Profit or Philanthropy?

On one of those happy hours after work, my colleague and I got into a debate on companies and their social responsibility. His view was that a company's only responsibility is to make money for its shareholders and that they should be blamed neither for problems in the society nor ignoring their responsibility towards society - pretty capitalistic indeed. My view was that though profit remains a company's primary motive and shareholders their primary focal point, companies must be profitable within the realms of social responsibility. Remember, I am not a communist by any means, neither am I a total believer in Ayn Rand and her theory of objectivism. I believe in capitalism where society plays a significant part - a middle ground of sorts.

So, profit or philanthropy? Competitive advantage or corporate social responsibility? Where does one end and other begin for a company (or an individual, for that matter). Can everyone, like Buffet and Gates have proved successfully, follow one up with the other? If all companies were socially responsible, wouldn't we all be buying groceries only from Whole Foods? Wouldn't every car manufacturer switch to hybrids?

When Nike faces a consumer boycott because of media reports on its labor practices in Asia or when McDonald's and KFC are held responsible for obesity in the US, it raises a debate in my mind - Are we right in pointing the finger at companies for flaws in the individual or the society? Or are companies and their practices the causes of the flaws that we are talking about? It is a classic chicken and egg question. After all, Who is John Galt?

In pursuit of more clarity on this issue, I came across this article in the Harvard Business Review by Porter and Kramer (yes, Porter of "Porter's 5 forces" fame), winner of the 2006 McKinsey Award for the Best Harvard Business Review Article.

Porter discusses both sides of the issue but agrees that there is a "moral purpose of business" and proposes a framework by which companies can integrate business and social needs into their value chain. Among the many cases he uses to highlight this concept, I found that of Nestle to be the most interesting (refer text below) and most explicit in highlighting how a company can contribute to economic and social growth while increasing its profits; a win-win.

Maybe there is John Galt!

Integrating Company Practice and Context: Nestlé’s Milk District

Nestlé’s approach to working with small farmers exemplifies the symbiotic relationship between social progress and competitive advantage.

Consider the history of Nestlé’s milk business in India. In 1962, the company wanted to enter the Indian market, and it received government permission to build a dairy in the northern district of Moga. Poverty in the region was severe; people were without electricity, transportation, telephones, or medical care. A farmer typically owned less than five acres of poorly irrigated and infertile soil. Many kept a single buffalo cow that produced just enough milk for their own consumption. Sixty percent of calves died newborn. Because farmers lacked refrigeration, transportation, or any way to test for quality, milk could not travel far and was frequently contaminated or diluted.

Nestlé came to Moga to build a business, not to engage in CSR. But Nestlé’s value chain, derived from the company’s origins in Switzerland, depended on establishing local sources of milk from a large, diversified base of small farmers. Establishing that value chain in Moga required Nestlé to transform the competitive context in ways that created tremendous shared value for both the company and the region.

Nestlé built refrigerated dairies as collection points for milk in each town and sent its trucks out to the dairies to collect the milk. With the trucks went veterinarians, nutritionists, agronomists, and quality assurance experts. Medicines and nutritional supplements were provided for sick animals, and monthly training sessions were held for local farmers. Farmers learned that the milk quality depended on the cows’ diet, which in turn depended on adequate feed crop irrigation. With financing and technical assistance from Nestlé, farmers began to dig previously unaffordable deep-bore wells. Improved irrigation not only fed cows but increased crop yields, producing surplus wheat and rice and raising the standard of living.

When Nestlé’s milk factory first opened, only 180 local farmers supplied milk. Today, Nestlé buys milk from more than 75,000 farmers in the region, collecting it twice daily from more than 650 village dairies. The death rate of calves has dropped by 75%. Milk production has increased 50-fold. As the quality has improved, Nestlé has been able to pay higher prices to farmers than those set by the government, and its steady biweekly payments have enabled farmers to obtain credit. Competing dairies and milk factories have opened, and an industry cluster is beginning to develop.

Today, Moga has a significantly higher standard of living than other regions in the vicinity. Ninety percent of the homes have electricity, and most have telephones; all villages have primary schools, and many have secondary schools. Moga has five times the number of doctors as neighboring regions. The increased purchasing power of local farmers has also greatly expanded the market for Nestlé’s products, further supporting the firm’s economic success.

Nestlé’s commitment to working with small farmers is central to its strategy. It enables the company to obtain a stable supply of high-quality commodities without paying middlemen. The corporation’s other core products—coffee and cocoa—are often grown by small farmers in developing countries under similar conditions. Nestlé’s experience in setting up collection points, training farmers, and introducing better technology in Moga has been repeated in Brazil, Thailand, and a dozen other countries, including, most recently, China. In each case, as Nestlé has prospered, so has the community.