Why 'Shared Value' Can't Fix Capitalism

It was accompanied by a video entitled “Rethinking Capitalism“. Since then, Porter and. Kramer have been championing the shared-value thesis in conferences, meetings with corporate leaders, and even White House advisers.

In August 2011, Steve Lohr had a supportive article in the New York Times, First, Make Money. Also, Do Good. And Fast Company followed with a positive article, Shared Value Capitalism: A Socially Responsible Way To Improve Quality And Retain Customers, concluding, “Shared value is not just a series of empty words or a catchy phrase. Experience is already proving that when it is pursued the right way, everyone wins.”

The “shared value” argument

Let’s take a closer look at the “shared value” argument. The video begins, like the article, by saying that capitalism has an image problem. Then video gradually slides into the notion that capitalism today has certain real problems, including waves of restructuring, personnel reductions, relocation to lower cost regions, commoditization, price competition, little true innovation and slow organic growth.

The video rightly questions the argument that what is good for business is necessarily good for society. The solution? See that what is good for society can also be good for business. Business has missed profit opportunities that would benefit society. For instance, a firm can make “gobs of money” out of the environment by reducing energy costs, or by producing healthy food products. If firms focus on these additional profit opportunities, they will make a lot more money and society will be better off than it otherwise would be.

The beauty of his solution is that capitalism can go on operating as it always has: no fundamental change is needed. There is no need to change managerial practices or behavior. Just a minor tweak of the “value chain” and, “open sesame!” Suddenly a whole new set of profit opportunities open up.

This, Porter says, is “the next chapter in strategy and value chains”. Conventional strategy models have become exhausted. The new model offers additional profit opportunities. For instance:

• GE [GE] is making a lot of money ($18 billion in 2009) out of of ecologically friendly products (“Ecomagination”) and these products are growing faster than the rest of GE’s business.
• Walmart [WMT] is making commendable, even extraordinary, efforts to put all of its activities on a sounder ecological basis.
• Whole Foods [WFM] makes a lot of money by offering high quality food.

No need to choose

Porter made his reputation in corporate strategy by insisting that the role of top management is to choose. The greatest failure of management over the years, he often says, has been its failure to make a strategic choice. However when asked in the video whether companies need to choose between making profits and serving society, Porter says no: companies can find “copious opportunities” to do both. No need to choose.

The next step, Porter  says, is to develop the analytic models, value chains and the toolkits, which his company be happy to provide to companies so that they can implement his ideas.

“Shared value” is presented as the antidote to Corporate Social Responsibility (CSR) programs, which, Porter says, typically involve making random donations to charity. His approach, he says, is an improvement on those programs, although one is tempted to think that he has offered a caricature  of CSR programs so as to make his “new approach” look like a clear improvement.

“Shared value” approach is indeed an improvement on this caricature of CSR. And the idea of looking for profit opportunities that offer good for society is in itself not a bad idea. But it is a big leap from there to suggest that “shared value” will “fix capitalism”.

A bandage on a cancer

To be sure, it is good to see GE being more ecologically responsible. However $18 billion in sales is only 11.5% of GE’s total sales. Thus 88.5% of GE’s sales are still “business as usual” i.e. not ecologically friendly. In public relations term, we do not have a different view of GE as a whole, simply because a small fraction of its overall business is now ecologically friendly. The question in thinking people’s minds is: when will GE get around to doing something about the rest of its business?

Similarly Wal-Mart’s good progress in ecological terms does not erase the extraordinary asocial nature of Walmart’s practices in other areas, including underpayment of workers resulting in a need for public support through food stamps and welfare payments, the tactics used to prevent unionization and the negative effects on employment and small business in the locations of its stores.

A pseudo fix to capitalism

As presented, the “shared value” argument oscillates between two views as to what is wrong: an image problem or a substantive problem. “Shared value” would not resolve even the image problem, let alone the substantive problem of capitalism, namely that the private sector is steadily getting lower and lower returns on assets, on invested capital and on equity. The life expectancy of firms is steadily declining.

The real problem with the argument is that “shared value” and “expanded value chains” that include socially worthwhile opportunities have yet to come to terms with the problems afflicting capitalism.

The principal reason why the private sector is experiencing declining returns is that the marketplace has changed and management hasn’t. In the marketlace, there has been an epochal shift in the power from seller to buyer. As a result, the “inside-out” perspective of value chains (“we make it and you take it”) is failing fast and needs to be replaced by an outside-in perspective (“we want to understand the customers and their problems and find ways to solve those problems”).

Thus “shared value” argument has yet to come to terms with the fact that we are now entering “the age of customer capitalism” as defined in Roger Martin’s landmark article of that name in HBR of January 2010 and further elaborated in his s book, Fixing The Game (2011). Following periods of “managerial capitalism” and “shareholder capitalism”, which one might call respectively “Capitalism 1.0” and “Capitalism 2.0” we are entering a new and very different third era of capitalism – “customer capitalism” or “Capitalism 3.0”. “Shared value” is still mired in Capitalism 2.0.

The real change needed in capitalism is not just tweaking “shareholder capitalism” to include the shared values of both business and societal stakeholders and find more profit opportunities in socially worthwhile goals, or fine-tuning value chains that operate from an inside-out perspective while “parsing and manufacturing demand”.

That’s essentially a “push” strategy in today’s “pull” world, as John Hagel, John Seely Brown and Lang Davison put it in The Power of Pull.

A real fix to capitalism

A real fix to capitalism entails the embrace of Capitalism 3.0 and the profound revolution in management thinking focused on “delighting customers” and redefining managerial roles, coordination mechanisms, values and communications so that everyone and everything in the firm is oriented towards accomplishing this goal.

It means reversing the mental framework implicit in the value chain and starting from what would delight the client and focusing the entire organization on that goal.

When this is done, as Apple [AAPL] has shown, the returns can be extraordinary. Compare that to GE and Walmart, firms that doggedly work on tweaking their supply chains: Wal-Mart’s’ share price is roughly what it was a decade ago and GE’s is less than half. There’s a big difference between Capitalism 2.0 and Capitalism 3.0.

Other companies like Amazon [AMZN], Salesforce [CRM] andIntuit [INTU] have shown us that the new way of management is something that any firm can learn. It’s not rocket science. It’s called radical management.

The parallels to business process reengineering

There are interesting parallels between the current attempt to “fix capitalism” through “shared value” and a similar undertaking to “fix capitalism” some twenty years ago.

At that time, HBR helped launch the business process reengineering movement with Michael Hammer’s article, “Re-engineering Work: Don’t Automate, Obliterate” (HBR, July-August 1990). This article was followed in 1993 by the book, Re-engineering the Corporation: A Manifesto for Business Revolution, by Michael Hammer and James Champy.

According Hammer and Champy, the situation of American capitalism was grim. American companies had become “bloated, clumsy, rigid, sluggish, non-competitive, uncreative, inefficient, disdainful of customer need and losing money.” Clearly, the system had to be replaced by something different. But what?

Business process reengineering

By 1993, the fashionable solution became business process re-engineering. The initial idea was sensible: to re-engineer processes, essentially a new fix to the system—particularly processes that took advantage of technology to minimize hand-offs and enable smaller teams to work on tasks from start to finish. Such process improvements could lead to modest gains in productivity, although the change was hardly the deep change needed to deal with the massive structural problems that Hammer and Champy had correctly identified. Nevertheless, Hammer and Champy were able to hype this modest proposal into something they called “radically new,” “a fresh start,” “something entirely different.”

The proposal was attractive to traditional managers for several reasons. For one thing, it was a technology fix: managers didn’t need to change their behavior. They could sit back while technology solved the problem. For another, the re-engineering could be done by experts—even by re-engineering “czars.” Managers could hire others to do the work.

It offered CEOs an attractive image of immaculate top-down power, while happily providing management consultants with “the next new thing”.

The downsides mirrored the advantages

The downsides of the approach were mirror images of the advantages. Because the management problems were not technology problems, the introduction of technology did not address root causes. Being designed by outside “experts”, the solution often didn’t fit the specific workplace. Because the process changes were introduced without basic change in the behaviors of the managers, the problems caused by those behaviors remained.

In fact, a principal attraction of business process engineering was precisely that under the guise of being something entirely different, indeed “a business revolution” it was actually more of the same. It was another superficial fix to a system that was suffering from rot within.

“Shared value” parallels “business process reengineering”

The use of “shared value” to “fix capitalism” may well prove attractive to traditional managers for similar reasons.

For one thing, it is a fix to the value chain: managers don’t need to change their behavior. They can sit back while new categories of profit opportunities are plugged into the existing system.

There is no need to become more responsive to customers: it continues to be a matter of “parsing and manufacturing demand”, albeit in areas where many firms have not previously looked.

For another, the adjustment can be done by experts. Managers can hire others to do the change, while preserving the existing culture of hierarchical bureaucracy.

The downsides mirror the advantages

Once again, the downsides of the approach are mirror images of the advantages. Because most of the problems of capitalism are problems that tweaking the value chain cannot resolve, root causes will not be addressed.

Because the process changes are introduced without basic change in managerial behaviors, the problems caused by those behaviors will continue.

In fact, a principal attraction of the new way to “fix capitalism” is once again precisely that under the guise of being something entirely different, it is in reality more of the same.

NOTE:

The original version of this article suggested that work in support of Shared Value was done for a fee. Mark Kramer has clarified in a comment to the article that his support of “shared value” work is in fact through a nonprofit organization — FSG — that he and Michael Porter founded, and from which Michael Porter takes no compensation.

His comment, which is well worth reading, also suggests that ‘Shared Value’ is in fact closer to customer capitalism than I was able to detect in his original HBR article or in Michael Porter’s video, which is good news.