Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Economics Main Page |
Social Accounting Main Page
Note: For a previous discussion of shared value, see my summary of Porter and Kramer's 2006 article, Strategy and Society.
Business organizations have increasingly been viewed as the cause of social, environmental, and economic problems, prompting political leaders to set policies that undermine competitiveness and economic growth. Companies have been trapped in an outdated approach to value creation based on short-term financial performance. Governments have been part of the problem by attempting to address social problems at the expense of business. This has all been based on an underlying model that assumes a trade-off between economic efficiency and social welfare. The solution is to reconnect business success with social progress based on the concept of shared value. What is needed is a new conception of capitalism where the purpose of the corporation is redefined as creating shared value.
Moving Beyond Trade-offs
The relationship between business and society has been based on the neoclassical view that social improvement is a constraint on business. From the social perspective, businesses must be taxed, regulated, and penalized to counteract the externalities (e.g., pollution), or social costs that they create, but do not have to bear. Corporate social responsibility programs have emerged to improve firms' reputations, but anything beyond that has been viewed as irresponsible from the shareholder perspective. Each side has assumed that the other side was an obstacle to achieving its goals. In contrast, the shared value perspective recognizes that business and society need each other to expand the total pool of economic and social value.
The Roots of Shared Value
The old narrow view of capitalism was that a business is a self-contained entity and social or community issues fall outside its scope. Business contributions through employment, wages, purchases, investments, and taxes in the pursuit of making a profit is all that can be expected. This sort of management thinking has resulted in commoditization, price competition, little innovation, slow organic growth, and no clear competitive advantage. A shortened investor time horizon, wave of vertical integration, outsourcing, and offshoring has weakened the connection between firms and their communities. Companies have been unaware or have ignored opportunities to meet social needs and have misunderstood how social weaknesses affect their value chains. Managers have focused on their industry and business environment and have missed the effect that location can have on productivity and innovation. Shared value involves policies and operating practices that improve a company's competitiveness while simultaneously improving economic and social conditions in the communities where the company operates.
How Shared Value is Created
Companies can create shared value in three ways:
1. By reconceiving products and markets,
2. by redefining productivity in the value chain, and
3. by building supportive industry clusters at company locations.
The concept of shared value provides many new ways to serve new needs, gain efficiency, create differentiation, expand markets and reset the boundaries of capitalism.
Reconceiving Products and Markets
Products and services that provide value to society represent the greatest unmet needs in the global economy. Companies should be asking questions such as: Is our product good for our customers or our customer's customers? Several examples are provided of firms that are moving to meet social needs such as healthier food and environmentally friendly products. For example, GE's Ecomagination products deliver cleaner and more efficient technology solutions for their customers and their communities in areas such as power generation, energy management, water, transportation and healthcare. IBM and Intel are developing ways to help utilities harness digital intelligence to economize on power usage. There are also substantial opportunities to serve disadvantaged communities and developing countries. Poor unban areas in the U.S. represent a large underserved market.
The starting point for creating shared value is to identify all the social needs, beneficial features, and harmful features that are, or could be embodied in the firm's products. This ongoing exercise will lead companies to discover new opportunities for reconceiving products, repositioning in some markets, and recognizing new markets previously overlooked. Some examples include micro finance and low priced cell phones that are providing banking services for people in developing countries. Thomson Reuters development of a monthly service for small low income farmers provides another example. The service includes weather reports, crop pricing, and agricultural advice that has helped many of the farmers double, and in some cases triple their incomes.
Redefining Productivity in the Value Chain
A company's value chain affects, and is affected by many societal issues such as natural resource and water use, health and safety issues, working conditions, and worker benefits and treatment. The shared value concept reveals the connection between societal progress and productivity in the value chain. The exhibit below conveys the idea where examining each of the areas illustrated reveals ways in which shared value thinking can transform the value chain to yield benefits to society and productivity benefits to the firm.
Energy use and Logistics - Energy utilization in processes, transportation, buildings, supply chains, distribution channels, and support services is improving using better technology, recycling, cogeneration, logistics to reduce shipping distances and in many other ways. For example, Marks and Spencer overhauled its supply chain to stop the purchase of supplies from one hemisphere to ship to another, saving millions in shipping cost annually.
Resource Use - There are numerous opportunities to reduce the utilization of all resources including water, raw materials, and packaging as well as to expand recycling and reuse. Some examples include Coca-Cola's reduction in its water consumption by 9% since 2004, and Dow Chemical's reduction in fresh water use by one billion gallons, saving $4 million.
Procurement - Some companies have realized that marginalized suppliers cannot remain productive or improve their quality. Improving the productivity of suppliers through increasing access to inputs, sharing technology, and providing financing can create shared value. For example, to help small coffee growers in rural areas of Africa and Latin America, Nestle redesigned its procurement system, providing advice on farming practices, guaranteed bank loans, and helping farmers secure inputs such as plant stock, pesticides and fertilizers. The farmers produce better yields, and increase their incomes. The farmers environmental impact decreased, and Nestle gained the advantage of buying from capable suppliers.
Distribution - New distribution models can dramatically reduce the use of paper and plastic as iTunes, Kindle, and Google Scholar have demonstrated by offering online scholarly literature. Hindstan Unilever developed a direct-to-home distribution system that provides another example. The system is run by underprivileged female entrepreneurs in Indian villages of fewer than 2,000 people. The project, referred to as Shakti provides skills and income to the women, and improves the health of the villagers through increased access to hygiene products.
Employee Productivity - Many companies have become aware of the effects a living wage, safety, wellness, training, and opportunities for advancement have on productivity. Poor employee health can cost companies a great deal more than health benefits. For example, Johnson and Johnson saved $250 million on health care costs and improved productivity from 2002-2008 by helping employees stop smoking and implementing many other wellness related programs.
Location - The myth that location doesn't matter is being challenged because of the productivity cost of highly dispersed production systems and the hidden costs of distant procurement. Examples of firms changing to local suppliers include Wal-Mart who is increasingly sourcing produce from local farmers near their warehouses, and Nestle who has established smaller plants closer to its markets.
All of the examples above illustrate how reimagining value chains from the shared value perspective can unlock new economic value that most companies have missed.
Enabling Local Cluster Development
Every company needs other companies and infrastructure around it to be successful. These geographic concentrations of firms, related businesses, suppliers, service providers, and logistical infrastructure are referred to as clusters. Clusters also include academic institutions, trade associations, standards organizations, and broader public assets and markets. Companies create shared value by building clusters to improve company productivity while addressing deficiencies in the surrounding cluster. Cluster thinking focuses on the connection between the firm's success and its communities success. Initiatives that address cluster weaknesses are more effective than community focused corporate responsibility programs, but require collective action. Cluster development that involves collaboration between the private sector, as well as trade associations, government agencies, and NGOs are the most successful. North Carolina's Research Triangle provides a notable example of public and private collaboration that created clusters in information technology and life sciences.
Creating Shared Value in Practice
A higher form of capitalism involves the recognition that not all profit is equal. Profits derived from a social purpose represent the creation of economic value through the creation of societal value. This shared value thinking is a powerful force to drive growth in the global economy and involves a whole new set of best practices and strategic opportunities. However, creating shared value will require identifying opportunities tailored to each units particular business in each of the three areas described above. Competitive advantages derived from these shared value initiatives are more likely to become sustainable than conventional cost and quality improvements, and are significantly more beneficial to companies and society than typical corporate social responsibility programs. Initiatives designed to create shared value (CSV) go far beyond the typical corporate social responsibility (CSR) program as indicated in the illustration below.
Enhanced opportunities to create shared value will come from collaboration between profit and nonprofit organizations, as well as private and public institutions. Governments and NGOs can also enable and reinforce the creation of shared value.
Although government regulations are needed, they must be designed and implemented in a way that sets goals to enhance shared value and stimulate innovation. Appropriate regulations have a number of characteristics including the following.
Regulations should:
1. Set clear and measurable social goals. Where appropriate, the regulation should set prices based on true costs, e.g. water use.
2. Set performance standards, but not methods.
3. Include phase-in periods for meeting the standards that allow companies to develop the necessary products and processes in a timely manner that fits the economics of their business.
4. Include universal measurement and performance reporting systems and government investments in the infrastructure needed to support them.
5. Require efficient and timely reporting of results that can be audited by the government as necessary.
6. Limit the pursuit of exploitative, unfair or deceptive practices that benefit companies at the expense of society, e.g., where major U.S. banks promoted unsustainable mortgage financing vehicles that turned out to be socially and economically devastating.
The Next Evolution in Capitalism
It is time for the narrow management approaches based on short-term thinking and the wrong kind of profits to change. Shared value focuses on the right kind of profits that create rather than diminish social benefits. A more sophisticated form of capitalism is needed based on a deeper understanding of competition and value creation. Business schools need to move away from the narrow view of capitalism and broaden the curricula to include the concepts of shared value, clusters and locational influences on company productivity and innovation, the economic impact of societal factors on enterprises, and how to serve nontraditional customer groups. Shared value offers corporations the opportunity to lead social progress and earn the respect of society.
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