Business ethics (Strategic Dimension)

Business Ethics –
Strategic Perspective
D R . C . C . TA N
SCHOOL OF MANAGEMENT
M A E FA H L U A N G U N I V E R S I T Y

Who – For whose sake
Why – the Right thing to
do, duty, good or bad,
or on God’s hands,
using Rationality

Historian
Ethics
Philosophies

What – Inner Calm, Good is
Pleasure, Greatest Good for the
Greatest Numbers

How – Power, Free Choice

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Other Justification i.e. Culture, Principles, Historian
Philosophies, Religious Beliefs, Business Best
Practices, Self-Interest, New Beliefs and Paradigm
such as Environmental Sustainability.
Provide reasons for what
is right and what is good.

Provide reasons for what
is right and what is good.

Business
Ethics
Right
Doing the Right things i.e. Being honest, not
cheating, have justice and being fair.
 Deontological theory of ethics
 Moral Standard

Good
Doing what is good – purpose and for whose is
good such as individual and organizational
(tactical ethics), the voices of majority and
society level (Social ethics) and environment
and earth (transcendental ethics).
 Teleological theory of ethics
 Non-Moral Standard.
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Self-Interest

Good

Right
Moral Standard

Deontology theory of ethics:
 The right thing to do – justice, honesty, fairness
 Based on the characteristics of the behavior.
 How to fairly distribute rewards or outputs to
people who are in need, who contribute. For
instance, how to distribute / allocate outcomes such
as pay, rewards, recognition and promotion relative
to an employee’s input as well as retribution.
 Thus a distributive justice.

Temptation Zone:
Self-Interest/Disinterest
Non-Moral Standard

Threshold / Conscience kicks in

 Teleological theory of ethics:
 Based on the goals or what is goof for the majority
i.e. rules and laws, and policies like the Food and
Drug Administration’s policies.
 Thus a procedural justice.
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Philosophy:
 Believing in regenerative
sustainable
environments

Policy (Motivation):
 Learning from the
Nature policy to
self-regenerate
and reproduce
 C2C (Cradle to
Cradle
Knowledge and
Certification)

Patterns of
Behaviors
(Strategies):
 Biodegradable
Shoes Business
 Green Roof
Buildings
 C2C Car Concept
– the Ford Model
U

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What consumers know about a company can influence their evaluations of products introduced
by the company and corporate social responsibility (CSR) actions and commitment can lead to
productive corporate association which can serve as an important context for the evaluation of a
company’s products and services.

Your company’s
actions:
 CSR

Build company
association

Organization’s
image

Customers

CSR

Image

Image

Image

Image

 Organization’s image could
influence the extent of
member identification with
the organization.
 Organization’s image can
also serve as a reputation
barrier in a market

Consumers’
evaluation of your
products and
services

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Reputation serves several functions, as
an effective entry barrier in the market,
a mechanism to enable the firm to
receive premium prices for its output, a
basis for repeat business

Bargaining power of
suppliers

New entry

Company’s
Rivalry

Bargaining power of
consumers


New substitute



Consumers became increasingly
dissatisfied with product
performance, deceptive and/or
unsafe business practices and
marketer handling of complaints.
The rights of consumers were
proclaimed by the U.S.A. President,
John F. Kennedy, in 1962, in what
became known as the “consumers’
Magna Carta”.
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Consumers’ Magna Carta:
 The right to safety
 The right to be informed
 The right to choose
 The right to be heard.

Safety
Choose
Informed
Heard

 A combination of all four of these rights gives rise to a “right” which Kotler regards as the
“most radical and the most basic challenge to the traditional rights of marketers, and that is
the right to influence products and marketing practices in directions that will increase the
quality of life.” (Kotler, 1972).
 This right implies that profitability and immediate consumer gratification are not sufficient
fulfillment of marketing’s responsibility, and that marketing activities and products must, in
addition, be “life-enhancing” because the world’s resources are too limited to be used
indiscriminately to satisfy customer desires without considering the social wisdom of doing
so.
 Kotler, P. (1972), “What Consumerism Means for Marketers,” Harvard Business Review, 50,
pp. 48-57.
Limited Resources
Marketing
Quality of Life

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New entry

Bargaining power of
suppliers

Company’s
Rivalry

?
Bargaining power of
consumers
Or
Bargaining power of
other stakeholders in
addition to consumers

New substitute

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From the marketing to the societal marketing concept:
 The essence of the marketing concept which reached its apotheosis in the early 1960s has
been described by Kotler (1972) as a “consumer orientation backed by integrated marketing
aimed at generating customer satisfaction as the key to attaining long-run profitable
volume.”
 Bell and Emory (1971) identified its three basic elements as a customer orientation:
 Studying and understanding customer needs, wants and behavior, not excluding
“stimulated” needs and wants.
 An integrated effort i.e. a systems approach coordinating the elements of the
marketing mix, and
 A Profit orientation.
Supply Activities

Resources i.e.
Cost.

Products and
Services:
 Values

Integrated
Marketing

Customer
Satisfaction

Profit
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From the marketing to the societal marketing concept:
 In the 1960s marketing writers such as Lazer (1969) still advocated growth through
consumption. He saw marketing as an instrument of social control, designed to convert
society from a producer to a consumer culture. By changing norms and values in favor of
greater consumption, society would be more able to adapt to the requirements of an
abundant economy.



Producer Culture?
Sustainability Culture?

Supply Activities

Resources i.e.
Cost.

Products and
Services:
 Values




Consumer Culture?
Sustainability Culture?

Integrated
Marketing

Customer
Satisfaction

Profit
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Profit Orientation
(Growth)
 Producer culture
 Consumer culture

Integrated Marketing Effort
through satisfying the
stimulated needs and wants
(Consumption) within an
abundant economy (View)

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 By the 1970s, however, as it became clear that society’s resources were finite and its
environment damageable, writers like Feldman (1971), Kotler and Levy (1971) became
critical of the emphasis on material consumption without consideration of societal benefit.
 Dawson (1969) also regarded the original marketing concept as having certain inherent
weaknesses. Dawson argued that the customers of a particular business are only a
minority group in society as a whole, and he cited the tobacco industry as a classic case of
an industry which has always been particularly attentive to customer satisfaction (for
example, different shapes, styles and tastes of its products) yet it is one facing increasing
unpopularity, particularly amongst those sections of society which are not its customers.
Thus the marketing concept emphasized – and sought to satisfy – selfish interests of the
individual in his role only as consumer and was seen as uni-dimensional and narrow in
outlook.

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 According to Dawson (1969) “market considerations alone, even long run, can no longer
determine what is good or bad, right or wrong, prudent or imprudent, urgent or non-urgent
in the business community.”

e.g., Moral Standards

View (New Paradigm):
 Env. Damageable and
thus resources are
finite.

Need multidimensional and
wider perspectives in
outlook
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




Kotler (1972) saw the main problem as arising from the ambiguity of the term “customer
satisfaction.” It could mean either short-run customer desires or long-run customer
interests.
Kotler cited cigarettes and alcohol as classic products which provide immediate satisfaction
but may be detrimental in the long-run.
The inadequacies of the marketing concept thus center around its short-run operational
focus on profit, with the satisfaction of the consumer not a goal in itself, but merely a means
to this end; its emphasis on material consumption without consideration of the long-run
societal or environmental impact of this policy; its narrow stress on the individual and the
gratification of immediate and selfish wants without concern for long-run consumer
interests.
Means

View: From producer or
consumption views to more
proactive, environmental
and society friendliness
views

(Strategy)
 Customer
Satisfaction
 Green
Approach

End:
 Short-term
desire
 Long-term
interests and
benefits

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Short-Run Operational Focus on
Profit





Long-Run Society and Environment
Sustainability
Well-being of people
Smartness of people

Transcendental Ethics
Social Context

Other rationales

Tactical Ethics
(Self-Interest)

Ethics
Right

Level / Approach

Good

Innovative business
strategies, actions, and
behaviors

Justification / Judgment
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Profit driven
marketing concept

Profit driven marketing concept but
added on with some ethical
consideration.
 Information – to make intelligent
purchase decision
 Moral duty
 Fair and justice
 Long-run consumer welfare
 Avoid deleterious consequences of
society

The societal marketing concept:
 Like the marketing concept, the societal concept of marketing recognizes profit as a
major business motive and counsels firms to market goods and services that will satisfy
consumers under circumstances that are fair to consumers and that enable them to
make intelligent purchase decisions, and counsels firms to avoid marketing practices
that have deleterious consequences for society.

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 Dawson’s (1969) conception of societal marketing goes considerably further than that of Kotler
(1972).
 Dawson’s “human concept” entails a widening of business concerns on three levels:
 The internal environment (human resources within the organization)
 The proximate environment (consumers, competitors, suppliers and distributors)
 The ultimate environment (society in general).
 This third level is the most far-reaching and refers to the achievement of a genuine external
social purpose by contributing to the identification and fulfillment of real human needs such as
security, dignity and spiritual solace.
 Dawson requires from business a commitment to the solution of the social problems of the world
and argues that if profits are viewed in sufficiently long-run and indirect terms, then the human
concept can be said to contribute towards business survival and profitability. For, like Kotler, he
has implicit faith in the theory that what is good in the long-run for society, is good for business.

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What is good in the long-run for society, is good for business

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3 Levels of the business stakeholders in societal marketing:
Business Environments:

Business:






Commitment
Strategies
Policies
Organization
Management

Communication:
 Feedback
 Consultation
 Negotiations

Proximate environment:
Consumers, competitors, suppliers, distributors
Internal
environment: HR

Ultimate environment:
The society in general

To fulfill human needs for security, dignity, and spiritual solace

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Deliverance Needs

Grow Needs

Self Transcendence

Self-Actualization
Esteem Needs:
 Self-Esteem
 Recognition

Deficiency Needs

Social Needs:
 Sense of belonging
 Love

Self-actualization is different
from all the previous needs. We
don‟t feel spurred into action by
a sense of deficiency
 “Must find food…” “Must
make friends…”.
 Rather, we feel inspired
to grow, to explore our
potential and become more of
what we feel we can be.
Maslow called selfactualization a growth need
while all the rest are
deficiency needs.

Safety Needs:
 Security
 Protection
Physiological Needs:
 Hunger
 Thirst
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 At the self transcendence level:
 People view the world and their purpose in it in a
more global scale
 To identify with a cause greater than themselves,
to experience a communion beyond the
boundaries of the self.
 As a person’s ability to obtain a unitive
consciousness with other humans
 Realizing that people is not independent from
culture and environment.
 Helping others to achieve self actualization.

 what is good in the long-run for society, is good for business.
 This principle is in fact the basis upon which most proponents of societal marketing
expound their views.
 Other aspects of the societal marketing viewpoint are its emphasis on communication
between the business and its environment in the form of feedback mechanisms,
consultations and negotiations between competitors, consumers and government
agencies.

Good for
Society

Good for
Business

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Reference:
Bell, M.L. and Emory, C.W. (1971), “The Faltering Marketing Concept,”
Journal of Marketing, 35, pp. 37-42.
Dawson, L.M. (1969), “The Human Concept: New Philosophy for
Business,” Business Horizon, 12, pp. 29-38.
Feldman, L.P. (1971), “Societal Adaptation: A New Challenge for
Marketing,” Journal of Marketing, 35, pp. 54-60.
Kotler, P. and Levy, S.J. (1971), “Demarketing, Yes, Demarketing,”
Harvard Business Review, 49, pp. 74-80.
Lazer, W. (1969), “Marketing’s Changing Social Relationships,” Journal
of Marketing, 33, pp. 3-9.

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In sum, what is business ethics:
 Ethics are concerned with doing good, or the right thing in a given human situation.
 Business ethics are concerned with an evaluation of business practices in the light of some
concept of human value, it looks at corporate profits not for their own sake but with respect
to the achievement of some human good.
 Vitell and Davis (1990) define business ethics as the “inquiry into the nature and grounds
of moral judgments, standards and rules of conduct in situations involving business
decisions” (p. 64). Thus ethics is concerned with the motivation for action rather than the
action itself.

Ethical, Social and
Moral Grounds (Views)

Motivation / Incentive for
Action:
 Concerns for ethical
actions / profits

Ethical / Ecological
Action / Conduct,
and Consequences

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 Take, for example, South African divestment. During the
1980s American corporations found themselves under
increasing pressure to divest their subsidiaries and any
other interests in South Africa. This pressure came, and
still comes, primarily from various racial-minority
groups.

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 During the period 1984 through 1988, some forty America’s largest corporations did divest their
South African subsidiaries:
 American Brands, American Tel & Tel, Bank of Boston, Black and Decker, Borg Warner,
Bundy Corporation, CPC International, Chase Manhattan, Citicorp, Clark Equipment,
Coca-Cola, Dow Chemical, Dun and Bradstreet, Emery Air Freight, Emhart, Exxon,
Firestone, Flour, Ford, Foster Wheeler, General Motors, Honeywell, IBM, ITT, Johnson
Controls, Kellogg, Kodak, MacMillan, Motorola, NCNB, Norton, Pepsico, Perkin-Elmer,
Phillips Petroleum, Proctor and Gamble, Rohm and Haas, SPS Technologies, Sarah Lee,
Tambrands, Union Carbide, Varity, Warner, Westinghouse, Xerox.

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 Superficially this may appear to be evidence of ethical concern among these companies in that
they sold off profitable operations because they were located within an immorally governed
country. But was this action truly motivated by ethical concern, or were these corporations
merely concerned that their profitability could be damaged by continued ties with South Africa?
 In other words, was the underlying motivation for the divestment decision moral or economic?
In this case actions clearly to not readily betray motives.
Ethical, Social and
Moral Grounds (Views)

Motivation / Incentive for
Action:
 Concerns for ethical
actions / profits

Ethical / Ecological
Action / Conduct,
and Consequences

Vitell, S. and Davis, D.C. (1990), “Ethical Beliefs of MIS Professionals: The Frequency and Opportunity for
Unethical Behavior,” Journal of Business Ethics, 9(1), p. 63.
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The Nation November 17, 2013 1:00 am

Women, water, well-being top priorities for Coca-Cola:
Coca-Cola's sustainability strategy is improving lives, creating jobs, increasing
opportunity, preserving resources and meeting needs for the community, said chairman
and CEO Muhtar Kent.
"There are no issues that will shape or define the 21st century more than the global
empowerment of women; the management of the world's precious water resources; and
the well-being of the world's growing population," he said after the company released its
10th annual "Sustainability Report and third Global Reporting Initiative Report"
highlighting the progress the Coca-Cola system made last year, and the new 2020
sustainability goals announced earlier this year.
This is the first report to include both an update on existing sustainability goals and the
company's new global 2020 goals. It follows Coca-Cola's sustainability framework "Me, We, World" - and is rooted in three leadership priorities.

Spectrum of business ethics:
Environmental Regulation, Gov. Policy, e.g. Penalty level

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 Firms avoid illegal zones. A firm, for example, that pays all its employees in America at
least the minimum wage signals nothing about the firm’s moral stance on labor
exploitation; the firm is merely obeying the law.

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Published: 19 Nov 2013 at 08.49Online news:
 US retail giant Walmart violated employees' rights by unlawfully
threatening and firing workers who participated in strikes and
other group protests, the National Labor Relations Board said.

The NLRB said it has found some merit in charges alleging that
Walmart violated employee rights in 14 states and that it was
prepared to issue complaints, unless the parties reach
settlements in the cases.
Among the charges, Walmart "unlawfully threatened, disciplined,
and/or terminated employees for having engaged in legally
protected strikes and protests," the federal agency said in a
statement.
The stores where the violations took place were in California,
Colorado, Florida, Illinois, Kentucky, Louisiana, Maryland,
Massachusetts, Minnesota, North Carolina, Ohio, Texas and
Washington state.

in Palmdale, California, Wal-Mart.

in Maryland, Wal-Mart.

Now we’re going to discuss on this
domain.

 Creates and sustains competitive advantage by ensuring your company is in compliance with the
law.
 We call this “Light Green” Strategies.
 Freeman et al. (2008):
 Relies on the public policy to drive its strategy.
 Countries with strict environmental standards seem to gain an edge in the global
marketplace – they become more efficient and have better technology.
 Within an industry, companies can actively pursue public policies that fit with their special
competitive advantage. By innovating with technology and expertise, a company gains an
advantage over a competitor that cannot comply as efficiently.

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 Through its 3P (Profit-Planet-People) program, 3M is able to easily
comply with new chemical legislation while competitors must exert
resources.
At the 3M Website:
Business Conduct
 At 3M, they believe that what the company stands for is just as
important as what they sell. They are proud to have built a centuryold tradition of operating with uncompromising honesty and
integrity.
What They Stand For:
 A good corporate reputation does not develop by accident. 3M's
reputation is rooted in their corporate culture and embodied in our
Business Conduct Policies, the code of conduct they first
introduced in 1988. Today's policies embody the same spirit of
integrity that has always been at the core of their company; they
define what legal and ethical conduct means in everything they do,
wherever in the world they are doing business on 3M's behalf.

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 Creates and Sustains competitive advantage by paying attention to the environmental
preferences of customers – the needs of the Market. We call this “Market Green”.
 Market green strategies following the greening of customers.
 Today‟s customer-focused, market-driven company cannot afford to miss the fact that many
customers prefer environmentally friendly products given a similar cost. The Internet has
made customers more informed about every aspect of a product, including its potential
environmental harms. Companies that can meet these environmental needs will be the
winners.
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 Whole Food Markets successfully appeals to a demographic that values organic and local
products.
 Coastwide Laboratories, an industrial cleaning products company, has appealed to its customers
through offering its “Sustainable Earth” formula.

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 Create and sustain competitive advantage by responding to the environmental preferences of
stakeholders.
 We call this “Stakeholder Green”.
 Companies can seek to maximize the benefits of one group, or they can seek to harmonize the
interests of all groups.
 Stakeholder green strategies are based on a more thorough adoption of environmental principles
among all aspects of a company‟s operations. Many companies have adopted a version of
stakeholder green by requiring suppliers to meet environmental requirements and by setting strict
standards for the manufacturing process.
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Customers

Future
Generation
Employees
Suppliers

Societies

Shareholders

 Create and sustain competitive advantage by responding to the environmental preferences of
stakeholders.
 Example:
 Wal-Mart recently announced a variety of environmental goals, including cutting greenhouse
gas emissions by 20% and constructing stores that are 30% more energy efficient.
 While these measures consider the impact on the communities in which Wal-Mart locates,
other measures are impacting suppliers, for example, rewarding those who can reduce
packaging.
 Paying attention to recyclable material in consumer packaging, educating employees on
environmental issues, participating in community efforts to clean up environment, and
appealing to investors who want to invest in green companies are all a part of stakeholder
green.
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2013 Global Responsibility Report
Walmart has a responsibility to lead, and is proud of what she accomplished so far on the journey to
become a more sustainable and more responsible business. By working collaboratively with many
fantastic partners around the globe, Wal-Mart had a productive year. Here are a few examples:
 Renewable energy now provides 21% of Walmart's electricity globally, and Wal-Mart became
the largest onsite green power generator in the United States;
 Walmart and the Walmart Foundation are increasing training, market access, and career
opportunities for nearly 1 million women worldwide;
 Walmart and the Walmart Foundation gave more than $1 billion to support organizations that
impact local communities around the world;
 The Walmart Foundation became the first partner of Feeding America to donate 1 billion meals
(since 2005);
 Saved customers $2.3 billion on fresh fruits and vegetables since 2011; and
 Wal-Mart committed to hire any honorably discharged U.S. veteran in his or her first year off
active duty.

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 Create and sustain value in a way that sustains and cares for the Earth.
 We can call it the “Dark Green”. Being a dark green commits a company to being a leader in
making environmental principles a fundamental basis of doing business – deep commitment
to environmental and business values. Dark green logic simply says that the belief that we
must respect and care for the Earth is one of the deep values we share.
 Nike, Ford Motor Company, and textile maker DesignTex, have adopted to some extent the
design idea of “cradle to cradle” rather than “cradle to grave.”
 These companies are seeking to design products that can be reduced to reusable materials,
with whatever is not reused harmlessly decomposing into nutrients for the earth.

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With an agenda of having all performance footwear meet their own
internal sustainability standards by 2011, the Nike „Considered‟ line
is obviously searching for ways to remain competitive in low-cost
Asian manufacturing markets as well as in urban neighborhoods
where personal street style is constantly reinventing itself.

Nike has vowed to remove hazardous substances
from across their entire supply chain, and the entire
life-cycle of its products, by 2020. The sportswear
giant have also promised to use their influence,
knowledge and experience to bring about
―widespread elimination‖ of hazardous chemicals
from the clothing industry, Greenpeace says.

 Designtex seeks to instill the potential for a
closed loop system in its products. Early in the
lifecycle of every material, there are
opportunities to infuse environmental qualities,
that by design, challenge each subsequent stage
to preserve and amplify those qualities. This is
Environmental Design at Designtex.

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 PET (polyester) resin bottles used for water, soda and other beverage packaging can be
converted into recycled polyester yarns and fabrics. Plastic bottles make their journey
from the consumer to curbside collection and on to separation and processing at a
materials recovery facility. The recycling facility sells post-consumer PET resin to a
company that extrudes it into polyester yarn, which is then up cycled into fabric. For
every 2 million tons of PET bottles that are not recycled and instead sent to landfills,
the equivalent of 18 million barrels of crude oil are dumped down the drain. And while
rates of recycling are increasing among the general public, consumers still throw away
three times
as many bottles as they recycle². By giving plastic bottles a new lease on life in
polyester textiles, the value of this material is not wasted, and is instead allowed to
live on in a useful, durable product. Designtex’s new Regeneration collection of
upholsteries is made of 100% post-consumer recycled polyester.

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 IKEA to educate and use societal marketing to promote Green Brand and Green Buying:
―Turn your recycling into awards at IKEA Edinburgh‖. Any can, plastic bottle or glass
bottle bought in our store can now be recycled using a brand new Recycle & Reward
Machine in The IKEA Edinburgh Customer Restaurant. You can either donate your
reward to one of our chosen charities (10p per recycled drink container) or collect your
vouchers to redeem one of our rewards below. (1 recycled drink container = 1 voucher)
Choose your reward!

 Making a can from recycled materials instead of new saves enough energy to power a
television for three hours. Recycled plastic bottles can also be turned into all sorts of
new things, from park benches to fleece jackets!

 Designtex is first to market with Eco-Intelligent™ polyester made with an antimonyfree catalyst for panel and upholstery.

 What does titanium have to do with fabrics? Traditionally polyester has been made
using the heavy metal antimony as a catalyst during the production process. Things
began to change in 1999, when Designtex started collaborating with Victor
Innovatex and McDonough Braungart Design Chemistry on a new kind of polyester
that no longer relies on this heavy metal.
 Classified as Eco Intelligent™, this new polyester is antimony-free. Here‟s where
the titanium comes in: the catalyst for the production process has been successfully
switched from antimony to this environmentally safer material. Beyond that, the
fiber is designed to be used, recovered and remanufactured safely and effectively
throughout multiple product lifecycles, and is produced with materials and
manufacturing practices that are optimized for human and environmental health
and safety.
 After initially introducing this revolutionary new fabric into the market place in 2003,
Designtex continues to add new Eco Intelligent™ Polyester styles to their
sustainable product offering.
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Hazard Summary-Created in April 1992; Revised in
January 2000
 Everyone is exposed to low levels of antimony in the
environment.
 Acute (short-term) exposure to antimony by
inhalation in humans results in effects on the skin
and eyes. Respiratory effects, such as inflammation
of the lungs, chronic bronchitis, and chronic
emphysema, are the primary effects noted from
chronic (long-term) exposure to antimony in humans
via inhalation. Human studies are inconclusive
regarding antimony exposure and cancer, while
animal studies have reported lung tumors in rats
exposed to antimony trioxide via inhalation. EPA
has not classified antimony for carcinogenicity
(substance that produce cancer).

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 New Belgium Brewing Company has a fulltime sustainability “goddess”
and is the world’s first 100% wind-powered brewery; conversion to wind
power funded by voluntary reduction in employee bonuses.

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Light
Green

Market
Green

 Some
competitive
advantage
can be
gained
through
efficiency
gains.

Dark
Green

Stakeholder
Green

 Competitive
 Competitive
advantage
advantage
gained
obtained
through
through
reputation and
differentiation
relationship
and innovation.
benefits.

 Aligns with fundamental
principles of founders,
employees, and customers
leading to high commitment
– along regenerative
sustainability.

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Stakeholder
Green
Light
Green
Market
Green

Dark
Green

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Unethical

Ethical

71

How business measure and assess business
ethics decisions?

Sample Answer:
It should be the same as the way we get used to measure and assess business as usual,
except that the management has strong ethical belief in making a difference. However, the
extent of ethical leadership in each business decision varies from person to person, due to
different levels of competencies, innovativeness capacity, ethical values and culture, etc. For
instance, Professor Michael Porter provides three levels of ethical principles or values or
paradigms to guide business decisions, i.e. from the fundamental stage of reconceiving
customer needs, products and markets, to redefining productivity in the value chain, to enabling
local cluster development to embrace shared values. In a way, his philosophy also matches
with this illustration i.e. from light green to dark green. The C2C approach has become
favorable to many giant Transnational Corporations to innovate both business models and
products.
Also, Professor Michael's shared value cluster development based on business ethics principle
also stimulate a fast movement in social entrepreneurship in which Doi Tung development is
actually an exemplary case.

The decision making can also be
considered to be along the continuum of
deontology theory of ethics and teleological
theory of ethics. That is, decision is made
either based on "moral" i.e. fairness,
rightness and justice to allocate outcomes
such as pay, rewards, recognition and
promotion relative to an employee's
contributions, or "non-moral standard" i.e.
procedures and rules and regulation of the
organization or the government for the
defined goodness (i.e. the voice of the
majority).






In short, the role of business in society, in its communities:
Business increasingly is seen as a major cause of social, environmental, and economic
problems – the 3P (People, Planet, and Profit).
Shared value thinking represents the next evolution of “Capitalism.”

Philanthropy


Donations to
worthy social
issues

Corporate
Social
Responsibility




Good corporate
citizenship and
compliance with
community
standards.
“Sustainability”

Creating
Shared Value





Integrating Societal improvement
into economic value creation itself.
Shared Value – Corporate policies
and practices that enhance
competitiveness of the company
while simultaneously advancing
social and economic conditions in
the communities in which it sells
and operates.
Profit involving shared values
enables society to advance and
companies to grow faster.
76

Corporate
Social
Responsibility
 Value – Doing good, good
citizenship, philanthropy, and
sustainability.
 Discretionary.
 Separate from profit maximization.
 Agenda externally determined.
 Impact is limited by the corporate
footprint and CSR budget.
 Example: Fair trade purchasing

Creating
Shared Value
 Value – Economic and societal
benefits relative to cost.
 Integral to competing
 Essential to profit maximization
 Agenda is business specific
 Mobilize the entire company
budget
 Example: Transforming
procurement to increase quality
and yield

 In both cases, compliance with laws and ethical standards and reducing harms for corporate
activities are assumed.
77

Environmental Impact
Supplier Access and Viability
Energy Use

Water Use

Company
Productivity

Employee Health

Employee Skills

Gender and Racial Equity
Worker Safety






Social deficits create economic cost.
External conditions shape internal company productivity.
Social needs represent the largest market opportunities i.e. Cluster Development.
There is a growing congruence between economic value creation and societal objectives
(based on the examples we illustrated earlier – i.e. light green to market green to stakeholder
green to dark green.
78

Reconceiving
customer
needs,
products, and
markets

Redefining
productivity in
the value chain
– How the
organization
conducts its
business

Enabling local
cluster
development

79



Redefining
productivity in the
value chain – How
the organization
Reconceiving conducts its
business
customer
needs,
products, and
markets






Design products and services to address societal needs: e.g.
environmental impact, safety, health, education, nutrition, living
with disability, housing, financial security.
Open new markets by serving the unmet needs in underserved
communities (bottoms of the pyramids) : Often requires
redesigned products or different distribution methods.
Businesses have the potential to be more effective than
governments and NGOs in creating and marketing solution to
community problems.
Thus, new needs and new markets open up opportunities to
differentiate, innovate, and grow.
A new generation of social entrepreneurs is capturing these
opportunities, often faster than mainstream businesses.

80

 Novo Nordisk in China provides diabetes training
programs together with governments, NGOs, and
opinion leaders to promote the latest thinking
among physicians on diabetes prevention,
screening, treatment, and patient
communication.
 Targeting smaller cities.
 220,000 sessions to date.

81

 Novo Nordisk’s “Diabetes bus” program to raise patient
awareness and provide on-site advice.
 NovoCare telephone hotline allows patients to reach
specialists with questions.
 NovoCare Club provides ongoing updates to members.
 Patient education focuses on prevention, lifestyle
changes, and effective use of insulin products.
 280,000 patients educated to date.

82

 Result:

 Since 1997, this program is estimated to have reduce
healthcare costs in China by $ 700 million through
reducing diabetes related complications
 Novo Nordisk revenues have increased by an estimated
$ 114 million.

83

 Cost Leadership Companies
save Lives:
 Frugal innovators in China
and India are making medical
devices that are cheaper—
sometimes by an order of
magnitude—than their
Western equivalents.
 Companies such as China's
Mindray and India's TRS
serve home markets and
create products that are
stripped to their essentials:
scanners that cost $10,000
rather than $100,000; portable
electrocardiographs that cost
$500 instead of $5,000.

These devices are not merely cheap knock-offs of Western designs. Often they are
just as effective as the gold-plated kit used in the West, yet they are rarely found in
rich-world hospitals. Their absence helps explain the massive disparity in costs
between Western and emerging-world treatments. A night in an American hospital
typically costs 25 times as much as a night in an Indian, Brazilian or Chinese one;
a night in a European hospital typically costs four times as much.

 What Novo Nordisk in China is
doing is:
 Redefine the business around
unsolved customer problems or
concerns, not traditional product
definitions, or the customer’s
customer.
 Think in terms of improving lives,
not just meeting consumer needs.
 Identify customer groups that
have been poorly served or
overlooked by the industry’s
products.
Customer Value Proposition:
 Start with no preconceived
 Improving Lives
constraints about product
 Opens up new opportunities
attributes, channel configuration,
to customer segmentation
or the economic model of the
and marketing
business e.g. small loans are
unprofitable.

Targeted
Customers:
 Underserved
and
Overlooked

86

April 30 2013 /3BL Media/ - Novo
Nordisk was named as one of the top
100 sustainable companies at the
Annual Summit of Green Companies
held in Kunming, China. The annual
event assesses sustainable
competitiveness of enterprises doing
business in China. On the Annual
Summit‟s „China Top 100 Green
Companies 2013‟ list, Novo Nordisk
ranked number five in the multinational company category. It is the
first time the company has been
selected.

88

Redefining Productivity in the Value Chain

89

Redefining Productivity in the Value Chain

90

Cluster Development in the Company’s Major Locations

 A strong local cluster
improves company growth
and productivity
 Local suppliers
 Supporting institutions
and infrastructure
 Related businesses
 Companies, working
collaboratively, can catalyze
major improvements in the
cluster and the local business
environment (the environment
for innovation)
 Thus, local cluster
development strengthens the
link between a company‟s
success and community
success.

Reconceiving
customer
needs,
products, and
markets

Redefining
productivity in
the value chain
– How the
organization
conducts its
business

Enabling local
cluster
development

93

Red: Illustrated (CC Tan, 2014)

Competitiveness

Innovation

Clusters and Culture

Market

Nespresso Capsules Varieties

100

Conclusion: The Purpose of Business
 There is an opportunity to transform thinking and practice about the role of the
corporation in society.
 Shared value gives rise to far broader approaches to economic value creation.
 Shared value thinking will drive the next wave of innovation, productivity growth,
and economic growth.
 Business acting as businesses, not as charitable givers, are arguably the most
powerful force for addressing many of the pressing issues facing our society.
Conclusion: The Purpose of Business
 A transformation of business practice around share value will give purpose to the
corporation and represents our best chance to legitimize business again.

108

Weekly Project No. 4
 Let’s study the governmental factor towards creating competitive advantage of a
nation.
 Brainstorm and do some research to answer this question:
 If the government continues to behave to yield to political pressure to insulate
inefficient farmers, is this really helping the farming industry and the overall
competitive advantage of a nation who relies heavily on farming activities and their
supply and demand systems? Argue your points from ethical reasoning you have
learned so far and also from the principles of the Diamond Model.

109

Weekly Project 3:

Using the 5-point scale, state the extent to which you agree with each of the following
statements:
1
Strongly Disagree

2
Disagree

3
Neither
Agree Nor
Disagree

4
Agree

5
Strongly Agree

About the Head:
1. The head listens to what employees have to say.
2. The head has the best interest of employees in mind.
3. The head makes fair and balanced decisions.
4. The head can be trusted.
5. The head discusses business ethics or values with employees.
6. The head sets an example of how to do things the right ways in terms of ethics.
7. The head disciplines employees who violate ethical standards.
8. The head conducts his or personal life in an ethical manner.
9. The head defines success not just by results but also the way they are obtained.
10. ―When making decisions, the head asks, What is the right things to do?‖

About the respondent himself or herself:
1. I am willing to put in a great deal of effort beyond that normally expected in order to
help this organization be successful.
2. I talk this organization to my friends as a great organization to work for.
3. I would accept almost any type of job assignment in order to keep working for this
organization.
4. I find that my values and the organization’s values are very similar.
5. I am proud to tell others that I am part of this organization.
6. This organization really inspires me to pursue for the best.
7. I really care about the performance of this organization.
8. For me this is the best of all possible organizations for which to work.
State yourself a little:
Male (
)
Female (
Organization:
University (
)
Private Business (

)
Government (
)

)

It’s no secret that in many industries today, upstream activities—
such as sourcing, production, and logistics—are being
commoditized or outsourced, while downstream activities aimed
at reducing customers’ costs and risks are emerging as the
drivers of value creation and sources of competitive advantage.
Consider a consumer’s purchase of a can of Coca-Cola. In a
supermarket or warehouse club the consumer buys the drink as
part of a 24-pack. The price is about 25 cents a can. The same
consumer, finding herself in a park on a hot summer day, gladly
pays two dollars for a chilled can of Coke sold at the point-ofthirst through a vending machine.

That 700% price premium is attributable not to a better or different
product but to a more convenient means of obtaining it. What the
customer values is this: not having to remember to buy the 24pack in advance, break out one can and find a place to store the
rest, lug the can around all day, and figure out how to keep it
chilled until she’s thirsty.
Downstream activities—such as delivering a product for specific
consumption circumstances—are increasingly the reason
customers choose one brand over another and provide the basis
for customer loyalty. They also now account for a large share of
companies’ costs. To put it simply, the center of gravity for most
companies has tilted downstream.

Yet business strategy continues to be driven by the ghost of the
Industrial Revolution, long after the factories that used to be the
primary sources of competitive advantage have been shuttered
and off-shored. Companies are still organized around their
production and their products, success is measured in terms of
units moved, and organizational hopes are pinned on product
pipelines. Production-related activities are honed to maximize
throughput, and managers who worship efficiency are promoted.
Businesses know what it takes to make and move stuff. The
problem is, so does everybody else.

The strategic question that drives business today is not ―What
else can we make?‖ but ―What else can we do for our
customers?‖ Customers and the market—not the factory or the
product—now stand at the core of the business. This new center
of gravity demands a rethink of some long-standing pillars of
strategy: First, the sources and locus of competitive advantage
now lie outside the firm, and advantage is accumulative—rather
than eroding over time as competitors catch up, it grows with
experience and knowledge. Second, the way you compete
changes over time. Downstream, it’s no longer about having the
better product: Your focus is on the needs of customers and your
position relative to their purchase criteria. You have a say in how
the market perceives your offering and whom you compete with.
Third, the pace and evolution of markets are now driven by
customers’ shifting purchase criteria rather than by improvements
in products or technology.

Must Competitive Advantage Be Internal to the
Firm?In their quest for upstream competitive
advantage, companies scramble to build unique
assets or capabilities and then construct a wall to
prevent them from leaking out to competitors. You
can tell which of its activities a firm considers to
be a source of competitive advantage by how well
protected they are: If the company believes its
edge lies in its production processes, then plant
visits are strictly controlled. If it believes that R&D
sets it apart, security around its research labs is
airtight and armies of lawyers protect its patents.
And if it prizes its talent, you’ll find hip work
spaces for employees, gourmet lunches, yoga
studios, nap nooks, sabbaticals, and flexible work
hours.

On a hot day, consumers gladly pay a
700% price premium for the convenience
of buying a cold can of soda from a
vending machine.
Downstream competitive advantage, in
contrast, resides outside the company—
in the external linkages with customers,
channel partners, and complementors. It
is most often embedded in the processes
for interacting with customers, in
marketplace information, and in customer
behavior.

A classic thought experiment in the world of branding is to
ask what would happen to Coca-Cola’s ability to raise
financing and launch operations anew if all its physical
assets around the world were to mysteriously go up in
flames one night. The answer, most reasonable
businesspeople conclude, is that the setback would cost the
company time, effort, and money—but Coca-Cola would
have little difficulty raising the funds to get back on its feet.
The brand would easily attract investors looking for future
returns.

The second part of the experiment is to ask what might
happen if, instead, 7 billion consumers around the world
were to wake up one morning with partial amnesia, such that
they could not remember the brand name Coca-Cola or any
of its associations. Long-standing habits would be broken,
and customers would no longer reach for a Coke when
thirsty. In this scenario, most businesspeople agree that
even though Coca-Cola’s physical assets remained intact,
the company would find it difficult to scare up the funds to
restart operations. It turns out that the loss of downstream
competitive advantage—that is, consumers’ connection with
the brand—would be a more severe blow than the loss of all
upstream assets.

Establishing and nurturing linkages in the marketplace
creates stickiness—that is, customers’ (or complementors’)
unwillingness or inability to switch to a competitor when it
offers equivalent or better value. Millions or billions of
individual choices to remain loyal to a brand or a company
add up to real competitive advantage.

The reality is that companies are increasingly finding success not
by being responsive to customers’ stated preferences but by
defining what customers are looking for and shaping their ―criteria
of purchase.‖

Must You Listen to Your Customers?
A company is market-oriented, according to the technical definition, if
it has mastered the art of listening to customers, understanding their
needs, and developing products and services that meet those needs.
Believing that this process yields competitive advantage, companies
spend billions of dollars on focus groups, surveys, and social media.
The ―voice of the customer‖ reigns supreme, driving decisions related
to products, prices, packaging, store placement, promotions, and
positioning.

But the reality is that companies are increasingly finding success not
by being responsive to customers’ stated preferences but by defining
what customers are looking for and shaping their ―criteria of
purchase.‖ When asked about the market research that went into the
development of the iPad, Steve Jobs famously replied, ―None. It’s not
the consumers’ job to know what they want.‖ And even when
consumers do know what they want, asking them may not be the best
way to find out. Zara, the fast-fashion retailer, places only a small
number of products on the shelf for relatively short periods of time—
hundreds of units per month compared with a typical retailer’s
thousands per season. The company is set up to respond to actual
customer purchase behavior, rapidly making thousands more of the
products that fly off the shelf and culling those that don’t.

Indeed, market leaders today are those that define what performance
means in their respective categories: Volvo sets the bar on safety,
shaping customers’ expectations for features from seat belts to
airbags to side-impact protection systems and active pedestrian
detection; Febreze redefined the way customers perceive a clean
house; Nike made customers believe in themselves. Buyers
increasingly use company-defined criteria not just to choose a brand
but to make sense of and connect with the marketplace

How Cialis Beat Viagra:
 Redefining customers’ purchase criteria is one of
the most powerful ways companies can wrest
market leadership from competitors.
 The strategy serves incumbents and challengers
alike. Consider, for example, the $5 billion market
for erectile dysfunction drugs. Pfizer launched
the first such drug, Viagra, in April 1998, with a
record 600,000 prescriptions filled that month
alone. At a price of $10 per dose and a gross
margin of 90%, Pfizer could afford to splurge on
marketing and sales. It rolled out a $100 million
advertising campaign, and sales reps made a
whopping 700,000 physician visits that year. In
the process, Pfizer created an entirely new
market on the basis of one key criterion of
purchase: efficacy. The drug got the job done.

 By 2001 annual sales had reached $1.5 billion, and other
pharmaceutical companies had taken note of the size, growth,
and profitability of the market. In 2003, Bayer introduced
Levitra, the first competitor to Viagra. The drug had a profile
very similar to Viagra’s and a slightly lower price—classic ―me
too‖ positioning.
 Soon after, Lilly Icos, a joint venture between Eli Lilly and the
biotech firm ICOS, entered the market with a new product—
Cialis—that was different from its competitors in two ways.
First, whereas Viagra and Levitra were effective for four to five
hours, Cialis lasted up to 36 hours, making it potentially much
more convenient for customers to use. Second, product trials
showed fewer of the vision-related side effects associated with
Viagra and Levitra.

At the time, the key criteria that physicians considered
in prescribing a drug for erectile dysfunction were
efficacy and safety. Those two criteria accounted for a
relative importance of 70%. Duration had a relative
importance of less than 10%.
The strategic question for Lilly Icos was whether it
could influence how physicians perceived the
importance of the criteria. The positioning was hotly
debated prior to launch: Should the company center its
marketing strategy on Cialis’s lack of side effects, given
that safety was already one of the two key criteria? Or
should it attempt to establish duration as a new
criterion?

The marketing team decided to emphasize the benefits
of duration—being able to choose a time for intimacy in
a 36-hour window—in its launch campaign, and it set the
price for Cialis higher than that for Viagra to underscore
the product’s superiority.
The new criterion of purchase—marketed as romance
and intimacy rather than sex—caught on. A
BusinessWeek article reporting on an early positioning
study stated, ―Viagra users who had been informed of
the attributes of both drugs were given a stack of
objects and asked to sort them into two groups, one for
Viagra and the other for Cialis. Red lace teddies, stilettoheeled shoes, and champagne glasses were assigned to
Viagra, while fluffy bathrobes and down pillows
belonged to Cialis.‖

In 2012 Cialis passed Viagra’s $1.9 billion in
annual sales, with duration supplanting
efficacy as the key criterion of purchase in
the erectile dysfunction market.
Those criteria are also becoming the basis
on which companies segment markets,
target and position their brands, and
develop strategic market positions as
sources of competitive advantage. The
strategic objective for the downstream
business, therefore, is to influence how
consumers perceive the relative importance
of various purchase criteria and to
introduce new, favorable criteria.

Must Competitive Advantage Erode over
Time? The traditional upstream view is that as
rival companies catch up, competitive
advantage erodes. But for companies
competing downstream, advantage grows over
time or with the number of customers
served—in other words, it is accumulative.

 For example, you won’t find Facebook’s competitive
advantage locked up somewhere in its sparkling offices in
Menlo Park, or even roaming free on the premises. The
employees are smart and very productive, but they’re not the
key to the company’s success. Rather, it’s the one billion
people who have accounts on the website that represent the
most valuable downstream asset. For Facebook, it’s all about
network effects: People who want to connect want to be
where everybody else is hanging out. Facebook does
everything possible to keep its position as the preeminent
village square on the internet: The data that users post on
Facebook is not portable to any other site; the time lines,
events, games, and apps all create stickiness. The more
users stay on Facebook, the more likely their friends are to
stay.

 Network effects constitute a classic downstream
competitive advantage: They reside in the marketplace,
they are distributed (you can’t point to them, paint
them, or lock them up), and they are hard to replicate.
Brands, too, carry network effects. BMW and Mercedes
advertise on television and other mass media, even
though fewer than 10% of viewers may be in their
target market, because the more people are awed by
these brands, the more those in the target market are
willing to pay for them.

 Indeed, the very nature of network effects is that they are
accumulative. But other downstream advantages—particularly
those related to amassing and deploying data—are
accumulative as well. Consider Orica, an explosives company
mired in a commodity business in Australia. The primary
concern of its customers—quarries that blast rock for use in
landscaping and construction—was to meet well-defined
specifications while minimizing costs. Because the products on
the market were virtually indistinguishable, the quarries saw no
reason to pay a premium for Orica’s or any other company’s
explosives. At the same time, Orica knew that blasting rock is
not as straightforward as it may appear. Many factors affect the
performance of a blast: the profile of the rock face; the location,
depth, and diameter of the bored holes; even the weather. Mess
up the complex formula for laying the explosives often enough
and your profits crumble into dust and get blown away by the
wind.

 Orica realized that customers harbored much unspoken anxiety about handling
the explosives without accidents, not to mention transporting and storing them
safely. If it could systematically reduce even some of those costs and risks, it
would be providing significant new value for the quarries—far in excess of any
price reduction that competitors could offer. So Orica’s engineers set to work
gathering data on hundreds of blasts across a wide range of quarries and
found surprising patterns that led them to understand the factors that
determine blast outcomes. Using empirical models and experimentation, Orica
developed strategies and procedures that greatly reduced the uncertainty that,
until then, had gone hand in hand with blasting rock. It could now predict and
control the size of the rock that would result from a blast and could offer
customers something its competitors could not: guaranteed outcomes within
specified tolerances for blasts. Quarries soon shifted to Orica, despite lower
prices from competitors. Not only had the company developed an edge over
rivals, but the advantage was accumulative: As Orica amassed more data, it
further improved the accuracy of its blast predictions and increased its
advantage relative to its competitors.

 Can You Choose Your Competitors?Conventional wisdom holds that firms
are largely stuck with the competitors they have or that emerge independent
of their efforts. But when advantage moves downstream, three critical
decisions can determine, or at least influence, whom you play against: how
you position your offering in the mind of the customer, how you place
yourself vis-à-vis your competitive set within the distribution channel, and
your pricing.
 If you’re in the beverage business and you’ve developed a rehydrating drink,
you have a choice of how to position it: as a convalescence drink for
digestive ailments, as a half-time drink for athletes, or as a hangover
reliever, for example. In each instance, the customer perceives the benefits
differently, and is likely to compare the product to a different set of
competing products.

 In choosing how to position products, managers have tended to pay
attention to the size and growth of the market and overlook the intensity and
identity of the competition. Downstream, you can actively place yourself
within a competitive set or away from it. Brita filters compete against other
filters when they are placed in the kitchen appliances section at big-box
stores, for instance. But Brita changes both its comparison set and the
economics of the consumer decision when the filters are placed in the
bottled-water aisle at supermarkets. Here Brita filters have a competitive
cost advantage, delivering several more gallons of clean water per dollar
than bottled water. Of course, not all buyers of bottled water are buying
solely for the criterion of cost (some are buying for portability, for example),
but for those who are, Brita is an attractive choice.

 Brita changes its competitive set when it is placed in the bottled water aisle
at the supermarket instead of with kitchen appliances at a big-box store.
 If you would prefer not to be compared with any other brands, then you’re
better off marketing, distributing, and packaging your products in ways that
avoid familiar cues to customers. A trip to the grocery store or a glance at
online catalogs shows how similar many products’ packaging is: Most
yogurts are sold in exactly the same pack size and format, and their
communications are often so indistinguishable that consumers cannot
recall the brand after having seen an advertisement. The lack of
differentiation encourages competition, when many of these brands would
be better off avoiding it.

 Finally, pricing has a strong influence on whom you compete
with. When Infiniti launched its comeback car, the G35, in 2002, it
was hailed as a BMW-beater. The car, loosely based on the
legendary Nissan Skyline, rivaled the BMW 5 series in terms of
interior space and engine power, but it would have struggled to
compete for a couple of reasons: The 5 series is aimed at
experienced BMW buyers—or at least buyers who have
previously owned a luxury automobile. Also, the 5 series is very
expensive, and when customers are shelling out that kind of
money, they’re not looking for value—they’re looking for an
established brand and value proposition. Infiniti chose to
position the G35 against the BMW 3 series instead. The right
pricing accomplished that objective: Many consumers, especially
car buyers, use price as a key criterion in forming their
consideration set.

 Does Innovation Always Mean Better Products or Technology?Like prime real
estate in a crowded city, customers’ mindspace is increasingly scarce and
valuable as brands proliferate in every category and existing ones are sliced
wafer-thin. Companies compete ferociously against one another not to prove
superiority but to establish uniqueness. Volvo does not claim to make a better
car than BMW does, nor the other way around—just a different one. In customers’
minds, Volvo is associated with safety, while BMW emphasizes the joy and
excitement of driving. Because the two automakers emphasize different criteria
of purchase, they appeal to very different customers. In a global study aimed at
finding out what ―excitement‖ meant to customers, respondents were asked to
―describe the most exciting day of your life.‖ When the results were tallied, it
turned out that BMW owners described exciting things they had done—whitewater rafting in Colorado, attending a Rolling Stones concert. In contrast, the
most exciting day by far in the lives of Volvo owners was the birth of their first
child. Brands compete by convincing customers of the relative importance of
their criterion of purchase.

 That is not to say that the upstream activities associated with
building safer or faster cars don’t matter. The product remains an
essential ingredient in demonstrating the brand’s positioning on
its chosen criterion. The product and its features turn the abstract,
intangible promises of the brand into real benefits. Volvo’s
product innovations really do make its cars safer, reinforcing a
lasting brand association with its customers. But the product
itself does not occupy a more privileged position in the marketing
mix than, say, the right communication or distribution.

Business Ethics / Corporate Social
Responsibility:
Competitive battles are won by offering
innovations that reduce customers’ costs and
risks over the entire purchase, consumption,
and disposal cycle.

 Where Else Does Innovation Reside? The persistent
belief that innovation is primarily about building
better products and technologies leads managers to
an overreliance on upstream activities and tools. But
downstream reasoning suggests that managers
should focus on marketplace activities and tools.
Competitive battles are won by offering innovations
that reduce customers’ costs and risks over the
entire purchase, consumption, and disposal cycle.

 Consider the case of Hyundai in the depths of the
Great Recession of 2008–2009. As the economy
faltered, American job prospects looked painfully
uncertain, and consumers delayed purchases of
durable goods. Automobile sales crashed through
the floor. GM’s and Chrysler’s long-term financial
problems resurfaced with a vengeance, and both
companies sought government bailouts. Hyundai,
which primarily targeted lower-income customers,
was particularly hard hit. The company’s U.S. sales
dropped 37%.

 As overall demand plunged, the immediate response
of most car companies was to slash prices and roll
out discounts in the form of cash-back offers and
other dealer incentives. Hyundai considered these
options, but it eventually took a different approach: It
asked potential customers, ―Why are you not
buying?‖ The resounding answer was ―The risk of
buying during the financial crisis—when I could lose
my job at any time—is simply too high.‖

 Although choosing to avoid competitors may minimize head-on
competition, there is no guarantee that you won’t still have to
contend with competitors you didn’t want or ask for. But if you’ve
done your homework and established dominance on your
criterion of purchase, me-too competitors will be putting
themselves in an unfavorable position if they choose to follow
you.
 Surprisingly, you have more say in determining who your
competitors are if you’re a later entrant in a marketplace than if
you break new ground. A later entrant can choose to compete
directly with an incumbent or to differentiate, whereas an
incumbent is subject to the decisions of later entrants. But an
incumbent is not helpless: It can stay ahead of competitors by
continually redefining the market and introducing new criteria of
purchase.

 So instead of offering a price reduction, Hyundai devised a riskreduction guarantee to target that concern directly: ―If you lose
your job or income within a year of buying the car, you can return
it with no penalty to your credit rating.‖ Called the Hyundai
Assurance, the guarantee acted like a put option, addressing the
buyer’s primary reason for holding back on the purchase of a new
vehicle. The program was launched in January 2009. Hyundai
sales that month nearly doubled, while the industry’s sales
declined 37%, the biggest January drop since 1963. Hyundai sold
more vehicles that month than Chrysler, which had four times as
many dealerships. Competitors could easily have matched
Hyundai’s guarantee—yet they didn’t. They continued to slash
prices and offer cash incentives. The Hyundai Assurance was a
downstream innovation. Hyundai didn’t innovate to sell better
cars—it innovated by selling cars better.

 Reducing costs and risks for customers is central to any
downstream tilt—indeed, it is the primary means of creating
downstream value. Not surprisingly, many of the cases we’ve
examined illustrate this: Facebook reduces its customers’ costs of
interacting with friends; Orica reduces quarries’ blast risks; CocaCola reduces the customer’s costs of finding a cool, refreshing
drink the moment she’s thirsty.

 Is the Pace of Innovation Set in the R&D Lab?The
product innovation treadmill is an upstream imperative.
In fact, technology innovations are sometimes thought
to be the greatest threat to competitive advantage. But
such changes in the market are relevant only if they
upend downstream competitive advantage. You don’t
need to sweat every product launch and every new
feature introduction by a competitor—just those that
attempt to wrest control of the customers’ criteria of
purchase. After all, it was not the advent of digital
photography that ultimately doomed Kodak—it was the
company’s failure to steer consumers’ shifting
purchase criteria.

By contrast, after more than a century of shaving technology
innovation, Gillette still controls when the market moves on to the
next generation of razor and blade. Even though for the past three
decades competitors have known that the next-generation product
from Gillette will carry one additional cutting edge on the blade and
some added swivel or vibration to the razor, they’ve never
preempted that third, fourth, or fifth blade. Why? Because they
have little to gain from preemption. Gillette owns the customers’
criterion—and trust—so the additional blade becomes credible and
viable only when Gillette decides to introduce it with a billion-dollar
launch campaign. Four blades are better than three, but only if
Gillette says so. In other words, technological improvements don’t
drive the pace of change in the industry—marketing clout does.

 Market change can be evolutionary, generational, or
revolutionary, and each type can be understood in terms of
consumer psychology. Evolutionary changes push the
boundaries of existing criteria of purchase: higher horsepower
or better fuel efficiency for cars, faster processing speeds for
semiconductor chips, more-potent pills. Generational changes
introduce new criteria that complement old ones, often opening
up new market segments: sugar-free soft drinks, hybrid
vehicles, pull-up diapers, once-a-day medications where
multiple pills were previously required. Revolutionary changes
don’t just introduce new criteria, they render the old ones
obsolete: The new video-game controllers from Nintendo Wii
changed how people interact with their games; touch screens
and multitouch interfaces changed what customers expect from
a smartphone; a vaccine for tuberculosis, AIDS, or malaria
would make current treatments almost redundant within a
couple of decades.

The power required to push a revolutionary change through
the market is greater than that required to move a market
through a generational change, and that power in turn is
greater than the market muscle required to introduce an
evolutionary change. In each case, the quality of the
product innovation—the increased benefits relative to
current products—helps move the market, but it does not
guarantee a shift. High failure rates for new products in
many industries suggest that companies are continuing to
invest heavily in product innovation but are unable to move
customer purchase criteria. Technology is a necessary but
insufficient condition in the evolution of markets. It’s the
downstream activities that move customers through
evolutionary, generational, and revolutionary changes.

Tilt
 An ongoing downstream tilt in industry after industry calls into
question many ingrained assumptions about business—in particular,
those about competitive advantage, competition, and innovation.
 The downstream tilt has particular resonance for three kinds of
companies: The first is companies that operate in product-obsessed
industries, such as technology and pharmaceuticals. The possibilities
of downstream value creation and the potential for building
competitive advantage in the marketplace tend to be eye-opening for
such firms. The second is companies operating in maturing
industries whose products are increasingly commoditized. These
firms are keen to find sources of differentiation that do not rely on
easily replicated products or production advantages. The third is
companies seeking to move up the value chain. Downstream
activities provide a way to build new forms of customer value and
lasting differentiation.

The critical locus of both value and competitive
advantage increasingly resides in the
marketplace rather than within a company.
Activities that attract customers by reducing
their costs and risks and repel rivals by
building unassailable sources of differentiation
represent the key to competing downstream.
The downstream playing field has its own set of
rules, and managers who learn to play the
game achieve an early advantage.

"I call it controlling the
Labor Market by the
Invisible Hands (the HR
Analytics, the Statistical
Tools")." -- CC Tan
(2013).

The HR Trend on "Hired by the Data, Fired
by the Data" is getting its momentum fast
from the West to Thailand and Asia. While I
loved and had used HR Analytics and
Statistical Analysis to help on devising HR
Strategies, but I was one of the...m who
saw the "failing ethical issues" that caused
so much Emotional Pains on employees.
Now I am afraid our world is going to be
Badly Hurt by this so-called New Trend
who control the Labor Market by the
Invisible Hands (Comments: CC Tan,
November 23, 2013).

Here is the abstract of the Article from the Business Harvard
Review:
The term Big Data, admits writer Don Peck, "has quickly grown
tiresome." But the power of analytics as a mechanism for making
decisions about hiring and firing is still growing, and the
"application of predictive analytics to people’s careers … is
enormously challenging, not to mention ethically fraught." Indeed,
the idea that stats may determine whether we'll flourish in careers
or be temps forever is both promising and deeply concerning. Peck
traces the history of hiring in America, noting that attempts at
psychological testing based on "science" in the 1950s were largely
abandoned in favor of ad hoc interviews. But we know that
favoritism and bias are all too common in these situations. Now
that science is making a comeback, Peck explores some of the new
ways in which companies will be able to make some of their most
important decisions.

One is a start-up called Knack, which uses video games to measure
how people function neurologically when it comes to skills like
problem solving; the game has been used by Royal Dutch Shell. In
2010, Xerox started using "an online evaluation that incorporates
personality testing, cognitive-skill assessment, and multiple-choice
questions about how the applicant would handle specific scenarios
that he or she might encounter on the job." The color-coded rating
(red, yellow, or green) generated by an algorithm helps guide the
company in its hiring decisions. The attrition rate fell by 20% in the
initial pilot period, and over time, the number of promotions rose. Then
there's GILD, which uses data to search out software engineers who
might have been missed by traditional forms of recruiting.
In the end, Peck surprises himself: He now believes "that we’re headed
toward a labor market that’s fairer to people at every stage of their
careers." That is, one that isn’t based on who you know or what kind of
degree you have.

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