In the not-too-distant past, businesses had a single imperative – make a profit, often at any cost. In recent decades, however, new generations of consumers have faced the consequences of this single-minded, profit-focused ideology.
Recent generations have begun to adopt a different mantra when purchasing products. Often, a business’s values are considered when younger people are making purchases – and if a business is found to be mistreating its supply chain, such as underpaying or mistreating workers, they can be sure to find themselves going out of business in short order.
For the 21st-century business owner, understanding customer priorities and needs can be crucial in driving sales and positive customer experiences. This can be especially helpful for new and emerging business leaders, such as those who have recently completed a Master of Business Administration online, or experienced business professionals who are looking to expand their horizons in an increasingly values-driven economy.
Value Extraction versus Value Creation
When one thinks of the ways that an organisation can seek to earn and retain profits, it is offered in one of two fashions – value extraction, and value creation. Each has an extensive history and can distribute wealth among communities in vastly different ways.
Value extraction was introduced as a concept in the 1970s, by economists Milton Friedman, Michael Jensen, and William Meckling. The hypothesis of value extraction was somewhat simple – products existed simply as a way to maximise the value of a company for shareholders, and as a way to extract value (typically financial) from their customers.
Friedman was well known for publicising his views and wrote an extensive column on why he thought value extraction was a superior model for the New York Times in 1970. His work argued that the idea of an organisation was not as a body to do good for the community – that as a business model, stakeholders should be the ones making decisions on how they choose to spend their profits, through the extraction of dividends and bonuses.
Value extraction can work in a few different ways, but it’s commonly known as a method where employees and resources are extracted for maximum value, which is then distributed to shareholders. Consider supermarkets, for example – an industry segment that has found itself under increasing scrutiny in the last three years. It can be argued that these are contemporary examples of value extraction – where profits are up, but the rights of workers are not.
The direct countenance to the notion of value extraction, simply put, is value creation, made famous in the 1960s by author Peter Drucker. The premise was rather simple – societies entrust corporations with assets that produce wealth, whether that be manpower or materials. Crucially, while businesses should endeavour to be profitable, Drucker argued that companies have a role to play in society – crucially, that corporations can and should create value for customers, rather than just stakeholders.
Value creation can be seen in contemporary examples through the development of co-operatives, and companies that promote the distribution of profits to help social enterprise, such as Who Gives a Crap, a company that distributes half of their profits towards the development of toilets and sanitary facilities in developing nations where they are in short supply.
The Era of Globalisation
In recent decades, structural changes in the way that goods and services are produced and supplied have transformed the ways that we interact with products. Consider, for example, the purchase of a pair of underpants in the 19th century. At the time, you’d likely have purchased the product from a store that sourced the underwear from local producers. These days, while you may be purchasing underwear from an Australian company, it’s very likely that the products were manufactured in an overseas factory and shipped to Australia.
As the world has become increasingly interconnected through technology such as networked computing and the internet, and competing financial systems have become increasingly deregulated, opportunities have arisen for goods and services to move in a manner previously unheard of.
For example, modern smartphones such as the iPhone are reliant on a multinational stream of production and manufacturing that would have been inconceivable a century ago. Parts are sourced from nations all over the world, and shipped to manufacturing facilities in China so that they can be manufactured, packaged, and sent all over the planet for sale.
Globalisation has transformed how we source products, but for some, it has also resulted in job loss or reduction. For some, being able to source cheap labour from overseas nations has led to the near-total elimination of automotive manufacturing in Australia. As a result, some question whether globalisation is simply an avenue to value extraction, rather than an opportunity for value creation.
Intersecting Sustainability and Profitability
In recent years, there’s been a significant shift in the way that customers choose to engage with products. A rise in values-based spending – i.e. customers choosing to spend money on companies that benefit society beyond their shareholders, is beginning to shape the purchasing landscape.
For some organisations, it means beginning to reflect on the personal values they espouse, and how they may align with their target market. In other cases, the exposure of poor personal values, such as media personality and chef George Calombaris’ underpayment empire led to a public collapse of confidence, the closure of a number of outlets, and his termination as a judge on Masterchef Australia.
There is no doubt that there has been a change in the way that consumers behave – and while it doesn’t mean that an organisation has to cater to every single demand, demonstrating a capacity to understand the needs of customers and respond to them accordingly can help drive them to great success.
After all – anyone can produce a cheap product. Companies need to ask themselves – what’s the merit if I buy their cheap product, rather than a competitor with a similarly priced offer?
Profitability and sustainability look set to be on a collision course in the years ahead. As customers grapple with global challenges, such as an increasingly automated world, and the challenges of climate change, it will be imperative that businesses flex their sustainability credentials to not only stay ahead – but stay alive.
While it may not mean the end of the profit-driven empire – perhaps it’s time for a rethink in how businesses operate.
