Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity

by Douglas Rushkoff

  But a company can’t just open everything up at once, particularly when shareholders and others believe its best assets are its proprietary solutions. That’s why some very established companies are developing quasi-open-source practices to connect internal R & D with outside technologists, universities, and, yes, even other corporations.

  For instance, Procter & Gamble launched its “Connect+Develop” program43 in 2004, with the goal of producing 50 percent of the company’s total research and development output through collaborative innovation.44 The C+D initiative presents outsiders with an easy path to partnership: P&G publicizes its innovation goals online and openly solicits solutions from anyone, large or small, who wants to collaborate. Connect+Develop maintains a “Needs” list on its Web site, where detailed project specs are visible to anyone with an Internet connection. Clearly, the company is hardly embarrassed by its openness to outside help; if anything, it treats its willingness to engage with outsiders as partners in problem solving as a demonstration of confidence.45

  Over the last decade, the open approach has paid off. C+D’s most famous win to date has been the Mr. Clean Magic Eraser, really just a block of melamine foam—a polymer invented by the German chemical company BASF. Originally branded as Basotect, the foam was intended for use as a soundproofer and, later, as insulation in automobiles. But when P&G technologists discovered that the foam also functioned as a cleaning sponge, they moved to partner with BASF. The two companies quickly packaged the foam as is, under the Mr. Clean Magic Eraser brand, and released it in 2003.46 P&G and BASF then pooled their R & D teams to continue work on the product and released a wildly successful follow-up, Magic Eraser Duo, in 2004.47

  Likewise, when P&G sought to create a long-term air freshener under its Febreze brand, it partnered with Zobele, an Italian firm with only five thousand employees and extensive, niche expertise in the peculiarities of manufacturing air fresheners. P&G had a winning concept for a slow-release air freshener that didn’t require electricity. The company also had the supply and distribution chains to sell the innovation on a massive scale, but it lacked the expertise to engineer the idea into existence. Working with Zobele, P&G actually broke new ground and invented a no-energy automatic air freshener called Febreze Set & Refresh. The product went to market two years ahead of schedule, and the partnership continues to this day.48

  In both cases, partner companies found new applications for their engineering while gaining access to the considerable branding and marketing power of Procter & Gamble. P&G, for its part, saved years of research and millions of dollars in development costs while annexing expert out-of-house think tanks in the chemical industry. Instead of acquiring outside companies in order to monopolize their research, P&G sought to partner with these companies and develop long-term relationships. Like a nation discovering the theory of comparative advantage, P&G did better by trading its branding and distribution expertise for these companies’ particular skills. By letting them retain their independence, P&G also permits them to preserve their own innovative cultures—which can be called upon again in the future.

  By edging into this strategy, Procter & Gamble avoids both risk and shareholder wrath. It is not completely abandoning its extractive and competitive corporate tactics all at once but merely “experimenting” with the more open-source development style of our decidedly more digital landscape. The company dedicates only a portion of its research and development efforts to agile, experimental processes while keeping the rest safely in the sphere of traditionally closed corporate practices.

  Insulating legacy methodologies while simultaneously encouraging participation in newer approaches is called “dual transformation.” As Harvard Business Review advises, innovation of institutional processes can take years to produce benefits. If an established company dedicates itself entirely to the emerging digital economy and its more open, peer-to-peer methodologies, “it throws away any advantage it still has.” Its CEO also risks a shareholder revolt, or even civil action. To innovate safely, companies should conservatively reposition the core business while creating “a separate, disruptive business to develop the innovations that will become the source of future growth.”49

  Hybrid strategies can also give larger companies a way to contend with slowdowns or even a contraction in earnings. Instead of selling off assets, and doing so under pressure during a recession, companies can repurpose their unused facilities toward the very forces costing them business. This expands capabilities, develops competence in the new landscape, publicizes that competence, attracts new kinds of employees, and generates goodwill. Instead of simply resisting disruption, the hybrid company embraces it while also staking a real but limited claim on that disruption’s becoming the new normal.

  What might some of these strategies look like moving forward?

  Consider supermarket chains, which are increasingly threatened by local food shares, community-supported agriculture (CSA), and growing discontent with Big Agra. The traditional corporate response to this conundrum is Whole Foods: a large, publicly traded company that attempts to provide consumers with organic products at scale. Problem is, “certified organic”—an appellation itself corrupted by corporate agriculture’s lobbying of the Department of Agriculture—rarely means food from small or local farms. Six large California farms account for the vast majority of officially organic produce.50 In spite of large posters throughout the stores featuring wholesome local farmers, locally grown food is still hard to find on the Whole Foods sales floor. That’s because it doesn’t make sense for a company of its size to sacrifice the efficiencies of scale to the minutiae of local sourcing and distribution. Whole Foods isn’t a hybrid strategy at all but an industrial response to a new consumer trend.

  Regular supermarkets might actually be in a better position to adopt a hybrid strategy toward local agriculture. Instead of seeing the growing CSA and farmers’ market constituencies as competitors, they could embrace them as partners. If a supermarket were to encourage, or even provide the space for, a weekend farmers’ market, it might make up for lost produce revenue with sales of condiments and dry goods—both of which sell at higher margins and with less waste than fresh goods. In terms of specialization, supermarkets are better at the distribution of long-distance packaged goods, while local farmers and CSAs are better at farm-to-table freshness.

  Supermarkets are also better at cash management, electricity generation, parking, insurance, and a host of other things that vendors and consumers would be willing to pay for. There’s no reason why farmers wouldn’t pay for stall space, the same way they do at a municipal marketplace. Meanwhile, produce unsold by the end of the day could be stored in supermarket refrigerators or even sold wholesale to the supermarket for it to sell over the coming week. If local agriculture marketed in a more peer-to-peer fashion ends up replacing a significant portion of the produce and meat industry, such a supermarket will be positioned to prosper—without having surrendered its core business in the meantime.

  Even a store such as Walmart can hedge against its own scorched-earth corporate policies by fulfilling the emerging need for more local, peer-to-peer marketplaces. Importing inexpensive goods from China and selling them to middle-class Americans is not a good long-term strategy, anyway—not when America’s middle class is descending into poverty and the Chinese are becoming a middle class themselves. That’s an arbitrage that has run its course, as the company’s own numbers are indicating more clearly every quarter. If the resurrection of a middle class in America is going to depend largely on less extractive and more lateral economic activity, a company such as Walmart can ensure its own ongoing prosperity by finding a way to participate.

  Instead of resisting the future with more aggressive tactics, Walmart must accept the impending contraction of its consumer base. This doesn’t mean closing up shop or selling off real estate under pressure; it means repurposing at least some of its assets and expertise to the new environment
. The company could try supporting the growth of peer-to-peer digital marketplaces such as Etsy by creating real-world analogues for them. The sales floor could become a hybrid of local crafts and boutiques alongside Walmart’s own offerings, all funneled through its own checkout and inventory systems. Popular, locally produced items in one location could be quickly identified and then ordered for distribution to the most probable markets, using Walmart’s vast trucking and fulfillment operations as well as its globally connected network of stores. Instead of simply extracting cash from communities, it would put itself in a position to foster local enterprise as well as peer-to-peer activity between communities that could not otherwise easily reach one another. The company could leverage a portion of its real estate, expertise, and logistics to enable and participate in the economy that may just replace it anyway.

  When I shared this approach with researchers at the World Economic Forum, they argued that a company like Walmart cannot operate this way without violating its corporate charter and risking shareholder lawsuits. True enough; but while making other people wealthy may not be consistent with a traditional corporate code, it may just be a better long-term strategy for prosperity than economic destruction. In a shrinking, postgrowth landscape, maybe keeping one’s customers and suppliers viable is the best option. By facilitating local economic development, Walmart would be sustaining the markets on which it depends for its retail businesses. Or, in terms that shareholders would understand, the money will come back.

  These are the sorts of principles that are already espoused, albeit a bit less dramatically, by a relatively new corporate ethos called “inclusive capitalism.” Conceived by a task force including E. L. Rothschild CEO Lady Lynn Forester de Rothschild, the inclusive capitalism movement seeks to correct the dislocations caused by traditional corporate capitalism, particularly over the last thirty years. The initiative holds conferences and publishes papers encouraging corporations to conduct at least some portion of their business activities in ways designed to promote economic and social development.

  One of its tenets is that larger corporations should attempt to award contracts and purchase supplies from as many small and local businesses as possible, in order to feed the local and bottom-up economy. Unlike cash transfers to fellow megaconglomerates, purchases from small and medium-sized businesses tend to put more money into circulation. The cash ends up injected into businesses that operate closer to the ground, where a higher portion of revenue goes to salaries and local taxes.

  Corporations can do an awful lot of good for the world and provide insurance for themselves by adopting a hybrid approach to contract rewards. Hewlett-Packard UK, for example, contracted to over six hundred small and medium-sized enterprises (SMEs) in 2011, intentionally dedicating some 10 percent of its supply-chain budget to these smaller vendors. By doing so, HP ends up working against the perverse, winner-takes-all extremes of corporate efficiency in a digital age.51 Moreover, utilizing the equal and opposite capability of digital technology to bring about more distributed outcomes, in March 2012, IBM helped to launch the Supplier Connection, an online marketplace connecting small business suppliers to large corporations looking to follow in HP’s footsteps. Over $150 billion has moved through this network annually since its inception.52

  It’s the equivalent of a fisherman throwing back smaller fish to populate the lake on which he depends, or a farmer rotating a cash crop with one that restores the topsoil. Smart businesses know not to destroy the communities on which they are depending.

  3. Change the Shareholder Mentality

  Inspired by the inclusive capitalism initiative, the Unilever conglomerate, responsible for such brands as Lipton, Dove, and Hellmann’s, has done away with its quarterly earnings reports in order to focus on advancing the social and sustainability interests that must be addressed if there is even to be a consumer market in the future.53 Clearly, Unilever is still constitutionally obligated to deliver returns, but at least it’s given itself a bit more room to engage in activities that might not immediately be recognizable as profitable.

  Most corporations don’t yet have the courage to follow suit—not even for initiatives that make pure business sense. According to a 2013 McKinsey survey, over half of corporate executives would pass on a viable project “if it would cause the company to even marginally miss its quarterly earnings target.”54 They are so afraid of their shareholders that they surrender what they believe to be in the best long-term interests of the company’s profitability. These are not progressive, environmental, or spiritual priorities they’re sacrificing to shareholder addiction to growth but business priorities.

  In an economy in which corporate profit over net worth is declining, shareholders can no longer look to share price as the single metric of success. If a company can’t grow without cannibalizing itself, then it has to give up on growth if it wants to survive in the long term. That means its stock just won’t go up until the next period of growth, if that ever even happens. The good news is that it doesn’t have to. A nongrowing company can be tremendously prosperous and deliver the vast majority of that prosperity to its shareholders. It just might not come in the form of a rising share price, which is the only metric most shareholders understand. That’s why shareholders need to be trained to value other metrics or be replaced by people who do.

  The easiest alternative to make shareholders happy is to pay them. Dividends—a quarterly payment to shareholders—used to be considered a good thing. An investor would buy a stock hoping for long-term growth but counting mostly on participating in the company’s generation of wealth. In our current, growth-obsessed stock market, dividends are understood as a sign of weakness. Can’t the company put that money to work? Companies that engage in particularly large regular payouts to shareholders are called “dividend traps,” because investors fear a big dividend portends slower growth and a decline in share price.

  We might better call stocks with no dividends “growth traps.” If a company is depending entirely on quarter-over-quarter growth in order to deliver value to its shareholders, it is in a much more precarious position—particularly in a contracting economy—than a company that has managed to achieve sustainable prosperity. It’s one thing to grow. It’s another to be dependent on growth in order to pay back debts and generate shareholder value. Or, worse, to simply promise that real earnings are coming at some point in the future.

  The disproportionate emphasis on share price is magnified further by our increasingly digital stock exchanges. Algorithms can trade only on changes in share price. They depend on volatility, not consistent returns. To an algorithm, a stable stock market is a profitless one. And a high-speed, high-frequency trading program never sticks around long enough to collect its dividend, anyway.

  Instead of catering to this prosperity-defeating, ultrashort-term mentality, CEOs of sustainable companies need to communicate honestly with their shareholders about the firms’ prospects—and the virtues of holding on to shares. Dividends and the stability of returns ought to replace share price as the measure of the company’s value over time. Common shares become more like what are now known as the “preferred” shares usually owned by institutional investors and pension funds. Preferred shares don’t shoot up so much when a stock is in favor but, instead, provide constant returns to investors. It’s less like owning a share of stock than, well, owning a company.

  Stressing earnings over share price also helps a company unwind from its own destructive impact on the greater economy. Unlike share prices, which remain trapped in capital, dividends come in the form of money. Sure, they can be reinvested in more shares, but they can also be spent. If a shareholder population can’t be convinced to accept prosperity over growth, then they need to be replaced. This isn’t so easy. The more people there are who want to sell their shares, the lower the shares’ prices go, and that’s when the class-action lawsuits start coming. The better alternative may be to buy out the shareholders o
neself and get off the stock exchange altogether.

  Going private—even temporarily—permits businesses to hit the reset button. They can eschew shareholder obsessions like growth targets and focus on the long term and on creating real value instead of the day’s closing share price. Until recently, privatization has been used mostly as a form of financial jujitsu. A private-equity firm purchases a distressed or undervalued firm, uses its banking relationships to restructure the company’s debt, and then puts it back on the market for a hefty profit. That’s what happened when the Blackstone Group purchased the Hilton hotel chain in 2007, for $47.50 per share, a 32 percent premium to the stock’s closing public valuation.55 Seven years later, Blackstone took Hilton public once more, with an IPO that netted them a $10 billion profit—credited mostly to complicated tax and debt maneuvers.56 Even at that, many observers considered it a disappointing return on investment.57

  But buying back a company from one’s shareholders can also give a CEO, a founder, or employees a chance to suspend growth and focus on more important things. That’s the approach taken, perhaps most famously, by Michael Dell. While the company was growing in the 1980s and 1990s, shareholders were more than happy. But Dell found its growth slowing as the PC market was disrupted by tablets and the server market upended by cloud services. The company’s problems were compounded by its typically corporate, growth-obsessed overexpansion, as well as its myopic focus on supply costs and margins over product innovation.58 Michael Dell sought to implement some seemingly radical changes, such as selling PCs at a loss in order to upsell more profitable software and services, but his impatient shareholders disagreed.59 Such a pivot would take longer than a single quarter to accomplish. If it failed, or failed to succeed fast enough, Dell’s share price would decline further, making the company an easy target for a takeover, an ouster, or a shareholder lawsuit.