De Beers // Creating Shared Value vs. Corporate Social Responsibility (MOC, Monday, Week 13)
microeconomics-of-competitivenessyear-twoWhat is a company's responsibility to the country/region/town it operates in?
"Corporate Social Responsibility" = sharing the value a firm captures by arbitrarily choosing little charity projects to pay for (reeks of firms distracting the public from the profits they make/CYA).
Example: Ronald McDonald House --- taking care of kids with cancer is admirable, but has nothing to do with McDonald's business model.
[vs]
"Creating Shared Value" = projects in line with firm's business strategy that grow the pie/benefit the firm by improving the broader community.
Examples: Microsoft supports community college IT programs with free job training, software, and class guests --- good for the world, and creates customers and potential employees for MSFT. Nestle works with farmers in developing nations to improve yields and build infrastructure/healthcare/schools --- admirable projects that also improve the quality and reliability of Nestle's supply chain.
Ideally, society does not expect successful firms to donate money to random social causes --- government is supposed to allocate resources to fix social problems with firms' tax dollars.
Unfortunately, the world increasingly seems to demand arbitrary corporate charity...
How does De Beers create value? They sell tiny, (relatively) plentiful stones that have minimal functional use.
Industrial diamonds are worth <$1 per carat... [Putting aside all my qualms about whether De Beers creates much real value at all...] ==> Supply/mining
Exploration and mining are not simple (and De Beers has innovated a lot); huge fixed costs; hard to run a business in countries where diamonds are plentiful
==> Enable the market
Manage sightholders, fragmented retail (and benefits to retail branding), sorting technology
==> Stimulate consumer demand
Advertising, positioning
If you ask De Beers in private who actually adds value in the diamond business, they can make a pretty compelling case:
"Without us, there would be nothing --- just a bunch of rocks."
According to Jon Oppenheimer, it takes De Beers about 20 years to get to nominal breakeven on a new diamond discovery. This is not a quick-turnaround business.
What does De Beers do that benefits poor African countries?
Direct impact: taxes, jobs, infrastructure, purchases ("we buy stuff").
Economic development: skill training, tourism development, cluster development, improves local business practices (maybe)
Political and social development: HIV/AIDS programs, environmental preserves, better housing, raise standards of government/suppliers, positive impact on political/legal processes (maybe), lends national legitimacy
Dangers moving forward:
-- Declining market share => harder for De Beers to maintain production discipline
-- Black Economic Empowerment (South Africa) => imposes non-market constraints.
-- Beneficiation demands (Botswana: you must do cutting/sorting in our country, which has non-competitive factor conditions) => If you think De Beers does any good for an African nation, it's in bringing innovation and efficient capitalism to places where that is rare. Why would you ever force them to do specific economic activities in your country that are NOT efficient? In general, as a country, why would you ever want firms to build non-competitive industries that rely on cheap labor? It can't work --- and you wouldn't even want it to!
The big issue: Politics. Dividing the pie/national governments' desire to capture more $/create jobs (of any kind) in the short term.