Shared Value

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= creating economic value in a way that also creates value for society by addressing its needs and challenges [1]


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by Michael E. Porter and Mark R. Kramer:

"Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social responsibility” mind-set in which societal issues are at the periphery, not the core.

The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.

The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. Shared value creation focuses on identifying and expanding the connections between societal and economic progress.

The concept rests on the premise that both economic and social progress must be addressed using value principles. Value is defined as benefits relative to costs, not just benefits alone. Value creation is an idea that has long been recognized in business, where profit is revenues earned from customers minus the costs incurred. However, businesses have rarely approached societal issues from a value perspective but have treated them as peripheral matters. This has obscured the connections between economic and social concerns.

In the social sector, thinking in value terms is even less common. Social organizations and government entities often see success solely in terms of the benefits achieved or the money expended. As governments and NGOs begin to think more in value terms, their interest in collaborating with business will inevitably grow.

A growing number of companies known for their hard-nosed approach to business—such as GE, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and Wal-Mart—have already embarked on important efforts to create shared value by reconceiving the intersection between society and corporate performance. Yet our recognition of the transformative power of shared value is still in its genesis. Realizing it will require leaders and managers to develop new skills and knowledge—such as a far deeper appreciation of societal needs, a greater understanding of the true bases of company productivity, and the ability to collaborate across profit/nonprofit boundaries. And government must learn how to regulate in ways that enable shared value rather than work against it.

Capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth. But a narrow conception of capitalism has prevented business from harnessing its full potential to meet society’s broader challenges. The opportunities have been there all along but have been overlooked. Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.

The purpose of the corporation must be redefined as creating shared value, not just profit per se. This will drive the next wave of innovation and productivity growth in the global economy. It will also reshape capitalism and its relationship to society. Perhaps most important of all, learning how to create shared value is our best chance to legitimize business again." (http://hbr.org/2011/01/the-big-idea-creating-shared-value/)


Discussion

A critique of the limitations of Michael Porter's 'inside-out' vision of shared value

John Elkington:

"Shared Value is undeniably a key step forward in corporate strategy. In the Harvard Business Review it is gaining real traction. The idea is that if business aligns its commercial and societal objectives, it can better evolve scalable solutions to key global challenges.

The central message is indisputable: "Business and society have been pitted against each other for too long," Porter and Kramer argue. "That is in part because economists have legitimised the idea that to provide societal benefits, companies must temper their economic success. In neoclassical thinking, a requirement for social improvement – such as safety or hiring the disabled – imposes a constraint on the corporation."

The net result, Porter and Kramer insist, is that the strategies of many corporations "have largely excluded social and environmental considerations from their economic thinking". They continue: "Corporate responsibility programs – a reaction to external pressure – have emerged largely to improve firms' reputations and are treated as a necessary expense. Anything more is seen by many as an irresponsible use of shareholders' money."

So far, so good. But if you seem to scoop sustainability up with corporate social responsibility and dump them in the "bucket of history", as Marx attempted with capitalism, you risk antagonising those who - because they see the systemic nature of the crises we increasingly face - have embraced the sustainability framing of the agenda.

FSG, is signaling its intention to open the Shared Value platform out to wider inputs, which is very welcome. But, there are three things Professor Porter said at the summit that left me wondering whether more fine-tuning may be needed. First, he enthused that capitalism works like "magic", conjuring value "out of nothing". Yet industrial capitalism typically converts natural capital that has evolved over millions of years into things that financial markets value. If Shared Value is to create real long-term value, it must acknowledge that capitalism is not invariably a benign process, indeed it can play a key role in destroying key resources, reducing the planet's biodiversity and destabilising the climate.

Second, he reduced corporate sustainability to resource efficiency. That may be what companies can currently measure, but recall that the original formulation of sustainability focused on the idea of intergenerational equity. At a time when the world population is heading towards nine billion, our economic model is often dangerously myopic in systematically favouring a few forms of capital (financial, physical, intellectual) over others (human, social, natural).

If you focus on the narrow commercial interests of particular companies, then it makes sense to encourage CEOs and others to cherry-pick their priority issues from a menu of options. But what if, unlike items on a restaurant menu, the challenges are all symptoms of the systemic dysfunction of modern-day capitalism? Might the Shared Value approach encourage incrementalism rather than the necessary transformative, systemic change?

Finally, Professor Porter seemed to suggest that Shared Value offers a values-free way for leaders to select their strategic priorities. What he meant, I am told, was that this isn't so much a shared-values agenda, as an infinitely better way to identify areas where commercial and societal value creation align. Still, declared or not, values are shot through all forms of capitalism, even if masked by market pricing signals.

This is something that PUMA Chairman Jochen Zeitz is trying to address with the environmental profit & loss methodology, seeking to place a market value on the environmental impacts of his company and supply chain. In 2010, PUMA calculates that the environmental costs imposed by its business activities were "worth" €145m. Once you know the numbers, whether or not the market incentivises you to address them, it's a matter of values as to whether you decide to take a free ride, or pay your bills.

UN Secretary-General Ban Ki-moon characterises sustainability as offering "what economists call a "triple bottom line" – job-rich economic growth coupled with environmental protection and social inclusion." Porter doesn't much like the triple bottom line concept, which I coined in 1994, seeing it as an attempt to balance off different forms of value creation. But the declared intent was always to achieve what Jed Emerson some years ago dubbed "blended value".

Perhaps the difference of opinion reflects the fact that FSG started out advising foundations on how to direct their philanthropy. Perhaps theirs is an "inside-out" world, where you take a given quantum of resources and use it to achieve the greatest possible impact. The "outside-in" sustainability movement comes from a different starting point, a world in which our species is moving into the Anthropocene. This is a new reality in which our species has impacts on a geological scale and where the interests of future generations need to be brought back into the present – in ways that today's capitalism systematically fails to do." (http://www.guardian.co.uk/sustainable-business/sustainability-with-john-elkington/shared-value-john-elkington-sustainability)

Panel discussion at 2011 Net Impact Conference

Ali Hart:

“At the 2011 Net Impact Conference, shared value was the focus of a session topic, proving that this idea is bubbling up in business. Participating on the panel was Enterprise Holdings, Inc., which owns and operates Alamo, Enterprise Rent-A-Car and National Car brands. Lee Broughton, Head of Corporate Sustainability for Enterprise Holdings, Inc., relayed that Enterprise is the largest owner of passenger vehicles in the world, with a fleet of 1.6 million in the US alone. As recently reported here, Enterprise released its first sustainability report and has taken on the challenge of improving urban mobility. Not only is the company investing in alternative fuel research, but also it’s investing in EVs.

Enterprise Rent-A-Car invested in and committed to 500 Nissan LEAFs and instead of scattering them throughout the country, the organization partnered with 30 of its locations in major markets, clustering the vehicles in an effort to socialize them. The company views this as a win-win-win: more people will have the opportunity to drive Nissan LEAFs or see them driving around which will potentially inspire them to purchase one; Enterprise Rent-A-Car will bolster its sustainability cred; and Nissan will save money on advertising. This partnership creates value for all parties involved – Enterprise Rent-A-Car, Nissan and society, since EVs are more environmentally friendly than gas-guzzlers.

Also on the panel was Starbucks, which just announced its new initiative, Create Jobs for USA in partnership with the Opportunity Finance Network (OFN). Starbucks donated the first $5 million to launch the Create Jobs for USA program and is asking Starbucks customers to donate at least $5. Donations will go directly to OFN, which funds small businesses, including social enterprises and nonprofits. According to OFN, $3,000 in donations creates or maintains a job in a community. While exciting, this is arguably more of a philanthropic partnership than an example of shared value.

Starbucks also discussed how it’s achieving shared value with an initiative to recycle all customer cups by 2015. Interestingly, Starbucks invited competitors in its supply chain to come up with innovative ways to achieve this goal. What Starbucks found was that when the competitors were invited, their existing suppliers showed up with potential solutions; nothing like a little competition to get the innovation flowing. While clearly beneficial to the Starbucks brand and the communities in which the company operates, the economic benefits remain to be seen. If the recyclable cups cost more to produce, Starbucks might make up for the cost in increased sales as people vote with their dollars to support the effort. Only time will tell.

All in all, it’s inspiring to see so many large brands finding value in shared value. That these efforts are being incorporated into company strategies means that we really can do well from doing good.” (http://www.triplepundit.com/2011/11/shared-value-partnerships-makings-collaborative-economy/)

More Information

Article: Michael E. Porter and Mark R. Kramer. Creating Shared Value. Harvard Business Review, 2011 URL = http://hbr.org/2011/01/the-big-idea-creating-shared-value