More than a year before the 2008 financial crisis, Mars, Incorporated asked itself what the right level of profit should be for the business. This question was in part triggered by a growing appreciation of our social and environmental impact, and the influence that this could have on the long-term sustainability of the business. Through our internal think-tank called Catalyst, we launched a research programme termed the Economics of Mutuality (EoM) that continues today. Starting by exploring the relationship between profit and growth, the programme has evolved via a series of experimental business and academic pilots into an alternative metrics-based business model that may change the way in which we measure value at Mars.
“Rather than stigmatising the pursuit of profit, Economics of Mutuality recognises that value creation is more effective and sustainable when all parts of the value chain are considered”
EoM’s objective is to develop a value optimisation model to address new forms of scarcity that did not exist 40 years ago when Milton Friedman’s ‘Chicago School’ model rose to prominence. Friedman’s thesis that ‘the only social responsibility of business is to use its resources and engage in activities designed to increase its profits’ was developed to address a scarcity of financial capital in a world enjoying natural resource surpluses. Today, the scarcity paradigm has turned on its head, with financial capital in growing (dysfunctional) surplus and natural and human resources under pressure. EoM is designed to address new forms of scarcity by taking into account all aspects of the value chain, whether human capital (at the individual level), social capital (for communities), natural capital, or shared financial capital.
Our initial research uncovered a surprising absence of a relationship between profit and growth – from data encompassing the 40… years dominated by the Chicago model, across 3,000 plus… companies with revenues greater than…$1bn – with the bottom line consistently following a steep upward trend, the top line random. Concluding that this was more likely a result of Friedman’s dogma that ‘the sole social responsibility of business is to increase profit and maximise shareholder value’ than from any natural law, the Mars team then considered whether ‘prosperity’ could instead be more sustainably linked to creating a mutuality of benefits for the corporation and its stake-holders and, if so, how much value one should create for others to achieve that sustainable ‘sweet spot.’ Our initial research also showed us that throughout human history there have been three variables that account for prosperity – the land that provides, the labour that transforms, and the capital that provides liquidity. The business case for EoM is built around sustainable prosperity, i.e. the need to account for all of these variables together.
Our focus on metrics creation exemplifies the difference of approach between the EoM programme, in which a returned benefit to those involved in the transaction is endemic to the business model, and many corporate social responsibility programmes, where payback to society or the environment is often positioned as a supplementary cost and a trade off for the business.
New metrics, Catalyst believes, can be used to create powerful incentives for managers to manage differently, in ways that would more holistically account for impact beyond the pure profit motive (i.e. in business, you often only manage what you measure).
Our programme has four focus areas: human capital, social capital, environmental capital and financial capital. Our activities within each focus area are at varying stages of development as we explore below.
Human Capital: We started out by considering the degree to which a business can impact human capital through its policies, rewarding practices, ways of working and so forth. The research programme’s aspiration – working on the basis that charity begins at home – was to augment the conventional metrics of well-being at work (e.g. salary, working hours, environment), with a deeper exploration of other factors impacting employee satisfaction, including social interactions, corporate identity, and prospect of upward mobility. We identified a series of drivers that a company can leverage directly to impact the human capital of employees, and indirectly to impact the human capital of employees of value chain partners – these drivers helped us to understand the types of human metrics that could be developed.
Social Capital: The team undertook a series of scientific and business pilots on both the supply and demand sides of the value chain, to develop a methodology to assess the social fertility of the communities in which Mars operates, in addition to the social impact of Mars operations. Catalyst evaluated the contribution of 40-60 variables to a sense of ‘social capital’ – following the World Bank’s definition as the ‘quality and quantity of a community’s social interactions’.
Two breakthroughs characterised this work. First, Catalyst found a remarkable stability and consistency of variables across very different cultures, geographies, and commodity growing communities, with the variables reduced to just three, covering over 80% of the variance and making business scalability possible. The data also revealed a correlation between the level of social capital present in farming communities and the economic output of those communities, further demonstrating the relevance of this measure to business needs.
Environmental Capital: The impact of a business on the environment has been studied in detail over the years, but it remains challenging to measure. At Mars our approach has been informed by both our Efficiency principle (i.e. ‘we use resources to the full, waste nothing’), and our belief that we must operate within planetary boundaries. As an example, we have measured inflowing materials used across the coffee product lifecycle to determine total resources required to produce one unit. This approach enabled managers to benchmark products against each other to identify ‘hotspots’ in which abnormally large amounts of resources are being consumed. This, in turn, enabled us to make targeted investments against the right metrics to reduce inputs, such as biodegradable coffee packaging, thereby enhancing resource efficiency. We are now setting our overall business targets to ensure that our impacts on the planet, such as water use and GHG emissions, move towards levels that are within the ability of the planet to sustain.
Financial Capital: In the exploration of how to expand the concept of financial capital beyond profit, the team revisited Forrest E. Mars, Sr.’s philosophy of creating a ‘mutuality of benefits’ among all stakeholders through the manufacturing and distribution of our products. The result was the development of an analytical tool to look at the financial capital and benefits generated across the value chain, in order to develop a simple and scalable approach to understand how value is distributed across stakeholders.
Together, we believe that the work being undertaken in each of these areas will provide us with the beginnings of a framework around which the Economics of Mutuality can be measured and impacted. But, more importantly, for us this work represents the beginnings of a new business model that has the potential to challenge the Chicago School’s belief in the pursuit of profit as an end in itself by aligning profitability with a more sustainable holistic approach to business activity. By expanding managerial focus beyond simple profit to take account of the full cost and benefit of doing business, the Economics of Mutuality seeks to address the new forms of scarcity that have arisen in human and environmental spheres that threaten the sustainability of the capitalist model.
Rather than stigmatising the pursuit of profit, EoM recognises that value creation is more effective and sustainable when all parts of the value chain are considered.
Now that the Economics of Mutuality programme has arrived at a tested methodology for quantifying capital across People, Planet and Performance, the next phase of the programme will see us sharing our research with external audiences. As a first step, Mars has launched a research partnership with Oxford University’s Saïd Business School to undertake research to develop a business management theory around the Economics of Mutuality. In parallel we will be continuing to learn from the work of others, and looking for opportunities to operationalise the methodology across the Mars business.