Morality is a shortcut to good business strategy

Intro

While everyday operations are by necessity immersed in zero-sum play, good strategic decisions must make a contribution to the common weal. An enterprise ought to be different, representing a unique business idea within its market area. Otherwise it does not participate constructively in the plus-sum game of the market. Thus it will not provide any added value and cannot be successful in the long term.

Business basics

The hard core of economics, called praxeology, is rooted in the plain logic of life; the struggle for survival is, in essence, naked economic competition. This is illustrated by Gause´s law: two or more species (companies) cannot co-exist in the same habitat (market) if they have the same survival (business) strategy. One species (company) will be at least marginally stronger and come out on top, exterminating the others. Hence the incessant speciation and differentiation in nature and economic life. Our vast economic plus-sum game depends on super ordinate rules, but no norms can eliminate the zero-sum component – the conflict between the self-interest of the competing players and coalitions.

The praxeological approach emphasizes the inherent logic of economics, the unyielding invariancies in the structure of the game. Such value-deficient insights fall short of explaining the all-important variations in economic performance under outwardly very similar conditions. This limitation can be overcome only by extending the frame of reference by considering the meta-rules of the economic game. The plus-sum character of economic life depends on these superordinate aspects, but no system of rules can eliminate the zero-sum component – the conflict prevailing between the self-interest of the competing players or coalitions.

In head-on competition, marginally weaker companies are bound to lose out. Either they perish, or they take refuge in differentiated niches with distinctive conditions for success. Every viable company, like every species, must have some superior competence and enjoy some competitive advantage in its own line of business. Diversity in nature and the economy spring from the same logic. Companies pursuing identical business strategies cannot coexist in the same market; only one of them can survive, barring artificial restrictions on competition. Cut-throat competition is the outcome of zero-sum based strategic thinking. Economic depressions can be traced back to similar shortcomings.

In a market economy, enterprises are participating in a web of value-creating games. Every market transaction by definition creates value. The goods or services rendered must be more valuable to the buyer than to the seller, otherwise there would be no deal. Added value is the driving force of commerce which thus constitutes a vast plus-sum game. But the division of the spoils is a zero-sum game which can give rise to time-consuming haggling, wasting part of the accrued added value.

A free and open market with many buyers and sellers is the appropriate remedy. It reduces but rarely eliminates the zero-sum component of trading. The marketplace is basically amoral. Every player has to watch out for himself and catch where he can. Competition is, or should be the incorruptible referee of the market, and the formal morality of managers is limited to following the approved rules of the game. The market discipline is an efficient stand-in for the frail morality of man, but its effectiveness depends on the official and unofficial system of rules. Ideally the norms should promote long-term, fruitful plus-sum play.

Strategic plus-sum play

In the long term, companies pursuing the same business strategies cannot coexist in the same market; only one of them will survive, barring artificial restrictions on competition. Current business dynamics, if not the law, sooner or later cuts short any all too cozy cohabitation. Genuine, value-creating cooperation can be realized only between diverging organizations. Collaboration between similar companies always smells of conspiracy; mergers and acquisitions are the obvious alternatives.

In a competitive market, a sound corporate strategy must be adjusted to the specific situation of the company. Save for trivial statements, valid guidelines for strategic thinking in business are therefore few and far between. The most pervasive is to try to minimize competitive pressure. Surprisingly, this egoistic precept provides guidance for long term plus-sum play by promoting the sensible division of labor far into the future. The invisible hand of Adam Smith is quite instructive in a strategic context, too.

The governing strategic principle should be that an enterprise must be different, representing a distinct way of making money within its market area. Otherwise it does not participate constructively in the plus-sum game of the market. Thus it will not provide any added value and cannot be successful in the long term – morality is a shortcut to good strategy. Learning from competitors is commendable, but all-out copying is futile in the absence of a clear-cut cost advantage. During the daily grind, zero-sum games are prevalent but strategic competition requires a more creative approach in order to achieve sustainable profitability.

An innovative strategy always carries a certain risk but exaggerated risk-avoidance eventually buries a company for good. An enterprise must contribute by defining, developing and implementing a unique business idea with the potential to create added value for existing or presumptive customers. In marketing, morality is at least as important as in internal company relations. The trust of the customer can only be built over time but it can be lost in one, short moment. Contemporary corporations can be as particular about their reputation as medieval knights.

A favourable image is also an important asset in attracting gifted people to the company. Besides earning money and getting ahead, young men and women of the right calibre want to participate constructively. For them, self-realization implies a measure of altruism. A most important task of top management is to make work meaningful for the troops. A genuine heart-felt company mission raises the game beyond trivial zero-sum play, and makes wonders for company morale. For good people, real satisfaction can be achieved only by playing a plus-sum game. And in business, good people is all.

Primarily, my conviction concerning the supremacy of morality rests on deductive reasoning. The market economy is evidently a plus-sum game and elementary game theory tells us that honesty and openness are the necessary and sufficient success factors. This conclusion is supported by a lot of anecdotal evidence, but thorough empirical investigations are few and far between. There are good reasons for this lack of verification (or falsification). Moral capital is very hard to measure but empirical research in this area could eventually yield applicable results. Otherwise we must resort to circular argumentation. Long-term success is the only dependable measure of morality!

A candid plus-sum strategy cannot be pursued in a foul moral environment. It would work like a dream if the rules of the game were perfectly attuned to the public interest. But I maintain that our present democracies are close enough to the ideal for good morals to pay off handsomely.

Moral leadership

A corporation is an island of planned economy in a sea of uncontrollable market forces, a small society where morality is indispensable for the efficiency of the internal plus-sum game. High morality reduces control requirements, improves motivation and encourages creative cooperation. It facilitates delegation and activates under-utilized resources. The organizational hierarchy is flattened, which promotes flexibility and adaptability; the company can promptly adjust to changes in the business environment − the well-being of the personnel is thrown into the bargain.

Moral leadership is a key if not the key responsibility of top management. Integrity at the top provides a powerful example and creates the right atmosphere for a fruitful plus-sum game. Honest leaders attract honest people, fostering adherence to company values at all levels. Control, supervision and reporting can be slimmed down to the minimum. Hierarchical shackles are eliminated and self-organization is encouraged, ensuring high flexibility and motivation. At best, the virtuous circle of decentralization produces the necessary conditions for its implementation.

But a dispersal of responsibility can beget disorder, confusion and sundry inefficiencies. Cynics have ample room for their evil designs and free riders may just enjoy themselves. Lack of recognition might sap the self-motivation of the progress motors. Morality alone can not be relied upon to solve all problems. Old-fashioned discipline and organizational structure are still required. “Economize on love” says the Nobel laureate James Buchanan, meaning that the management of self-interest is still the mainstay of an organization.

Performance pay economizes on love, for sure, but is no substitute for morale. It can be a poison, particularly in a downturn, and must be handled with exquisite care. Morality is in any case an indispensable support, keeping our egocentricity in check and imparting sense, purpose and cohesion. The higher the morale the better; the moral capital correlates with efficiency, profitability and competitiveness.

A lot can be done to facilitate the growth of moral capital. Relevant information should be easily accessible and actively dispersed – openness is after all a requisite condition for plus-sum play. An in-house management training program provides opportunity for top executives to indoctrinate the staff and meet managers in an informal setting. And, most importantly, personnel policies must be focused on promoting the real contributors to company success while weeding out pernicious cynics.

This is no mean task and the difficulties increase with company size. In general, the superior has the least knowledge of the true character and performance of an employee. The team-mates know much more but only the subordinates are truly informed. In small and middle-size companies, the grapevine provides much important information which gets lost in a big organization. One way or another, promotions (and demotions) as well as hiring and firing must come out right. They carry the true message of company values, overriding any amount of executive rhetoric or written policies.

Networking

Network organizations call for a substantial degree of trust between the parties and thus a corresponding amount of moral capital. The same holds for joint ventures where the owners all too easily fall out about issues, great and small. I have participated in many, mostly successful joint ventures. Openness and honesty is the only admissible currency. Distrust and mutual recrimination disrupts a joint business in no time.

Networking represents the ultimate logic of plus-sum play. It has, of course, been around for ages; trade and industry has always depended on a network of more or less trustful connections. But customarily, business relations are contaminated by a sizable zero-sum component, which entails considerable costs and inefficiencies. Modern networking strategies aim at reducing this burden by cutting transaction costs all around. Additional long-term gains can be made by blurring the organisational barriers between the business partners and encouraging the open exchange of information.

Accordingly, formal and informal networking has become popular but a close collaboration must be preceded by the build-up of sufficient trust capital. This is best secured in a stepwise fashion. Subcontractors can for instance be brought deeper into production planning while customers are enticed to become partners in product development. Outsourcing of vital company functions, such as information processing, calls for a lot of trust but, given good morals on all sides, there are no limits to the scope of networking.

A joint venture is a very intimate relationship between two companies, albeit in a clearly circumscribed area. The partners assume joint responsibility for a well-defined project. Usually all important decisions require unanimity which opens the door for a stalemate or something worse. The joint venture approach utilizes the complementary strengths of the partners and diminishes the risks, but calls for substantial moral capital to maintain trustful relations between the partners. Otherwise the project will collapse.

In an open ended cooperative effort you cannot apply administrative power and you have to rely solely on good will and fair play. A man as good as his word then becomes an essential asset for the project, regardless of his position or localization in the collaborating organizations. Trust slowly begets trust while distrust spreads like wildfire. Among lower level managers the temptation to pull a fast one is hard to resist. The involvement of the top executives is therefore essential; without backing from the highest level, joint projects will founder.

In a broad perspective, business enterprises carry out vital tasks in a wider, politically coordinated network. The success of this overarching plus-sum game depends on the proper interaction of all key participants on the appropriate level – local, national or global as the case may be. Democratic societies sorely need moral capital to lubricate the wheels of this super-ordinate, self-organizing mechanism. The lack thereof causes destructive friction which seriously impedes our welfare and future prospects.