Larissa van ‘t Westende
Article Summaries Marketing Strategy (excluding cases)
CREATING SHARED VALUE - HOW TO REINVENT CAPITALISM - AND
UNLEASH A WAVE OF INNOVATION AND GROWTH
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 rather a new way to achieve economic
success.
Moving beyond trade-offs
The theory says that adding a constraint to a firm that is already maximizing profits, will
inevitably raise costs and reduce those profits.
A related concept, with the same conclusion, is the notion of externalities.
Externalities arise when firms create social costs that they do not have to bear, such as
pollution. Thus, society must impose taxes, regulations, and penalties so that firms
“internalize” these externalities - a belief influencing many government policy decisions.
Corporate responsibility programs - a reaction to external pressure - have emerged largely to
improve firms’ reputations and are treated as a necessary expense. Shared value is about
expanding the total pool of economic and social value. A shared value perspective, instead,
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. The return will be greater economic value and broader strategic benefits
for all participants.
What is “shared value”?
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.
The roots of shared value
In this kind of competition, the communities in which companies operate perceive little benefit
even as profits rise. Instead, they perceive profits to come at their expense, an impression
that has become even stronger in the current economic recovery, in which rising earnings
have done little to offset high unemployment, local business distress, and severe pressures
on community services. Strategy theory holds that to be successful, a company must create
a distinctive value proposition that meets the needs of a chosen set of customers. The firm
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gains competitive advantage from how it configures the value chain, or the set of activities
involved in creating, producing, selling, delivering, and supporting its products or services.
How shared value is created
Companies can create economic value by creating societal value. There are three distinct
ways to do this: by reconceiving products and markets, redefining productivity in the value
chain, 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.
Reconceiving products and markets
In these and many other ways, whole new avenues for innovation open up, and shared value
is created. Society’s gains are even greater, because businesses will often be far more
effective than governments and nonprofits are at marketing that motivates customers to
embrace products and services that create societal benefits, like healthier food or
environmentally friendly products. The societal benefits of providing appropriate products to
lower-income and disadvantaged consumers can be profound, while the profits for
companies can be substantial.
Blurring the profit/nonprofit
boundary
The concept of shared valued blurs
the line between for-profit and
nonprofit organizations. The blurring
of the boundary between successful
for-profits and non- profits is one of
the strong signs that creating
shared value is possible.
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, even in the absence of
regulation or resource taxes. The
new thinking reveals that the
congruence between societal progress and productivity in the value chain is far greater than
traditionally believed. 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, resulting in striking
improvements in energy utilization through better technology, recycling, cogeneration, and
numerous other practices - all of which create shared value.
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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. The opportunities apply to all resources, not just those that
have been identified by environmentalists. Better resource utilization - enabled by improving
technology - will permeate all parts of the value chain and will spread to suppliers and
channels. Landfills will fill more slowly.
Procurement
Today, some companies are beginning to understand that marginalized 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. Nestlé
example: far broader insight, which is the advantage of buying from capable local suppliers.
Outsourcing to other locations and countries creates transaction costs and inefficiencies that
can offset lower wage and input costs.
Distribution
Companies are beginning to re-examine distribution practices from a shared value
perspective. As iTunes, Kindle, and Google Scholar (which offers texts of scholarly literature
online) demonstrate, profitable new distribution models can also dramatically reduce paper
and plastic usage. Similarly, microfinance has created a cost-efficient new model of
distributing financial services to small businesses.
Employee productivity
The focus on holding down wage levels, reducing benefits, and offshoring is beginning to
give way to an awareness of the positive effects that a living wage, safety, wellness, training,
and opportunities for advancement for employees have on productivity.
Location
Business thinking has embraced the myth that location no longer matters, because logistics
are inexpensive, information flows rapidly, and markets are global. The cheaper the location,
then, the better. Concern about the local communities in which a company operates has
faded. That oversimplified thinking is now being challenged, partly by the rising costs of
energy and carbon emissions but also by a greater recognition of the productivity cost of
highly dispersed production systems and the hidden costs of distant procurement discussed
earlier.
These trends may well lead companies to remake their value chains by moving some
activities closer to home and having fewer major production locations. Until now, many
companies have thought that being global meant moving production to locations with the
lowest labor costs and designing their supply chains to achieve the most immediate impact
on expenses. In reality, the strongest international competitors will often be those that can
establish deeper roots in important communities. Companies that can embrace this new
locational thinking will create shared value.
Creating shared value: Implications for government and civil society
The principle of shared value creation cuts across the traditional divide between the
responsibilities of business and those of government or civil society. From society’s
perspective, it does not matter what types of organizations created the value. What matters
is that benefits are delivered by those organizations - or combinations of organizations - that
are best positioned to achieve the most impact for the least cost.
