Corruption - The Con Man Who Took Down His Own Country (Then Ran For Office)

This is a business dynamics & systems thinking analysis of the Goldenberg scam which caused the Kenyan recession in 1993. Please listen to this podcast available here: http://www.npr.org/blogs/money/2013/03/26/175382519/episode-447-the-con-man-who-took-down-his-own-country-then-ran-for-office

Causal loop diagram explaining the Kenyan policy for increasing foreign capital in the country and the ability of Goldenberg to exploit the policy.

Causal loop diagram explaining how Kamlesh Pattni was able to leverage his advantage after Goldenberg shut down, despite being a famous scam artist

 

Policies that could have kept Pattni from succeeding after the initial scam

·         A mandatory requirement that allowed purchase of government treasury bills, only after or at the same time as the stated amount of U.S dollars was deposited. This would have prevented Pattni from doubling his earnings from interest after defaulting on his deposits at the end of the three month period, despite being charged a 3% penalty. (See the ‘Recession Cycle’ loop)

·         A law which required a more thorough and external (possibly outside auditors/investigators) review of any individual(s) who filed for a banking license, prior to issuing one. Pattni received his banking license too easily and amid suspicion and speculation among banks of a then potential scam. (See the ‘Goldenberg Scandal’ & ‘Expected Reaction’ loops)

·         It was mentioned in the podcast that Pattni was acquitted of all his charges by the Kenyan court of law. This only served to reinforce his then transformed image as a catholic preacher and further disguise his misdoings, positioning him to stand for office. Surely, a more detailed investigation and verdict would not have been farfetched considering the available and obvious evidence against him. Moreover, his community service and handouts were clear signs of him attempting to cover up the scam. (See ‘Goldenberg Scandal’ & ‘Expected Reaction’ loops)

·         The entire Goldenberg scam could have been avoided altogether, had the Kenyan government chosen not to turn a blind eye to the export of smuggled gold. This would not have been all that difficult since they were already aware of the practice and a basic policy which regulated the export of such gold would have crushed the whole operation. However, this can also be attributed to the imperfections, inefficiencies and corruption which was widespread within the government itself. (See the ‘Leveraged Advantage’, ‘Charity’ & ‘Politics’ loops)  

Future Scenario Analysis: Recharge MyDenim Custom Jeanswear & Regeneration

Scenario

The cost of hub rentals in the future will increase to the extent that it will restrict geographic expansion and thereby limit consumer reach. This is a relatively Surprise-Free scenario, because past trends have shown that the cost of real estate, especially rentals, in central geographical locations (Hubs) has been on a gradual yet constant rise.

Uncertainties And Trends

Uncertainty 1: Current Competition

	Scenario The cost of hub rentals in the future will increase to the extent that it will restrict geographic expansion and thereby limit consumer reach. Strategy ·         License or outsource manufacturing operations ·         Invest in premium delivery services like priority mail to reduce lead-time and improve consumer reach. ·         Develop an IMC strategy to engage consumer interaction and boost virality.
Uncertainty 2: Current cost of Expansion	Uncertainty 2: High cost of Expansion

Uncertainty 1: Intensive competition

Plot

This scenario takes into consideration the possibility that the cost of hub rentals in the future will increase to the extent that it will restrict the geographic expansion of MyDenim’s business and thereby limit its subsequent consumer reach. This is a very realistic prospect because past trends have shown that the cost of real estate, especially rentals, in central geographical locations (Hubs) is on a gradual yet constant rise.                                                              

            Cities or regions that are strategically located or have a close proximity to prime urban centers obviously attract the attention of sellers, which in turn, increase the density of occupants and this drives up the cost of real estate. This is an ongoing phenomena which is widely prevalent in our major cities today that are not short of ever increasing clusters of factories, stores or offices. We can thus extrapolate this trend to expect a similar situation in the future, wherein MyDenim may be unable to penetrate newer markets owing to an unforeseen spike in such costs.

Impact On Business Model

MyDenim’s business model requires an increasing number of hubs, or centrally located manufacturing units, to expand its market and consumer reach. But if the cost of renting real estate property to support these hubs soars unreasonably, the entire operation may experience stagnation of growth which can make it unsustainable in the long run. 

Plausibility 

Judging from the behavior of the global real estate market over the last rounded decade (2000 – 2010), which debatably is a conservative approach owing to the sub-prime mortgage crises in the U.S. and the European recession, the average rate of rental displays an oscillatory increase.  Since only 3 out of the 10 years showed a decline in rental prices, we can estimate the odds of this scenario actually becoming a reality to be approximately 3:10 (See graph below).

Precursors

The following indicators can provide an early warning that this scenario may be unfolding as a reality as they are factors that lead to higher rental prices in major cities.

·  Government Regulation: Many well-intentioned policies like housing-choice vouchers, affordable housing mandates, rent control, height regulations, historic designations, and protective zoning laws contribute to the creation of a bifurcated, distorted market — one in which a $500 apartment can exist next door to a $3,000 one. Affordable housing mandates, which usually require a developer to set aside a small percentage of new units for affordable housing, sound good in theory, but developers simply pass on the cost of the affordable units to other residents, driving up the cost of market-rate rents.

·     Plummeting Crime Rates: As crime rates plummet, more people are willing to live within cities. That decrease in crime, coupled with a cultural move away from suburbanization, reversed the wealth/population flight that marked the second half of the 20th century. Many cities are now close to, or exceeding, their 1950 population highs. There is a positive correlation between rising rents and house prices and falling crime rates in places like Atlanta, Washington, New York, Los Angeles, and Chicago.

·     Social Stratification: Along with high unemployment, and stagnant and falling wages for bottom- and middle-income earners, the hollowing out of the middle class brought with it a geographic realignment. As the economy required higher levels of education, a lot of cities, especially on the coasts, became hubs for a lot of well-paid people who could afford higher rents and higher house prices.

·   Market Speculation: This is one of the most hidden factors to high rental costs: large landlords and investors who can afford to buy up huge swaths of the available housing stock, reducing the natural elasticity of the market. Investor-driven developments are catalysts that can speed up the pace at which neighborhood rentals change.

Recommended Strategic Actions

These strategies align with the ideology of ‘reserving the right to play later’.

·         License or outsource manufacturing operations

If the rental expenses for hubs becomes unsustainable, it will make more sense for MyDenim to either license or outsource some or all of its manufacturing operations for new regions. This is an operation that will commence now, on a smaller scale, irrespective of fluctuations in future rental rates. This option will give MyDenim the flexibility to reach newer markets without having to bear the costs of renting out its own facility. While there will be a fraction of revenue loss as a result of the Licensing operation or outsourcing fee, it will give MyDenim the formidability needed to survive in a changing landscape.

·    Invest in premium delivery services like priority mail to reduce lead time and improve consumer reach

As per the present strategic plan, MyDenim will fulfill a small proportion of its customer deliveries via premium services like priority mail. This will be especially true in the case of customers who either demand the service or those who are located in outlying destinations, beyond the normal reach of the nearest hubs. It is plausible that this operation could be easily scaled up in the future, if opening new hubs is no longer a viable option. It will help reduce the average lead time and maintain greater consistency of deliveries.   

·         Develop an IMC strategy to engage consumer interaction and boost virality

This is another strategy which will commence immediately and with minimal financial investment initially. We plan on gradually growing this effort and pumping more revenue into the marketing budget to improve customer knowledge of MyDenim’s brand and offerings. Should hub rentals become too expensive, there will be a significant fraction of the intended investment that can be directed towards this IMC strategy, thus scaling it up to a greater extent. This will slowly but surely build the MyDenim brand and propagate it to a larger audience, who wouldn’t mind longer lead times or marginally higher prices. This relationship marketing initiative will complement the first two strategies for this scenario.  

Annex One: List of MyDenim Risks 

1.      Threat of customer dissatisfaction

2.      Limited geographic presence

3.      Failure to attain expected market share due to existing competition

4.      Delays and inconsistencies in delivery time

5.      Machine breakdown and/or system failure

Annex Two: List of four different scenarios discussed in the team, including the one with full write-up (In green)

Uncertainty 1: Current Competition

Scenario Globalization along with digital marketing add more pressure on margins due to increased availability of information through social media. Consumers become more selective as supplies exceed demands  leading to consumer selectiveness. Therefore, companies have to adapt by redesigning their supply chain models to relief preassure on their margin. Strategy Develop an effective supply chain model by incorporating the following three main attributes. ·         Lean: Effective and low-cost operations ·         Fast: Speed in fulfilling customer’s orders by adapting to change and realizing results. ·         Flexible: Effective process that enables clients to increase flexibility in their end-to-end supply chain.	Scenario The cost of hub rentals in the future will increase to the extent that it will restrict geographic expansion and thereby limit consumer reach. Strategy ·         License or outsource manufacturing operations ·         Invest in premium delivery services like priority mail to reduce lead-time and improve consumer reach. ·         Develop an IMC strategy to engage consumer interaction and boost virality.
Uncertainty 2: Current cost of Expansion	Uncertainty 2: High cost of Expansion
Scenario Fashion industry trends show positive signs in the emerging markets; however, consumers’ awareness is expected to increase because the power shifts to their hands.        Strategy ·         Invest heavily in big data solution to track consumers’ behaviors. ·         Build more hubs within close proximity to the emerging markets since consumers prefer quick delivery.	Scenario A natural disaster occurs, leading to a machine breakdown that affects the production capability and this would affect delivery time and customer satisfaction. Strategy ·         Buy more machines working in different places so that it reduces risk ·         Buy an insurance that covers natural disasters

Uncertainty 1: Intensive competition

Case Analysis - The Walt Disney Company and Pixar Incorporated: To Acquire or Not to Acquire

Walt Disney along with Pixar impacted the entertainment industry in a revolutionary manner when they escalated the use of three dimensional computer generated (3D CG) technology. This greatly enhanced viewer experience at a time when animated movies were growing in popularity. These movies, in particular, attracted the attention of children primarily due to the concept of sequels, which had extended the lifespan of hit movies. However, owing to the increasing success of animated movies as a result of the Disney-Pixar partnership, competition in this space became fierce as barriers to entry reduced and several production houses like DreamWorks and Paramount Pictures entered the industry. This prompted Disney to consider the future of their relationship with Pixar and take a critical strategic decision to ensure that they stayed on the pedestal.

Business Model

While ‘creative people’ were one of the crucial elements that both Pixar and Disney had in common, the innovative culture of Pixar helped maintain their technical superiority. Their proprietary computer animation technology gave Pixar a distinct advantage in the software development industry. The production of animated commercials was an additional source of revenue. Steve Jobs was also a valuable intellectual asset who significantly contributed to Pixar’s success. Pixar created a flat and flexible organization that gave more autonomy to the firm’s artists. Walt Disney was the frontrunner of animated children’s movies. They employed the most talented story writers in the business and owned the most advanced production studios. Although box office sales were a major source of revenue and a triggering signal for success, Disney’s actual financial success derived from alternate revenue streams such as the sale of toys, apparel, books, television showings, home video sales and video games.

Disney and Pixar joined hands to produce five animated movies in a partnership lasted a decade. Disney focused on marketing and distribution, while Pixar predominantly provided technical support. Disney received 60% of the movie revenue and held the right to produce sequels, schedule the release dates, and select the locations.

Principal Issue

The principal issue in this case is a decision. Robert Iger, the newly appointed CEO of Disney must decide whether Disney should acquire Pixar in an effort to cement its position as the leading producer of animated children’s movies, being the largest media conglomerate in the world.

Subsidiary Issues

·   As a result of technological advancement and the growing propagation of talent in the CG space, competition became fierce with several new players entering the industry. The impending contractual expiration of the Disney-Pixar partnership was piling increasing pressure on Disney to make a decision regarding the future of this relationship under these circumstances.

·   Owing to varying cultures at Disney and Pixar, this might repel existing employees of Pixar as they might think they would lose freedom and flexibility of work as well as other essentials that they were enjoying under Pixar.

·   Given that Pixar’s enterprise value was $5.9 billion, Disney would have to pay an additional premium of $6.5 - 7.4 billion, in addition to stocks with a 2.3:1 exchange ratio that could be very costly and could diminish stockholders value.

·   This acquisition will also be heavily dilutive as Disney’s price-to-earning (P/E) ratio was 17 while Pixar’s was 46; this would repel investors and reduce shareholder value.

Performance

The decade long Disney-Pixar partnership had been regarded by many as one of the most successful in the industry’s history, grossing over $350 million in their first three movies between 1995 and 1998. Between 98’ and 04’, Pixar contributed to 10% of Disney’s revenue and over 60% of its total operating income. Many of the great animated hits that represented the new generation of 3D movies, were an outcome of this co-production. This fruitful performance prompted Disney to purchase 5% of Pixar for $15 million in 97’, soon after its IPO was issued. It was also the largest IPO of the year, raising $140 million.

In 2004, amid reports that the relationship between Pixar CEO Steve Jobs and his counterpart Michael Eisner had broken down, potentially threatening contract renewal negotiations, Disney resolved to replace Eisner with Robert Iger in an effort to preserve the relationship - A clear indication that Disney valued Pixar’s contributions. This five movie deal which took these two titans through the release of ‘Cars’ in 2006 was also estimated to add over $1.5 billion in operating income and $0.44 in EPS to Disney’s bottom line. By far, the performance of the Disney-Pixar partnership paved the way for a new era of animated movies, using the jointly developed 3D CG technology. It also outlined the most significant part of Pixar’s history with both companies enjoying a great exchange of talent, resources and learning.

Alternative Decisions

Robert Iger must reflect on which of the following three alternatives are best for Disney’s future.

·  Re-engineering Disney Animation to better complete with Pixar, effectively striking a distribution deal with another animation studio. This would mean that Disney would have to forfeit their long, successful relationship with Pixar and all the investments they put into it. They would then have to broker a contract with another studio to fill Pixar’s void, assuming all the uncertainties that would come with it and starting from scratch with their new partners. This would also mean that Pixar could now become one of Disney’s biggest competitors - A problem that Disney would be creating for itself.        

·   If Iger decided to stick with Pixar, he will have to negotiate a new distribution deal and give into some of Steve Job’s demands which included 100% ownership of all films and a lower, fixed distribution fee for Disney.

·  The last option available to Iger is for Disney to acquire Pixar and integrate it into their organizational structure.

Criteria for Choice

·    Importance of animation to Disney’s corporate strategy since Disney-Pixar joint movies have achieved the highest revenues and have contributed the most to Disney’s operating income. Thus, continued strong financial performance for Disney by improving its average revenue growth and EBIT margin as well as maintaining healthy cash flows is crucial.

·    Maintaining an alliance with Pixar since it is better for Disney to collaborate with Pixar than compete with them. Pixar could easily become a major competitor and can take over a good part of Disney's market share after the partnership dissolves.

·  Comparatively lower risk option: The purchase acquisition estimation should not be overpriced, and should be compared to benchmarking acquisitions in the market. Disney must also retain the ownership of movies and the right to produce sequels.

·   Least alteration to the current successful operation, and retention of the creative and technical mix of talents that was produced by the partnership. Disney’s decision should not ruin the stellar performance Pixar has been achieving for them.

Recommendation

Based on the analysis of these alternatives and in light of the stated issues, we recommend that Disney go ahead with the acquisition of Pixar primarily because of the proven success that their partnership had displayed and secondly, on account of the strong strategic fit which was evident. In addition, Disney would gain a major asset in Steve Jobs who, at the time, was accredited with the highly successful launch of the Apple iPod and was regarded as the greatest modern day visionary leader and inventor. The prospect of pairing Jobs and Lasseter with Disney’s talented executive team was also very lucrative. Jobs was also at the help of Apple computers at the time and an affiliation with Disney would be mutually beneficial for all the three brands from an image standpoint. Moreover, the projected PE ratio of Pixar was 46, while that of DreamWorks, its closest competitor, was 30, making Pixar the undisputed leader in the CG technology space. Also, as things stand, Disney is a saturated company with average revenue growth of only 5.3% and Earnings before interest and tax (EBIT) as a percentage of revenue of 9.6%, while Pixar is a prosperous and promising company with an average revenue growth of 39% and 53% EBIT margin.

However, the decision to acquire Pixar also has significant drawbacks. First of all, Pixar and Disney were very different owing to varying cultures that could result in a clash. Disney would be poised with the daunting task of either integrating Pixar into its organizational culture or allowing Pixar to operate independently. The former would suggest that Disney would have to disregard Pixar’s unique culture, which would not go down too well with the Pixar faithful, while the latter option could result in isolating Pixar from Disney’s operations to an extent. This could alienate the smaller subsidiary and create a significant disconnect. Also, the prospect of working with Steve Jobs and accommodating his forceful personality was very intimidating for many Disney executives. Keeping Pixar’s employees committed to Disney’s vision would be challenging since many of them had contemplated resigning if Pixar were to be acquired. This uniquely blended talent pool is Pixar’s core value and Disney would be risking a mass exodus of talent.

Plan of Action

·   Disney should allow Pixar a fair deal of autonomy and protect its work culture as it is the main success factor of Pixar. This can also be achieved structurally by treating Pixar as a separate subsidiary of Disney.

·   Disney must also retain the Pixar brand in order to protect its distinct identity and to create a sense of association.

·  Disney must accept a gradual organizational shift to being more collaborative in order to foster smoother integration with Pixar’s work environment. This will retain Pixar’s talented employees and incentivize them to believe in the firm’s vision.

Case Analysis - Hewlett Packard: The Flight of the Kitty Hawk

Hewlett-Packard’s Kittyhawk project team was led by Rick Seymour and in 1992 they came up with five parameters for launching the project successfully. The introduction phase was supposed to take 12 months from start to finish, with revenue from the two year period expected to hit $100M. In addition, the Kittyhawk team were the first to introduce a 1.3-inch drive to the market with an 18 month development cycle (stage-gate process). HP aimed to become the industry leader, however, they needed to maintain a 35% growth rate to hit the target and to break-even within 36 months.

       Despite the outlined parameters, HP based its market positioning on predictions rather than taking advantage of the tangible opportunities in the market (e.g. revenue expectations were based on the financial projections, which had the tendency of being misinterpreted). Moreover, the market trends were bounded on cost basis and not by size. The Kittyhawk confronted the risk of having two highly competitive products in the market such as flash memory drives and the 1.8 inch drive, which were expected to be introduced shortly.

Business Model

HP focused on one niche to escalate its market positioning. However, there were challenges starting with manufacturing and ending in retail pricing. Outsourcing the manufacturing was a viable option, because it would decrease the operating expenses, however, HP would be running the risk of losing control over quality and being vulnerable to innovation inferiority while the HP culture deeply valued technical innovation as a key to success.

Principal Issue
The principal issue in this case is a decision. Seymour is poised with three alternatives and must decide which of them will best steer the Kittyhawk towards a successful and promising future. 

1.      Continue to pursue the ruggedness-based applications that were cropping up.

2.   Leverage the ruggedness & electronics integration technologies the team had developed to create a superior 2.5 inch drive for notebook computers, specializing on space and speed.

3.      Develop a ‘first of its kind’ $50 drive, which would have multiple industry applications.

Subsidiary Issues

1.  The actual Kittyhawk customers were very different from what the team had initially anticipated.

2.     Customers wanted a $50 drive, with or without the accelerometer.

3.      Kittyhawk sales failed to meet the team’s targets after two years of effort.

4.     The Disk Memory Division (DMD) had disk-drive sales of $519 million in contrast to IBM and Seagate Technology, which had disk-drive sales of $4 billion and $3 billion, respectively.

5.   The lowest unit price in the industry was $130 despite and irrespective of capacity, the best strategy to reach a $50 price margin was high volume production.

6.  There were several ‘possibilities’ that presented themselves, in prospect, for the Kittyhawk, however they were never validated against proper contracts for the product. This misled management to overestimate it’s potential. Nintendo and Chicago Controls’ platonic interest were prime examples of this.

7.    The Kittyhawk’s marketing strategies were narrowed down to focus on the mobile computing market and development of an inexpensive drive.

Performance
The main reasons for the Kittyhawk's initial failure were as follows.

1.   DMD failed to identify the right customers and develop the right product due to overestimated management outlooks.

2.      HP had been unsuccessful in introducing the new product as it was a distracting innovation not ready to satisfy the current market.

3.      The product couldn't accelerate other emerging markets in a short period as expected. PDA market is an example that never emerged as expected, and Kittyhawk’s performance was more than sufficient.

4.   The Kittyhawk couldn't add value for existing markets due to its incompatibility with potential products.

Alternative Decisions & Criteria for Choice

1.      If Seymour were to continue to pursue the ruggedness-based applications that were cropping up, HP would enjoy immediate business from currently interested Kittyhawk customers without having to modify their product. They could also avail of the opportunity to become pioneering leaders in the manufacture of durable drives and build a unique brand around it. This will allow the Kittyhawk to cater to a new range of applications vis-à-vis digital games, cash registers and others focused on the drive’s shock absorbing capability. However, this approach would also require HP to sacrifice its favored accelerometer technology and all the years of investments in time, effort and capital that went into it. Also, this would spell a transition into serving a very niche market with a high risk factor, in prospect.

2.      Leveraging the ruggedness and electronics integration technologies the team had developed to create a superior 2.5 inch drive for notebook computers, focused on dimensions of speed and space would give HP a proven market to sell the Kittyhawk. HP were one of the leading manufacturers of virtual memory products, at the time, and so it would not be very difficult for them to create inroads in this segment of the market as they could leverage their brand credentials to promote their offering and acquire early trust. They would hypothetically make more profit even by capitalizing upon a mere fraction of this market, as opposed to dominating the entire potential market for durable drives. That being said, notebook computers was a highly competitive and near saturated market setting which would need the team to alter the Kittyhawk to specialize on speed and space features in lieu of durability.

3.      Designing a $50 drive would make the Kittyhawk the lowest-price competitor in the market, provided they developed it first, and the possibilities would be immense. The team was very motivated to pursue this option - It would be an ideal drive that would encompass almost every application in the industry, at the time, from cash registers to notebook computers to gaming devices. On the flip-side, it would need heavy financial investments in R&D over an unknown time frame with no plausible certainty of perfectly developing the product.

Recommendation
Based on the analysis of these alternatives and in light of the stated issues, I recommend that Seymour pursue the second option and create a superior 2.5-inch drive for notebook computers specializing on speed and space dimensions instead of durability. With a proven market to sell the product, I believe that it would be easier for HP to make the transition into developing this drive since it would need minimal investments in R&D, on account of existing competitor alternatives.

Plan of Action

1.   Clear off inventory for the existing drive and manufacture until demand sustains.

2.   Shut down the production of this drive once the demand fizzles out and simultaneously focus on developing the superior 2.5 inch drive for notebook computers, focused on superior speed & space.

3. Invest in R&D to design a new and improved 1.8 inch drive for modern computing applications.

4.  Use in-house manufacturing for flexibility as demand grows and until the right product is developed. 

The Walmart Effect and a Decent Society - Who Knew Shopping Was So Important? (Article Analysis)

American capitalism is a symbol of economic strength and power, of unprecedented wealth and productivity, the strength which has built a nation that is today the envy of the world. However, according to Milton Friedman, the term ‘capitalism’ has a drastically varying and highly relative meaning - To some it is a term of opprobrium, signifying the oppression of small modest entities by ruthless gargantuan monopolies; to others it is a term of hope, signifying the freedom of men to shape their own economic destinies, the unleashing of human ingenuity and energy to raise the standard of living of the masses. ‘The Walmart Effect and a Decent Society’ very elaborately describes the actions of mega-corporations and brings to light the positive and negative impacts of their actions on stakeholders. Citing Walmart as the epitome of American capitalism, it utilizes specific examples coupled with astounding data and facts to fuel an intriguing yet tantalizing question – “How do we assure that American capitalism creates a decent society for all of us in the era ahead?”

               It is critical to first establish what H. Lee Scott eludes to, when he uses the term ‘decent society’. A rather reputable school of thought would define it as a civilization characterized by a high quality of life with superior purchasing power and ideal economic conditions, initiated by successful sustainable corporations which display great ethical standards and constantly transcend the limits of corporate social responsibility to benefit their local communities. Such a society would simultaneously be competitive, productive, progressive, balanced and free of social evils. The stalwarts of such a society, whilst pushing for constant development and growth, will also strongly advocate community welfare. Such an advanced society will, for instance, consistently strive to create employment and banish inferior products as well as those manufactured in an illegal manner. Business entities operating in such a society will be subject to rigorous measures of corporate governance. The efficiency of government policies pertaining to anti-trust laws ensure that monopolies never develop or exist.

If the above is truly an example of an ideal society, it is pertinent to measure where modern day U.S. society stands in comparison. The results are alarming – The U.S. is dominated by large corporations like Walmart, which have the power to influence an entire nation’s consumption patterns, decisions and thereby its economy and very culture. While these giant organizations bring many benefits to modern society in doing so, quite often, the decisions they make have detrimental effects as well. What is even more baffling is that in a capitalistic economy, the decisions are made by the people who own or manage the basic productive resources, and that is in contrast with decisions which are conformed to in a larger plan made by the state under non-capitalist forms of enterprise. People, as consumers, also make choices that inevitably favor such corporations, effectively making them almost monopolistic in nature as witnessed in the case of Walmart. While an actual monopoly can never really exist in a competitive capitalistic landscape, since it is largely governed by the laws of supply and demand, it is nonetheless possible that corporations can grow to gigantic scales and thereby exert relentless pressure on other institutions with devastating consequences. For instance, this can drive them to establish whatever conditions they so please on suppliers, be it maintenance of confidentiality terms or exertion of imbalanced bargaining power. These actions contradict the very laws of American capitalism.

How might this issue be resolved to ensure that capitalism creates benefits for society while keeping its negative effects in check? In effect, the American legal system failed to recognize that corporations would grow large enough to dominate the economy itself. The U.S. government is currently vying to attain 2% inflation in order to boost the nation’s GDP by maintaining consistent demand in the economy, but mega-corporations like Walmart have policies that advocate lower prices, thereby hindering this progress. Reforms in government regulation is therefore, one of the means through which such concerns can be addressed and artificially low prices can be extinguished. In an effort to protect investor and stakeholder interests, corporate governance reforms need to be periodically reviewed to also account for issues like child labor, low wages, employment of illegal immigrants, and the use of questionable raw materials.¹

Another more subtle means of ensuring that capitalistic mega-corporations conform to ethical standards put forth by government, is by building on the premise that ethics is a critical concern in all societies and that large corporations have a responsibility to maintain high standards of ethics in their business operations. This ideology essentially builds expectations among stakeholders for businesses in an ethical society and even advocates that abiding by these practices enhances a firm’s profitability. This acceptance of capitalism as the best economic system and the incentive of greater profitability can compel mega-corporations to comply.²  

    

An organization’s approach towards its stakeholders is also a significant aspect in this struggle. In the past, the mind-set required to rise to the top of a large corporation has run counter to adopting a stakeholder perspective in the process of value creation. Capturing sustainable value requires the large corporations of today to see stakeholder value as essential to the growth of their companies. Stakeholder power is now a reality in the new global business environment. Business leaders who fail to adopt a new mind-set risk putting their companies and careers at risk. It is thus pivotal that the leaders of today’s mega-corporations understand the distinction between the old and new mind-set of stakeholder value, and its repercussions on their businesses to initiate a requisite course of action.³ 

In conclusion, it is vital to note that this is, for the most part, a public policy issue that will need some form of government intervention. Partly, the tightening up of anti-trust laws is imminent but in addition, the lack of information made available to the public by today’s large capitalistic mega-corporations is also a significant issue that must be addressed with immediate effect. The implementation of these measures today will be the nascent steps towards assuring that American capitalism creates a decent society for all of us in the era ahead.

Citations & References

1.      ‘Corporate Governance’ by Steger, Ulrich.,Amann and Wolfgang (Digital Version) – ‘Beyond the Scandals and Buzzwords: Diffusion of corporate governance regulation’ (Page 6-7)

2.      ‘Why ethics and profits can and must work together in business’ by Donald P. Robin (WISE Reading)

3.      ‘Sustainable Value: How the World’s Leading Companies Are Doing Well by Doing Good’ by Chris Laszlo – ‘The old mind-set about stakeholder value versus the new mind-set about stakeholder value’ (Page 132-133)