food and feed. Better still, it generates local jobs and local income. While this program has been dismissed as too little, too late, we must remember that the global volume of coffee waste exceeds 10 million tons, enough for 10 million tons of mushrooms and 4 million tons of animal feed, all produced locally. And now, new biochemical industries have emerged, selling UV protection and odor control. If we could earn the same amount per ton of soybeans today, then the triple income stream adds $14 billion to the coffee economy, money that not only comes in, but doesn't leave local communities!
Any change is difficult
Large companies struggle to adopt this multi-revenue model, unable to explain to stock market analysts their shift from a core business to a multi-cash flow model beyond established markets. This situation is illustrated by Nestlé's response to the mushroom farming opportunity. Indeed, the world's largest coffee processor, whose waste is estimated at 3 million tons, decided to recover energy from coffee waste, thus reducing its dependence on fossil fuels. While energy production from waste features prominently in its sustainability report, which highlights the food group's performance in reducing its carbon emissions, it falls within the traditional logic of cost reduction. This case would be celebrated within the company's traditional logic. Waste that would have to be disposed of at a certain cost now produces energy and increases profits. This fits perfectly into the dominant business model where the company demonstrates its social and environmental responsibility by "doing less harm"! Would it be possible to convert the strategy into one that consists of "doing more good"?
Imagine Nestlé shifting from a "cost-cutting" model to a "value-creating" one. The financial, social, and environmental benefits of burning a few million tons of coffee waste would pale in comparison to the production of low-cost, healthy food (edible mushrooms provide a healthy diet) and the supply of animal feed that currently relies on imported soy from Brazil or the processing of slaughterhouse waste. You don't need to be an expert economist to quickly calculate the impact of mushrooms and animal feed on the local economy. Internal opposition to the proposal first cites the fact that mushrooms are not part of Nestlé's core business. Second, we often hear that mushrooms are not part of our daily diet. We respond that hamburgers and cornflakes were not part of our daily diet either. However, the biggest obstacle to the pervasive logic of the human and animal food proposition is that Nestlé has determined it is not in the mushroom or animal feed sector. Therefore, Nestlé will not seize this opportunity to add several billion dollars to its revenue.
We are aware that companies are not prepared to adopt this business model, and the millions of MBAs graduating from thousands of business schools worldwide are all steeped in the same logic: streamlining competition by seeking cost reduction as a sure way to improve cash flow. This imposes strict discipline on the supply chain by enforcing strict adherence to financial targets defined in budgets, reducing the number of suppliers, and limiting price negotiation to the sole objective. These budgets determine management bonuses, thus ensuring that everyone achieves the expected performance. Any perceived insensitivity is then quickly overcome by a corporate social responsibility program that projects the company as a responsible citizen, even though it has just forgone the opportunity to create thousands of jobs and provide millions of tons of quality food at a local cost, stimulating the local economy with readily available resources and helping to eradicate world hunger – not by genetic modification that puts seeds in the hands of a few producers in the world – but rather by using readily available resources.
We must move from the current model to one of inclusive growth, and this can never be achieved through massive additional taxation of citizens or through a harsh austerity program that throws thousands out of work and cuts to pensions and healthcare. The time has come to accept that the only way forward is to change the way we do business. This will require more than an economist preaching to the choir; it will require a minimum winning coalition ready to demonstrate in the marketplace that this new model can outperform what has dominated logic until now. After all, we are not against anyone or anything; we are in favor of something much better.
