Living in Peru : your everyday companion

(Provided by  Diego de la Torre – Partner, Aleteia Capital)

The dawn of the information society is approaching, even before we had a chance to adapt to its demands as individuals and businesses. We have lived as hunters and gatherers, we have worked in factories and now we are living in an information society, the icon of which is the computer. Nevertheless, we are faced with the beginning of a new type of society: the society of emotions. We are beginning to detect its effects in our employees, our consumers and our lifestyle.

Now is the time for change, the time for beginning to add emotional value to our products and services. The products of the future will have to appeal to our hearts, not merely to our heads. It will not be the best technology or the newest product what clients will prefer, but the story behind the product that will produce differentiation. Consumers will pay for the story that ignites their imagination, one that reflects how they see themselves and how they want others to see them.

As competitive pressure and technology cause products and services to become commodities, businesses will have to be different from their competitors by creating credible and convincing accounts that appeal to the hearts of consumers about who they are and what they believe in. Some of the most successful companies in the world, such as Disney, the Body Shop and Rolex have long recognized the consumer’s appetite for a good story. As said by Rolf Jensen of the Copenhagen Institute of Future Studies, "businesses need to imagine their businesses in the same way in which good novelists imagine their stories".

In another area, we live in a CNN world. Technological changes allow us to have access to information about world events in real time. Now an English consumer of shoes from a developing economy knows whether they were produced with manual labor by enslaved children, and incorporates this intangible aspect of the product into his purchase decision. Due to an increasing social and ecological conscience among consumers, intangible variables such as good corporate citizenship and social responsibility are the factors that increasingly decide the preferences for a certain good or service.

Also, due to the competitive pressure of globalization, all products tend to become commodities, whereby quality and price are standardized. For that reason the key to differentiating our products is found in a multiplicity of intangible aspects, foremost among them being the company’s social responsibility, which is nothing more than the contributions that it makes towards improving its social and ecological surroundings.

There is a neo-protectionism based on an ethical tariff that is not generated by a ministry of economy, but rather in the mind of the consumer, becoming a very subtle and effective para-duty device. A media report on the working conditions at Nike subcontractors in Southeast Asia sufficed to make this company’s shares suffer dramatic declines during the early nineties. A simple photo of a pregnant Peruvian female harvesting asparagus made it difficult for this product to get access to the European market.

Also, institutions such as the International Finance Corporation (IFC) or the World Bank consider a company’s social responsibility as a determining factor in evaluating loans for mining and industrial projects. All this results in social responsibility playing an indispensable part for all businesses that would like to compete successfully in a globalized world, as well as with a more and more educated and informed population that is ready to award with its preference to products or services from companies committed to the improvement of their social surroundings and to punish those that do not have a positive impact with indifference.

Value
Until 1990 the value of a company on the New York Stock Exchange was almost the same as its book value. Nowadays, the average ratio between market value and book value is three to one, according to data from the United States Federal Reserve. This means that of each US $ 900 of a company’s value, US $ 600 is attributable to intangible assets, such as intellectual capital, knowledge, reputation, professional management, ability to understand different cultures and markets, and solid corporate citizenship. These intangible assets are not recorded in the financial statements but are quantified by the market through the difference between their stock-exchange value and their accounting value. Unfortunately, business schools and universities train executives to be managers of tangible or accounting assets instead of preparing them to develop those intangible assets that, on average, represent two-thirds of a company’s value. The competitive pressure generated by globalization results in taking the quality and good pricing of a product or service for granted.

Those companies that have not implemented programs for re-engineering and total quality, or that have not developed strategic alliances or mergers in order to achieve economies of scale have simply disappeared from the corporate map. To handle a corporation’s physical and financial resources well is something that any company in the heap does in the globalized world. For this reason, those companies that stand out above average are those that manage to be different by means of intangible assets such as social responsibility. For example, I can recall that when I lived in Florida and I bought spaghetti sauce from the company belonging to actor Paul Newman, a fundamental element in my purchase decision process was that that company was very actively involved in social causes. I noted that many people reasoned out their purchases in the same way. As a result of this I conducted an empirical research at the London Business School concerning what I called corporate social responsibility elasticity of demand, which measured the percentage change in the amount of a product demanded in the face of a percentage change in the social investment made by the company. I must admit that it is difficult to accurately quantify the economic advantages of corporate social responsibility (CSR), but everything indicates that its elasticity is greater than one.

I believe, like Dan Keeler editor of Global Finance, that the CSR’s financial arguments are going to follow the same process as that for businesses’ ecological conscience. Just a decade ago, the green lobby made an effort to prove that being responsible with the environment made good economic sense. Nowadays the relation between good ecological management and above-average financial performance is clearly established. For example, a study conducted by ICF Kaiser, a prestigious consulting company based in Washington, found that companies that had an ecological strategy obtained higher valuations (by 5 percent) than those that did not take their impact on the environment into account. The positive impact in reduction of risk and costs that ecological management produces in the balance sheet is already recognized. There are also the image benefits derived from being considered a corporation that is concerned about the environment and the perception that it must have a very efficient management for this concept. To act in a socially responsible form generates similar benefits, but quantifying them is a little more difficult that in the case of pro-active policies in favor of the environment.

Chris Moon, a consultant with CSR Global, has no doubt about the benefits of the ESR: "Acting in a socially responsible form is of interest to shareholders, improves the company’s reputation and is indicative of good management". In the United States, the so-called ethical funds have grown 40 percent annually, whereas the overall growth for all mutual funds is only 15 percent. Furthermore, investment bank UBS Wasburg is forecasting an even more marked growth in this type of funds, and financial institutions are preparing to design products that satisfy the demands of socially responsible investors.

Nevertheless, in order for a company to implement a policy of good corporate citizenship, it must be efficient and profitable. Winston Churchill said, "It is a socialist idea that making profits is a vice; the true vice is making losses." It is obvious that the economic yield is very important. Without it, a company cannot confront its other responsibilities, and cannot be a good employer, a good citizen or a good neighbor. The greater effort must be channeled in generating new ideas for creating wealth and social well-being. The successful and efficient companies are those that have the opportunity to contribute to social improvement; losers cannot do so. The contemporary enterprise world demands a new strategic concept that combines three things: profit maximization, consumer’s satisfaction and impact on society.

THE NECESSARY CHANGES IN THE BUSINESS CULTURE
It is in this economics of intangibles, such as CSR, that the changes in enterprise culture become indispensable.

The graph on the following page will help to describe the paradigm changes and vision of the business culture that allow achieving the development of this new concept of long-term competitive advantage.

The graph shows the individual values of people (from money to solidarity) in the vertical axis, while the horizontal shows corporate values (from profit to public service). In our society, most people and organizations are found in Quadrant I. What I am proposing is not the idealistic Quadrant IV (Mother Teresa), but an equilibrium that would result from the origin. Therefore, it is necessary that the culture of businesses moves to achieve the desired equilibrium.