BOSTON--August, which is National Black Business Month, is a good time for American businesses to confront the reality that supplier diversity should be a top strategic priority, not simply a corporate citizenship obligation, according to Boston Consulting Group (BCG) Senior Advisor James H. Lowry, coauthor of Minority Business Success: Refocusing on the American Dream (Stanford Business Books, 2011).
"Black Business Month is the right time to remember that minorities will become the majority of the U.S. population by 2045. Because of sheer demographics, minority businesses will need to deliver the value that American corporations expect -- at every level of the supply chain. Right now they do not," Lowry said.
"Outdated policies on the part of business and government ignore the problem, and in some cases make it worse: They focus on grants to minority businesses of non-essential and low-value work, and they do not provide sufficient working capital or expertise to help minority businesses successfully scale up. Instead, a successful program should correct shortcomings in basic education, access to capital, business management skills, and access to mainstream supply chain opportunities."
Minority Business Success explains that modern competition pits a corporation's supply chain against rivals' supply chains, so developing supplier excellence is a management and strategic imperative. If large companies do not step up efforts to develop sophisticated minority-owned businesses, inexorable demographic shifts will, sooner or later, undermine quality and options when it comes to supply chain choices. Therefore, supplier diversity, at nearly every level, needs to be a strategic priority at just about every large company.
Lowry and Minority Business Success argue that large corporations and governments must address the following realities in order to unlock the potential microeconomic and macroeconomic benefits of minority business development:
Minority business will become increasingly important to America's erconomy -- and minority economic underachievement is a major liability: The adverse economic impact of minority underachievement will only grow as minorities increasingly become a larger portion of the workforce. Their success in creating wealth will determine the fortunes of the nation; so if America does not make minority business success a priority, the U.S. economy is destined to stumble.
The "Procurement Culture" is outdated and cannot deliver results: Adding supplier diversity to traditional procurement is ineffective, as mandated diversity-spend targets are tactical, not strategic. Minority businesses are relegated to low-value or peripheral work that does not directly support the corporate value chain. The current procurement approach does nothing to develop the skills, scale, and financial stability necessary for minority businesses to grow into partners that can create and deliver value.
Diversity strategy is a facet of outsourcing strategy: Value chain development is a strategic process, focused on developing outsourcing partners as a substitute for in-house operations. Successful diversity programs need to be managed with this "developmental" goal in mind. Leading companies create inclusion, and loyal allies, by developing long-term strategic relationships with minority outsourcing partners -- up to and including equity investments.
Financially squeezing value chain partners Is counterproductive; in fact, current supply chain diversity programs can do more harm than good: One of the biggest challenges facing minority businesses is cash flow: Operations, growth, and R&D all require working capital. Yet large corporations often expect suppliers to deliver immediate value, and then wait patiently for months to get paid. The competitive bidding process also pushes down margins on the "non-essential" work allocated to diversity targets (e.g., janitorial or landscaping services). To make matters worse, minority entrepreneurs have demonstrably more limited access to capital and credit. As a result, diversity programs often do more harm than good -- bankrupting suppliers through low-ball pricing, high delivery demands, and failure to pay.
A national industrial policy doesn't exist -- even though it's a "must have": America needs a coherent, coordinated industrial policy -- one focused on national competitiveness and led by the White House -- of which a key part would be minority business development.
Minority start-ups need support in order to create wealth: Increasing available capital is just one requirement for building successful minority businesses: Those investments also need to generate long-term revenue streams and wealth creation. Minority businesses need to be developed -- i.e., have the access to the skills and resources to see them through the entire growth curve: from start-up through scale-up.
"Wealth flows out of lackluster economies into the coffers of nations that do a better job of value creation," said Lowry, "and America won't prosper without a comprehensive strategy for doing better. We cannot move forward with an ad hoc strategy that leaves half our economic engine idling."