* Book: New Capitalist Manifesto. Building a Disruptively Better Business, Umair Haque. Harvard Business Press, 2011

In this second installment, the author discusses the case of Walmart in Chapter 2: Loss Advantage: From Value Chains to Value Cycles

Umair Haque:

“”The first step in becoming a constructive capitalist is learning to attain a loss advantage. It happens by turning a linear value chain into a circular value cycle. Here’s how a few revolutionaries have started to make the shift.

It was the Death Star of companies: ultra-lean, ultra-mean, and the size of a planet. By exploiting natural resources, squeezing suppliers, and crushing communities, Walmart grew to become the biggest company in the world—and public enemy number one for a generation of activists and reformers. But today, it’s rebuilding with three suspiciously benevolent goals: to use 100 percent renewable energy, to achieve zero waste, and to sell only products that benefit the environment. The goal is, as ever, to gain efficiency, only this time, it’s a radically constructive form of twenty-first century efficiency that is priority number one in the notoriously Spartan meeting rooms of Bentonville.

The old Walmart’s goal was cost advantage—the most primitive and simplest form of industrial era advantage. Cost advantage is the living embodiment of operating efficiency: minimize your own costs relentlessly, and both the boardroom and the economy will be better off. Walmart built the world’s biggest company by minimizing labor, marketing, and input costs.

But there’s a problem with mere operating efficiency. Firms impose a broad range of unseen, unintended, and unwanted costs on others—environmental costs, human costs, social costs, to name just a few—but because these costs are often invisible, they remain uncounted and thus are not minimized. These costs are often described as negative externalities or spillovers, a concept pioneered by Cambridge economist Arthur Cecil Pigou and refined over the years by thinkers as diverse as: MIT’s Peter Senge (who has applied them to organizations); sustainability thought leaders Paul Hawken and Amory and Hunter Lovins (who have noted their impact on the natural world); and Nobel Laureates Joe Stiglitz and Amartya Sen (who have looked at their macroeconomic repercussions).1 What’s common to all their deep thinking might be said to be this insight: when the full spectrum of costs incurred hasn’t been minimized, one kind of value is simply traded for another.

The costs you minimize with one hand might simply be given back with the other—like a factory polluting a river, cars smogging up the atmosphere, or food that results in ill health. If stuff is “free,” it’s underpriced—and so we can overuse it. That’s how pursuing pure operating efficiency has led too often to exploitation and depleted resources. Who, then, are these costs shifted onto? Orthodox business is used to considering rivals, like competitors, buyers, suppliers, and complementors and striving to outdo them in orthodox terms, like operating efficiency. The constructive capitalists we studied, however, considered five foundational categories of stakeholders whom I refer to throughout the course of this book: people, communities, society, the natural world, and future generations.

So negotiating power might have let Walmart achieve “everyday low prices”—the living expression of operating efficiency—but only at the expense of hidden, uncounted environmental costs. Without paying the costs of maintaining, sustaining, and renewing those resources, given Walmart’s size and reach (if it was a country, it would be among the world’s twenty-five largest economies), natural resources might end up threatened, putting communities and society on the offensive. Adam Werbach, CEO of Saatchi & Saatchi S, a global sustainability pioneer who worked closely with Walmart to kick-start its great shift, explained it to me this way: “Walmart initially took on its sustainability initiative as a defensive move. After its explosive growth in the 1990s as one of the most respected companies in the world, it was unprepared for the attacks it sustained, particularly from the labor and environmental community. As soon as they rose to the top of the Fortune 500 list, society’s expectations rose as well.”2

Society’s expectations: today, a radical new Walmart is discovering that operating efficiency isn’t enough to sustain lasting economic advantage. Constructive capitalism’s better definition of efficiency is socio-efficiency. It means minimizing all the costs that production incurs, whether they are the orthodox costs directly accounted for by industrial era business or less visible costs to society, communities, the environment, and people. That’s a fuller, more economically valid kind of efficiency, not just a partial efficiency, where only some of the costs incurred by production are addressed.

Achieving superior efficiency in twenty-first-century terms—socio-efficiency—results not in cost advantage, but in loss advantage: the first of the new sources of advantage constructive capitalists realize. Walmart is using it to reconceive the deep economics of production and consumption. Loss advantage means an advantage in minimizing a business’s own direct costs, while also minimizing the social, human, public, and environmental losses the business imposes on other economic actors. Where businesses seeking a cost advantage are often irresponsible, shifting, hiding, and pushing costs onto others, businesses seeking a loss advantage are radically—indeed, disruptively—responsible: they take responsibility for the full spectrum of the costs and losses production incurs.

Operating efficiency can be seen as a tiny subset of socioefficiency. It is efficient only in the weakest, smallest sense: the minimization of only the direct costs firms are forced to pay today by law, by social pressure, or by competition. Players seeking loss advantage are turning that kind of weak efficiency on its head: they strive to minimize all the costs they can find, protecting and shielding themselves from future regulation and from stakeholder and social pressure, and amplifying competitive pressure on rivals. In 2009, Congress passed the landmark American Clean Energy and Security Act, which sought to cap greenhouse gas emissions in the United States for the first time. Though it might not pass the Senate this year, here’s the point. When, inevitably, a bill capping, limiting, or taxing carbon emissions does become legislation, players seeking a cost advantage will find their cost basis disrupted because they will have to pay carbon costs. Yet, if they had sought a loss advantage yesterday, they would have sidestepped this disruption, because, while rivals struggled, their carbon costs would have already been minimized, traded away, and offset.”

Reprinted by permission of Harvard Business Review Press. Excerpted from The New Capitalist Manifesto by Umair Haque. Copyright 2011; All rights reserved.