Thursday, January 26, 2012

The Great Transformation 2.0

This year’s World Economic Forum WEF is headlined: “The Great Transformation: Shaping New Models”.  However, the term “The Great Transformation” does not seem to be all new to us. It has not been invented by Klaus Schwab, Founder of the WEF, but by the Austro-Hungarian philosopher Karl Polanyi. As early as 1944 he described what he understood as the “Great Transformation”: The transformation of traditional societies into market societies, characterized by the subordination of the substance of society to the laws of the market.[1]
For many years, the World Economic Forum was almost a synonym of this development, and to big business; and politicians who attended the forum seemed to understand economy as “the continuation of politics by other means.” As opposed to Clausewitz, who understood war as “the continuation of politics by other means”, they certainly shaped a more peaceful process. Nevertheless, the WEF was one of the most important forums and market places of “The Great Transformation”: The subordination of all realms of society under the laws of economy. Those were the days when protests against the WEF mobilized thousands of “anti-globalization activists”, and the critics of capitalism were suspected to be reactionary communists.
Today, there are just a few dozen protesters, and Klaus Schwab himself publishes the following sentence on the front page of the WEF website: “Capitalism, in its current form, no longer fits the world around us. We have failed to learn the lessons from the financial crisis of 2009. A global transformation is urgently needed and it must start with reinstating a global sense of social responsibility,” ( What a remarkable shift! Are the illustrious attendees of the forum willing and able to work towards a second “Great Transformation?” Do they understand what has been wrong with “Capitalism in its current form?”
I dare to doubt. I dare to doubt that “Capitalism in its current form” is capitalism at all! I haven’t heard any better analysis of what we have seen during the last couple of years than the one of Marc Chesney, Professor of Finance at the University of Zurich, who said this was not capitalism but “betrayal of capitalism”[2]. According to him, capitalism is based on an elementary principle: Those who are taking entrepreneurial risks, are entitled to reaping the benefits of their endeavors. However, “Capitalism in its current form” has been the art of separating risks from benefits, of creating “absolute return” to owners of capital, no matter which way the markets would develop. Governments, tax payers, unemployed people, society at large are paying the bill today and in the future.
Thus the problem is not with capitalism, but with its abuse by those who created – or tried to create – private wealth at the cost of society, and legitimized their action by referring to mainstream economics. Stakeholder theory is about value creation through fair exchange of risk and benefit potentials in stakeholder networks. This has been described and explained by many scholars from Freeman’s seminal Book in 1984 (Freeman, R. Edward, 1984: Strategic management: A stakeholder approach. Boston: Pitman) to the latest publication of my colleagues Sybille Sachs and Edwin Rühli at HWZ (Sachs Sybille / Rühli Edwin, 2011: Stakeholders Matter, Cambridge: Cambridge University Press).  

We may call it capitalism; we may call it anything else: I do agree with Schwab, a “Great Transformation” is needed. However, I would call it “The Great Transformation 2.0”, towards true leadership and management in the service of a peaceful and prosperous global society. Do we need the WEF for this insight? Not really: We could have known earlier – at least since 1944 – and we could have known better – at least since 1984. Let’s hope the attendees of the World Economic Forum 2012 are wise enough and fast enough – not to turn back the wheel, but to make credible steps forward towards a fair and more stable economic system in the service of humans around the globe.  

[1] Polanyi Karl, 1944: The great transformation. New York: Rinehart
[2] Chesney Marc, 2009: La finance trahit-elle le capitalisme? In: Revue Finance & Bien Commun, Genève, Mai/Juin 2009

Sunday, January 22, 2012

Creative Destruction or Simply Destruction?

Sybille Sachs highlighted in her last post (New path to innovation) some of the questionable business-practices surrounding corporate cost-cutting. I would like to provide here a concrete example I experienced in my years in the corporate world and further consider the short-term and long-term consequences of such company reorganizations and cost-cutting.
In the 1990s I had the pleasure to work for a rapidly growing, privately held start-up company in the medical laser industry. I use the word “pleasure” with deliberation, as the motivation, dedication and team-spirit were wonderful – and that despite working long hours, not having any huge bonuses or enticing stock-options as carrot-sticks dangling in front of our noses. The morale in the company was high because input (in terms of resources, effort and creativity) was readily recognizable in concrete results.

Then the company was purchased by a publicly traded corporation.
Within months a “reorganization” was initiated that resulted in the suspension of research projects, the dissolution of numerous prospering business relationships and the attrition of - in several rounds - employees. All this was undertaken in the name of “business consolidation” and the concomitant cost-cutting. The investors and stock market loved it: the corporation’s share price exuberantly jumped in response.

On the “inside”, however, the result was exactly the opposite: a sharp drop in employee motivation and rising cynicism, erosion of trust and know-how and – eventually – evaporating financial returns by the corporate subsidiary we had become. Indeed, within 18 months employee count had roughly gone down by a third and a company that boasted 35 million dollars in revenues, posted at best half of that number. The share price of the corporation subsequently dropped from (if I correctly recall) about 40 dollars a share to only 4 dollars a share!
Granted, a multitude of factors played into this precipitous drop in share price. But that these “cost-cutting” activities contributed in some form to the financial fallout in the stock market is self-evident. Less evident, however, are the larger implications of such “cost-cutting” strategies.

First, despite any strong personal penchant for valuing people over profits and striving towards not making ends justify means, it must be recognized that on a larger, macro-economic scale, such “destructivity” could indeed be part of Schumpeters’ (in)famous creative destruction. The American “churn” model of hire and fire, while often with terrible personal, social and innovation costs, does (or at least did…) permit considerable labor flexibility, speed of economic rejuvenation and knowledge transfer as employees and resources shuttle from company to company. For me, after having been let go in the second wave of attrition meant that I suddenly had the needed motivation to get out of the corporate world into an environment more suitable to my aptitudes and taste.
Second, however, what may be “creative” at one place (or time or for any one person), may not be thus in another. For a large and fluid labor market as the USA, the churn model may have been a viable option. For a more segmented and embedded labor pool as the EU, it seems less so. And for a very small and very much socially rooted labor pool as Switzerland, the “churn model” would have catastrophic socio-economic and likely also political consequences.

Not surprisingly, this is indeed what one discovers, as was once again poignantly illustrated to me during a recent lunch I had with a scientist at the Massachusetts Institute of Technology, who was involved in a start-up company with a footing in both Switzerland and the USA: he complained about how difficult it was to get start-up funding and start-up employees in Switzerland as compared to the USA. He readily understood, however, that the American model would be unsuitable for Switzerland, as the capacity to sustain “churn” was significantly smaller for tiny Switzerland. Nevertheless, both Switzerland and the US have highly productive and competitive economies, each remarkably well adapted to their particular socio-economic and geographic “biotope”.
Indeed, we know from biological organisms as well as biotopes that change is vital for the survival of an organism or a species. The challenge for all organisms (and biotopes) is to find that “sweet-spot”, sometimes referred to the “edge of chaos”, where change – and thus innovation – is maximized without sliding into chaotic destruction. Much the same may hold for an economy. But while one may well entertain such questions about an entire economy, it is another matter entirely to what extent such “creative destruction” or “churn” is to be a desirable for individual human beings.

If humans are to be ends in themselves, any corporate strategy that facilely treats employees as mere cost centers risks devaluing human life per se. And history is unfortunately replete with examples of where that can lead to…

Manuel Heer Dawson


Wednesday, January 18, 2012

Do (and communicate) the right thing at the right time
A few months ago, Novartis, one of the biggest pharmaceutical companies in the world, aroused people’s attention by announcing a cutback on more than 1000 jobs in their Swiss headquarters and a local production facility, while at the same time reporting on a profit in excess of USD 10 billion for the first nine months of 2011. Unsurprisingly, such a controversial announcement wouldn’t make sense for the general public and especially not for the company’s soon-to-be ex-employees.
However, after a certain period of considerable protest on the part of the employees and their unions and the usual stubbornness and secrecy of multinational corporations in such situations, yesterday’s newspaper reported on a wondrous U-turn that seem to have occurred in the management of Novartis. Whereas nobody has to leave the outdated production facility (that even receives a substantial makeover) anymore, also the job cuts in the headquarters could have been reduced by over two third.
After digging deeper into the triggers that caused Novartis to act this way, it appears that a fruitful dialogue between the involved stakeholders from the economic, political and social sphere has taken place in order to mutually find a better solution for the company’s planned restructuring in Switzerland. Apparently, managers from the US had a great influence on the overhasty communication regarding the mass layoff and were afterwards surprised by Swiss people’s intense reaction on the announcement.
What tells us this story? In my opinion, the case vividly illustrates two important aspects of stakeholder management and the idea behind “people-for-people”. On the positive side, the case confirms that bringing together the involved people in the form of a multi-stakeholder dialogue, clearly has the potential to yield most favorable solutions for all involved parties in situations like this - given the dialogue is set up correctly and all parties are willing to constructively contribute to the solution.
However, on the negative side, the right timing and corporate communication in the context of such stakeholder round-tables as a problem-finding an -solving approach is also decisive and – as shown in this case – can go terribly wrong. Why Novartis risked reputational damage and didn’t first try to involve the concerned stakeholders, search for common ground and this way actively seek a mutually beneficial solution that might even put them in a favorable light from a best-practices perspective remains their secret. 
Marc Moser

Source: TagesAnzeiger, “Novartis: Schweizer setzen sich gegen amerikanische Manager durch”, frontpage, 18.01.2012, Zürich.

Monday, January 16, 2012

New path to innovation
In an article titled “The Pharmaceutical Industry Faces a Horror Year,“ a Zurich newspaper ( writes, that leading pharmaceutical firms like Pfizer, Sanofi as well as Novartis are facing the loss of patent protection for important top products this year, and are therefore facing major revenue losses. Interestingly, these firms are confronting the situation with drastic personnel cuts in different areas, which includes such as how to respond to clinical developments. Cost saving has to begin immediately. However, proceeding this way raises questions.

First, investigations show
[i] that personnel cuts, particularly in the long run, do not bring about the desired success, unless a strategic reorientation occurs at the same time. In an extensive empirical study the authors were able to show that the size of the employee cuts is not a factor in explaining the post-downsized performance.

A further point concerns “survivor sickness” studies
[ii]. They show that personnel cuts have an array of negative consequences, also for those who remain at the firm: “Research indicates that survivors exhibit a plethora of problems, such as demotivation, cynicism, insecurity, demoralization, and a significant decline in organizational commitment”[iii]. One also speaks of the difficulty in diagnosing dysfunctional side effects of personnel cuts. They often lead to slumps in productivity.

In addition, if one considers that in the knowledge oriented society of today, knowledge is often a more important success factor than capital. There is then the danger that for every cut in personnel, the know-how networks will be destroyed and important knowledge bearers will be discarded. Indispensible resources for future core competences may be lost.

It is also striking that the only reasons given for the personnel cuts are the costs, but never the revenue side of the coin. By strengthening R&D capacity, setbacks could be absorbed. Is it therefore sensible to dismiss people in the area of research and development? Wouldn’t it make more sense to encourage targeted cooperation with stakeholders that possess special knowledge, in order to stimulate the innovative productivity of the firm’s own R&D?

Also in our own empirical investigations, we have always found impressive examples of cases, where firms that work together with their stakeholders have been able to substantially increase their license to innovate (see Sachs, Rühli 2011, page 114 ff). In this regard an interview partner (page 118) mentions, “The suppliers are creative and often involved as they try to find new solutions for the market….They act as accelerators who give us new ideas….And very often the supplier is also a strategic thought leader….”

Especially in the area of innovation, firms should not only engage in professional stakeholder management when the turnover drops. Our examples show in fact that not only the firms improve their license to innovate but also the involved stakeholders, which motivates them to further cooperation.

Based on the above, we can conclude that managers, practicing personnel cuts with the argument of saving costs, have an obligation to demonstrate that they also have the above mentioned consequences under control, e.g. the benefits. It should be carefully examined if the multifaceted disadvantages and damage of personnel cuts are not, in fact much higher than the advantage of short-term cost savings.
Sybille Sachs

[i] Garry D. Bruton, Kay Keels,  Christopher L: Shook, Downsizing the Firm: Answering the Strategic Question, Academy of Management Executive 1996, Vol. 10, No2, pp- 38-45
[ii] E.g. Firns, I., Travaglione, A. and O'Neill, G. (2006), Absenteeism in times of rapid organizational change. Strategic Change, 15: 113–128. doi: 10.1002/jsc.757
[iii] Ibid, p. 2
[iv] E.g. with lead-users, see Christopher Lettl, Cornelius Herstatt, Hans Georg Gemuenden,, Learning from users for radical innovation, International Journal of Technology Management, 2006, 33 (1), 25-45

Wednesday, January 11, 2012

Does it make sense?

Compared to the previous five decades, the last ten to fifteen years have seen dramatic changes in many ways. Some say we are going through a fundamental crisis of moral values. They say that selfishness, mistrust and opportunism are taking over, and from their point of view, we need to go back to deeper and stronger moral behavior. As an ethicist I certainly agree that moral behavior – whatever it means – may help us to lead a better life as individuals and as communities. But I suspect that’s not all of the answer. The answer – at least for the most developed countries – lies beyond the question if people used to be morally better or worse in the past.

My suspicion is that the marginal sense-making value of additional economic output and individual consumption is decreasing and about to tend towards zero. You think this answer is somewhat technical? Let me give you two examples:

My grandparents got their first telephone around 1948. Before then, they had to walk to the local post office to call a doctor, their family or friends. A clumsy black device on their kitchen-shelf changed their everyday life, and allowed them to easily stay in touch with an increasing number of people. It connected them to the world – to their world at least.

My parents bought their first car in the early sixties. It literally opened new horizons of freedom and autonomy for their private, as well as their professional life. In the early seventies, we spent our first vacation abroad and my parents bought a TV-set.
Back then, economic growth created jobs and wealth, it opened opportunities for consumption to millions of people – and most important: it all seemed to make sense. People experienced emancipation, dramatic increases in their quality of life. I’m not saying those times were ideal, particularly with respect to the environment.
But let’s be honest to ourselves: What about the last smartphone we bought? What about our newest car, our last vacation and our new TV-set? Do they make sense? Do they have a real impact on our quality of life, compared to what we had before? Maybe yes: the phone has more apps, the car uses less fuel, and so does the airplane that took us to the Seychelles, and the new TV-set is a digital one. But the difference to the generations before us is evident: more than ever, we are confronted with the question: “Does it make sense?”

This is a challenge and an opportunity at the same time. It is a challenge because economy and business firms are still organized as if more output, more income, more consumption and more economic growth were the solutions to all of our needs. But humans want to live in communities they can trust; they want to see perspectives for their future, they are searching for a meaning to their lives. It is an opportunity to face these questions from personal, as well as from organizational perspectives, and to carry them beyond unsustainable consumption patterns.
Future leaders make good use of this opportunity. We need to find them, better understand them, and leverage their wisdom into business schools and companies, in order to create a more sustainable future.

Christoph Weber-Berg

Sunday, January 8, 2012

The Power of Positive Motivation

In various messages at the turn of the year, the sense of community was mentioned as the primary basis for society, which needs again to be promoted in order to counterbalance self-interest as the mainspring of human behavior.
When a person concentrates on his self-interest, as foreseen in the concept of human beings as homo oeconomicus, then he is mainly concerned with himself and his needs. Others very quickly become rivals. In his professional life he is motivated to use his knowledge and ability to earn as much money as possible, so as to better satisfy his own needs.  According to a popular expression, “The more he has, the more he wants.”

If, however, our understanding of human beings causes us to see our relations with others as being of primary importance, then we will carry our knowledge and ability into our relationships. In this way, knowledge and ability can be combined innovatively and developed. In this context Erich Fromm distinguishes between active and passive motivation, and emphasizes that human beings need to interact with other human beings primarily with active and not only with passive "motivation." Passive motivation focuses on controlling an interaction, for instance to protect property. The output of these interactions can be described as "having." In contrast, active motivation considers "being" as "process, activity and movement." Fromm describes motivation as an activity between two human beings as follows: "He gives him of his joy, of his interest, of his understanding, of his knowledge, of his humor, of his sadness – of all expressions and manifestations of that which is alive in him." (Fromm, E. (1956). The Art of Loving. New York, NY: Harper & Row, p.24). With respect to knowledge, Fromm offers the following examples to contrast active and passive motivation within human interaction: "Having knowledge is taking and keeping possession of available knowledge (information); knowing is functional and serves only as a means in the process of productive thinking." (Fromm, E. (1997) To Have or to Be? London: Continuum, p. 33).

In our studies of stakeholder relations in practice, we found numerous examples in which Fromm’s concept of positive motivation led to innovative, new solutions. (See chapter 7, Sachs, Rühli 2011). The basis of this motivation is the desire to respect and understand and thereby to replace going solo with a sense of community.

Sybille Sachs

Wednesday, January 4, 2012

Ties that bind
Recently, I had a talk with a catholic priest about people’s participation at the Mass. Not surprisingly, he told me about the continuously declining numbers of participants, but he was more worried about the decreasing level of general social participation in his parish. As a matter of fact he pointed out the additional problems of recruiting or retaining members of various parish-related associations like charities, youth, hiking or card playing groups. In his opinion this phenomenon was not basically a question of religious faith, but mainly one of individualism. As people want to take their lives in their own hands and like to organize more and more aspects of their lives individually, they make ever less use of the parish’s social offerings. Again, this is not a new insight, as Robert Putnam (2000) described in his seminal work “Bowling Alone” various aspects of the American community (political, civic and religious participation, workplace connections etc.) and its decreasing level of social activity or, as he named it, social capital.
I am asking myself what the consequences of this shrinking in social capital are for people’s willingness to participate in collective actions regarding social issues. Let’s take the steadily increasing disparity of incomes and wealth in most of the Western countries as an example: “We are the 99 percent” is one of the corresponding “Occupy”-movement’s slogans. But why are those 99 percent not able to trigger any societal change regarding fairness in the dissemination of income and wealth? “No, we can’t!” seems to be the more adequate slogan.

I think that individualism is part of the problem. If people are striving for their own personal goals, they are not really organized regarding the pooling of shared interests in the context of a social issue. Further, people’s membership in and their feeling to belong to associations, unions and other social groups fosters the development and maintaining of shared values, norms and interests in the context of a social issue. Therefore, not only personal relationships, but also memberships in social groups lead to ties that bind among people.
One possibility to approach a social issue is a stakeholder network. Especially regarding complex social issues for which cooperation among the affected actors is needed to create sustainable solutions, stakeholder networks are a promising organizational form. However, even if stakeholder networks have proved their potential to create value regarding a complex focal social issue, they are no panacea. Stakeholder networks depend heavily on the knowledge and skills of the different stakeholders’ representatives participating in the problem-solving regarding the focal issue at hand. Therefore, through the interactions of representatives in a stakeholder network, the corresponding shared values, norms, and interests regarding the social issue are emerging. These personal interactions, in the sense of people for people, are important for creating sustainable solutions in complex issue-based stakeholder networks.

Stakeholder networks and its organizational form create social capital by supporting two different kinds of ties that bind. On the one hand, there are the already mentioned interactions among representatives of different stakeholders. On the other hand, shared values, norms and interests provide the social glue among individuals. This glue is needed to address complex social issues like the increasing disparity of incomes and wealth.

Tom Schneider

Monday, January 2, 2012

From materialism to non-materialism

At the end of 2011, many people may question the deeper causes of the financial crisis and the possible ways out. Damianos I, Abbott of the Greek-Orthodox St. Catherine’s Monastery and Archbishop of Sinai, (NZZ am Sonntag, p. 73, 25. Dec. 2011) made in my opinion a very convincing statement in this regard: "For me it is clearly not so much about a financial crisis but a spiritual crisis. There has always been materialism. Money has always been important. But today materialism is no longer merely tolerated as a human weakness. Having many things, being wealthy, are ideals today. The human need and desire for meaning is as big as it always was. But most people are seeking in the wrong places. However as in every crises this one also offers the opportunity of finding the right path."  

Therefore if we want to embark on a new path in 2012, then according to these wise words nonmaterial values need to be given special attention. We need to consider that we do not only “possess” material goods but that we also have knowledge and experience at our disposal, which in today’s knowledge based society are as relevant as material goods. The essential innovations of our society did not come only  about on the basis of financial ownership but through knowledge, ideas and the engagement of human beings in human enterprises. These contributions create property rights of all kinds (e.g. intellectual, organizational, financial etc.) for the firm. Therefore stakeholders (e.g. employees, customers, suppliers) with their broad range of skills become key actors in value creation. Due to their contribution in the value creation process, they create and enhance property rights for the firm as well as for themselves. In reality a broad range of stakeholders are normally indispensable for corporate operations aside from the investors. This has in fact important implications not only for value creation, but also for value distribution. Both are not exclusively of a financial nature but consist of different kinds of values (see chapter 4, Sachs, Rühli, 2011).

Property rights have to therefore be understood in an extended way: materially and non-materially. This broad understanding of property also motivates people to engage themselves in society instead of only concentrating on enriching themselves financially. The resolution for 2012 for the “right path”, also in the spirit of Damianos I, is to engage ourselves more with and for nonmaterial values.

Sybille Sachs