Out With the Old Economic Ideologies, in With the New

green-copyMore about commerce, less about competition. Leading business strategists like, Michael Porter brought about a shift beginning in the 1980s. Theorists like Peter Drucker had suggested the purpose of business was to create customers. Porter posited a more Hobbesian worldview, in which the natural state of business was one of competition. A company was constantly in a struggle to gain sustainable competitive advantage, Porter said. He taught that there are five competitive forces, including not only existing and potential competitors, but customers and suppliers. Today it’s different. We are massively more interconnected. In Tom Friedman’s terms, the world is flat. The businesses of today are not defined by corporate entities; they spill out across hundreds of companies, related through strategic alliances, buy-and-supply agreements, and collaborative arrangements. In a globally connected world, competition as an underlying condition isn’t just wrong, it’s destructive. We need to replace it with a focus on commerce – the mutually beneficial exchange of goods and services for the creation of greater economic value. One benefit is innovation. Competitive ideologies limit interaction with others. A belief system built on relationships, collaboration and exchange provides far greater opportunities for interaction and innovation. Another benefit is efficiency. A competitive ideology demands excessive emphasis on offense and defense, requiring massive transaction costs – legal agreements, costly accounting and due diligence procedures. A collaborative and commerce-based belief system substitutes trust and relationships for contracts and enforcement systems; business gets done faster, and less expensively. More About Relationships, Less About Markets. In the 1980’s and 1990’s, business began to rely on markets as the ‘best’ solution. Reagan and Thatcher added political dimensions of ideology on top of economic ideology. The result: de-regulation and the application of market forces to areas of economic life formerly the province of government, regulated or non-profit organizations. The rationale was simple: markets would cost less and be more innovative. The Darwinian law of the market would naturally find the best solution. This made sense when applied to outsourcing of non-strategic business functions, or to competitive bid sourcing. But it was less clear when applied to utilities, educational institutions, or natural monopolies like water companies or airlines. The US governmental response to Hurricane Katrina and the current Gulf Coast BP oil spill revealed costs to this faith in markets. And the global drift toward reliance on markets was a direct cause of the catastrophic failure of global financial systems. In a pure market system, a state of competition is inherently unstable. Pure competition quickly resolves to monopoly. But regulation is not the only solution. A far more business-natural response is to re-examine the critical role of relationships. Trusted business relationships, developed over time, and nurtured by personal interactions and interlocking interests, form powerful forces for the same things we wanted from markets: speed, low cost, and innovation. The old belief systems grew out of a competitive, impersonal world. Our new world is connected and related. Our belief systems need to reflect it.

[W thetrustadvisor.com]

Published in the hard-copy of Work Style Magazine, Summer 2010