Michael Porter's Creating Shared Value (CSV) Concept - Summary Notes

Michael Porter's Creating Shared Value (CSV) Concept - Summary Notes

Introduction

• Shared Value is a new form of capitalism.
• The idea of shared value was initially explored by the authors in December 2006 HBR.
• “Capitalism is under siege. In recent years business increasingly has been viewed as a major cause of social, environmental, and economic problems. Companies are widely perceived to be prospering at the expense of the broader community… companies must take the lead in bringing business and society back together”
• “The solution lies in the principle of shared value, which involves creating economic value in a way thatalso creates value for society by addressing its needs and challenges”
• “Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success”
• Porter & Kramer criticize neoclassical thinking on the trade-off between societal needs and economic success, and the way the concept of ‘externalities’ have shaped corporate and policy strategy.
• Uses Fairtrade as an example of what shared value isn’t: “Fair trade aims to increase the proportion of revenue that goes to poor farmers by paying them higher prices for the same crops. Though this may be a noble sentiment, fair trade is mostly about redistribution rather than expanding the overall amount of value created. 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. This leads to a bigger pie of revenue and profits that benefits both farmers and the companies that buy from them.”
• Throughout the article, there are countless examples of where creating shared value is happening and proving to be successful.

Initial Concept

• There are three main ways companies can create value opportunities
• By reconceiving products and markets
• By redefining productivity in the value chain
• By enabling local cluster development
• Business and society need to move away from the idea that there is a trade-off between these two entities; business and society.
• “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.”
• “Shared value thinking recognizes that social harms frequently createinternal costs for firms, such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And that this doesn’t 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.”– Porter is proposing a change in previous thinking, away from the neoclassical perspective which he believes is false.
• Shared value is not about sharing value which already exists – it’s about expanding the current pool of value which benefits everyone.
• “Early studies of cocoa farmers in the Côte d’Ivoire, for instance, suggest that while fair trade can increase farmers’ incomes by 10% to 20%, shared value investments can raise their incomes by more than 300%.”
• Applies to both developed and developing countries, but the opportunities differ.
• The trend of blurring for-profit/non-profit boundaries is a strong sign that creating shared value is possible.
• Social entrepreneurs are leading the way on creating shared value because they are not locked into traditional business thinking. Real social entrepreneurship should be measured by its ability to create shared value, not just social benefit.

Reconceiving Products and Markets

•  Societal needs are the greatest unmet needs in society.
• Uses examples: food companies à nutritional products, Wells Fargo à tools to help customers pay down debt, GE à Ecomagination, WaterHealth International à innovative water techniques to distribute clean water at a minimal cost to more than a million people in rural India, Thompson Reuters à cheap weather and crop-pricing information and agricultural advice to 2 million Indian farmers.
• When businesses build products around society, then both business and society benefit.

Redefining Productivity in the Value Chain

• Productivity and societal progress heavily linked – so called ‘externalities’ usually become internal costs to 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. 
•  “By reducing its packaging and cutting 100 million miles from the delivery routes of its trucks, Wal-Mart lowered carbon emissions and saved $200 million in costs.”
• Costs must be looked at in a long term perspective, and no longer short term.
• Porter & Kramer show many examples of creating shared value in activities along the supply chain. Here is one from each activity:
• Energy use and logistics: M&S stopping purchase of supplies from one hemisphere to another, expected to save £175 million annually by 2016.
• Resource use: Coca-Cola reduced worldwide consumption by 9% from a 2004 baseline. Saving water and costs.
• Procurement: Nestle providing advice to its farmers, guaranteeing bank loans and guaranteeing bank loads. This has led to greater yield per hectare, higher production quality, lower emissions, capable and reliable supply chains, while at the same time significantly increasing farmers’ incomes.
• Distribution: Microfinance has created a cost-efficient model of distributing financial services to small businesses. Hindustan Unilever creating new direct-to-home distribution system, run by underprivileged female entrepreneurs à doubling their household income.
• Employee productivity: By investing in employee wellness programs, Johnson & Johnson has saved $250 million on health care costs.
• Location: Olam International has cut costs 25% by bringing cashew nut processing back to location where they are grown in Africa, providing direct employment to impoverished rural areas.

Enabling Local Cluster Development

• “Success of every company is affected by the supporting companies and infrastructure around it. Productivity and innovation are strongly influenced by “clusters”, or geographic concentration of firms, related businesses, suppliers, service providers, and logistical infrastructure”
• Clusters include not just businesses, but institutions such as academic programs, trade associations and standards organizations. They also require public assets in the community: education, utilities, competition policy, and a strong legal framework.
• Firms create shared value by building clusters to improve company productivity while addressing gaps or failures in the framework conditions surrounding the cluster.
• Cluster development benefits both the company and society.
• Example: Nestle provided substantial assistance to build agricultural, technical, financial and logistical firms and capabilities in its coffee regions, thereby developing its local clusters, and as a result Nestle’s productivity improved.
• Example: “Yara realized that the lack of logistical infrastructure in many parts of Africa was preventing farmers from gaining efficient access to fertilizers and other essential agricultural inputs, and from transporting their crops efficiently to market. Yara is tackling this problem through a $60 million investment in a program to improve ports and roads, which is designed to create agricultural growth corridors in Mozambique and Tanzania. The company is working on this initiative with local governments and support from the Norwegian government. In Mozambique alone, the corridor is expected to benefit more than 200,000 small farmers and create 350,000 new jobs. The improvements will help Yara grow its business but will support the whole agricultural cluster, creating huge multiplier effects.”
• To support cluster development companies need to identify gaps and deficiencies in the community that have an effect on their own productivity and growth. This is where shared value comes from.
• This is different to CSR initiatives where there is minimal relationship between the firm and the societal need, thereby shared value is not created.

Conclusion

• Not all profit is equal – profits involving a social purpose represent a higher form of capitalism.
• It is a change of thinking, discounting the term ‘externality’ and treating societal problems as an internal cost to the firm.
• It is a far more effective and sustainable strategy than both traditional business thought as proposed by Milton Friedman, and current CSR practices.
• CSR practises allowed cover for major U.S. banks to promote unsustainable financial vehicles.
• The three opportunities for creating shared value are mutually reinforcing, for example enhancing the cluster will enable more local procurement and less dispersed supply chains.
• Shared Value creation can only exist with a change in mind set – particularly with regard to changing short term investment mentalities towards longer term investment with sustainability in mind.
• CSV will require concrete and tailored metrics for each business unit it each of the three opportunities described.
• “While some shared value opportunities are possible for a company to seize on its own, others will benefit from insights, skills, and resources that cut across profit/ nonprofit and private/public boundaries. Here, companies will be less successful if they attempt to tackle societal problems on their own, especially those involving cluster development. Major competitors may also need to work together on precompetitive framework conditions, something that has not been common in reputation-driven CSR initiatives. Successful collaboration will be data driven, clearly linked to defined outcomes, well connected to the goals of all stakeholders, and tracked with clear metrics.”
• Implications for government and civil society:
• Govt. and NGO’s need to throw away their preconceptions on the trade-off between business and societal needs, otherwise they are exacerbating this trade-off through their actions. For example command and control environmental regulation should be replaced with support to build innovative technology which both improves the environment and competitiveness at the same time, i.e. creating shared value.
• “The principle of shared value creation cuts across the traditional divide between the responsibilities of business and those of government or civil society”.
• Government should focus on cluster development (including all the elements described) and support technological innovation that promotes CSV.
• Regulations should: 1) set clear and measurable social goals, whatever they may be, 2) set performance standards but do not prescribe the methods to achieve them, those are left to companies, 3) define phase-in periods for meeting standards, which reflect the investment or new product cycle in the industry, thereby giving companies time to develop and introduce new products and processes, 4) put in place universal measurement and performance reporting systems, with govt. investing in infrastructure for collecting reliable benchmarking data and finally 5) simple compliance processes which can be easily understood.
• CSV regulations are different to traditional regulation because it focuses on measurable social improvement and sets standards rather than imposing a particular approach which stifles innovation.
• CSV regulation should limit pursuit of exploitive, unfair or deceptive practices, for example ensuring strict antitrust policy.
• The authors conclude that although not all of society’s problems can be solved through CSV solutions, it presents a vastly better system than we currently have and brings back the link between society and business.