Summary Articles MOSI
Module A
Porter & Kramer (2011), Creating Shared Value,
The more business has begun to embrace corporate responsibility, the more it has been
blamed for society’s failures. The legitimacy of business has fallen to levels not seen in
recent his- tory. This diminished trust in business leads political leaders to set policies that
undermine competitive- ness and sap economic growth. Business is caught in a vicious circle.
A big part of the problem lies with companies themselves, which remain trapped in an
outdated approach to value creation that has emerged over the past few decades. They
continue to view value creation narrowly, optimizing short-term financial performance in a
bubble while missing the most important customer needs and ignoring the broader influences
that determine their longer-term success.
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. 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.
Moving Beyond Trade-Offs
Business and society have been pitted against each other for too long. That is in part because
economists have legitimized the idea that to provide societal benefits, companies must temper
their economic success. A requirement for social improvement—such as safety or hiring the
disabled—imposes a constraint on the corporation. Adding this constraint to a firm that is
already maximizing profits, will inevitably raise costs and reduce those profits. Related is the
notion of externalities, which arise when firms create social costs that they do not have to
bear, such as pollution. Society must impose taxes, regulations, and penalties so that firms
“internalize” these externalities—a belief influencing many government policy decisions.
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,This perspective has also shaped the strategies of firms themselves, which have largely
excluded social and environmental considerations from their economic thinking. 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. Governments, for their part, have often
regulated in a way that makes shared value more difficult to achieve. Implicitly, each side has
assumed that the other is an obstacle to pursuing its goals and acted accordingly.
In contrast, the concept of shared value recognizes that societal needs, not just conventional
economic needs, define markets. It also recognizes that social harms or weaknesses
frequently create internal costs for firms—such as wasted energy or raw materials, costly
accidents, need for training etc. And addressing societal harms and constraints does not
necessarily raise costs for firms, because they can innovate through using new technologies,
operating methods, and management approaches—and as a result, increase their productivity
and expand their markets. Shared value, then, is not about personal values. Nor is it a
redistribution approach; “sharing” the value already created by firms. Instead, it is about
expanding the total pool of economic and social value.
For example, a shared value perspective, focuses on improving growing techniques and
strengthening the local cluster of supporting suppliers and other institutions in order to
increase farmers’ efficiency, yields, product quality, and sustainability. This leads to a bigger
pie of revenue and profits that benefits both farmers and the companies that buy from them.
The Roots of Shared Value
A business needs a successful community, not only to create demand for its products but also
to provide critical public assets and a supportive environment. A community needs successful
businesses to provide jobs and wealth creation opportunities for its citizens. This
interdependence means that public policies that undermine the productivity and
competitiveness of businesses are self-defeating, especially in a global economy where
facilities and jobs can easily move elsewhere. NGOs and governments have not always
appreciated this connection.
In understanding the business environment, managers have focused most of their attention on
the industry, or the particular business in which the firm competes. This is because industry
structure has a decisive impact on a firm’s profitability. What has been missed, however, is
the profound effect that location can have on productivity and innovation. Companies have
failed to grasp the importance of the broader business environment surrounding their major
operations.
How Shared Value is Created
Companies can create economic value by creating societal value. There are three distinct
ways to do this:
1. By reconceiving products and markets,
2. Redefining productivity in the value chain,
3. And building supportive industry clusters at the company’s locations.
Each of these is part of the virtuous circle of shared value; improving value in one area gives
rise to opportunities in the others.
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,The concept of shared value resets the boundaries of capitalism. By better connecting
companies’ success with societal improvement, it opens up many ways to serve new needs,
gain efficiency, create differentiation, and expand markets. The ability to create shared value
applies equally to advanced economies and developing countries, though the specific
opportunities will differ. The opportunities will also differ markedly across industries and
companies—but every company has them. And their range and scope is far broader than has
been recognized.
1. Reconceiving Products and Markets
In advanced economies, demand for products and services that meet societal needs is rapidly
growing. Food companies that traditionally concentrated on taste and quantity to drive more
and more consumption are refocusing on the fundamental need for better nutrition. In these
and many other ways, whole new avenues for innovation open up, and shared value is
created.
Equal or greater opportunities arise from serving disadvantaged communities and developing
countries. Though societal needs are even more pressing there, these communities have not
been recognized as viable markets. Today attention is riveted on India, China, and
increasingly, Brazil, which offer firms the prospect of reaching billions of new customers at
the bottom of the pyramid. Yet these countries have always had huge needs, as do many
developing countries. Similar opportunities await in nontraditional communities in advanced
countries. The societal benefits of providing appropriate products to lower-income and
disadvantaged consumers can be profound, while the profits for companies can be substantial.
Example: low-priced cell phones with mobile banking services for the poor to save money
securely.
As capitalism begins to work in poorer communities, new opportunities for economic
development and social progress increase exponentially. For a company, the starting point for
creating this kind of shared value is to identify all the societal needs, benefits, and harms that
are or could be embodied in the firm’s products. The opportunities are not static; they change
constantly as technology evolves, economies develop, and societal priorities shift. An
ongoing exploration of societal needs will lead companies to discover new opportunities for
differentiation and repositioning in traditional markets, and to recognize the potential of new
markets they previously overlooked. Meeting needs in underserved markets often requires
redesigned products or different distribution methods. These requirements can trigger
fundamental innovations that also have application in traditional markets.
2. Redefining Productivity in the Value Chain
A company’s value chain inevitably affects—and is affected by—numerous societal issues,
such as natural resource and water use, health and safety, working conditions, and equal
treatment in the workplace. Opportunities to create shared value arise because societal
problems can create economic costs in the firm’s value chain. Many so-called externalities
actually inflict internal costs on the firm.
Today there is a growing consensus that major improvements in environmental performance
can often be achieved with better technology at nominal incremental cost and can even yield
net cost savings through enhanced resource utilization, process efficiency, and quality.
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, The connection between competitive advantage
and social issues
There are numerous ways in which addressing
societal concerns can yield productivity benefits to
a firm. The graph depicts some areas where the
connections are strongest.
In each of the areas in the exhibit, a deeper
understanding of productivity and a growing
awareness of the fallacy of short-term cost
reductions (which often actually lower productivity
or make it unsustainable) are giving rise to new
approaches.
The following are some of the most important
ways in which shared value thinking is transforming the value chain, which are not
independent but often mutually reinforcing:
Energy use and logistics
The use of energy throughout the value chain is being reexamined triggered by energy
price spikes and a new awareness of opportunities for energy efficiency. The result has been
striking improvements in energy utilization through better technology, recycling,
cogeneration, and numerous other practices—all of which create shared value. For example,
logistical systems are beginning to be redesigned to reduce shipping distances, streamline
handling, improve vehicle routing etc.
Resource use
Heightened environmental awareness and advances in technology are catalyzing new
approaches in areas such as utilization of water, raw materials, and packaging, as well as
expanding recycling and reuse. Better resource utilization—enabled by improving technology
—will permeate all parts of the value chain and will spread to suppliers and channels.
Procurement
Today some companies are beginning to understand that marginalized, lower-waged
suppliers cannot remain productive or sustain, much less improve, their quality. By
increasing access to inputs, sharing technology, and providing financing, companies can
improve supplier quality and productivity while ensuring access to growing volume.
Improving productivity will often trump lower prices. As suppliers get stronger, their
environmental impact often falls dramatically, which further improves their efficiency.
Shared value is created.
Another way of creating shared value, is the advantage of buying from capable local
suppliers. Capable local suppliers help firms avoid costs and can reduce cycle time, increase
flexibility, foster faster learning, and enable innovation. When firms buy locally, their
suppliers can get stronger, increase their profits, hire more people, and pay better wages—all
of which will benefit other businesses in the community. Shared value is created.
Distribution
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