Harvard Business Review: Creating shared value
Harvard professor Michael Porter and Mark R. Kramer argue that the capitalist system is, under siege. Business is increasingly viewed as a major cause of social, environmental, and economic problems and companies are widely perceived to be prospering at the expense of the broader community.
A big part of the problem lies with companies themselves. They remain trapped in an outdated approach to value creation that emerged over the past few decades. Companies continue to view value creation narrowly, optimising short-term financial performance while missing key customer needs and ignoring the broader impacts that determine their longer-term success. As a consequence, they frequently overlook the wellbeing of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers and the economic distress of the communities in which they produce and sell.
Businesses must take the lead in bringing business and society back together. The solution lies in the principle of shared value Tweet This!, i.e. creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses acting as businesses – and not as charitable donors – are the most powerful force for addressing the pressing issues we are currently facing. Accordingly, the purpose of the corporation must be redefined as creating shared value, not just profits. This will drive the next wave of innovation and productivity growth in the global economy and will also reshape capitalism and its relationship to society.
Shared value is not about personal values. Nor is it about “sharing” the value already created by firm. It is about expanding the total pool of economic and social value. A good example of this difference in perspective, is the fair trade movement in purchasing, which seeks to increase the proportion of revenue that goes to poor farmers by paying them higher prices for the same crops. Although 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, would focus on improving growing techniques and strengthening the local cluster of supporting suppliers and other institutions, so as to increase farmers’ efficiency, yields, product quality, and sustainability. This would lead to a bigger pie of revenue and profits, benefiting both farmers and the companies buying from them. Early studies of cocoa farmers in the Côte d’Ivoire, for example, show that while fair trade can increase farmers’ incomes by 10% to 20%, shared value investments could raise their incomes by over 300%.
How is shared value created?
Companies can create economic value by creating societal value. There are three different ways to achieve this: by a) reconceiving products and markets, b) redefining productivity in the value chain, and c) building supportive industry clusters at the company’s locations. Every one of these is part of the virtuous circle of shared value. Improving value in one area, generates opportunities in the others. By better connecting companies’ success with societal improvement, the concept of shared value resets the boundaries of capitalism and opens up many ways to serve new needs, gain efficiency, create differentiation, and expand markets.
Redefining productivity in the value chain
The following are some of the most important ways in which shared value thinking transforms a company’s value chain. They are not independent, but often mutually reinforcing:
- Energy use and logistics: The use of energy throughout the value chain is being re-examined
- Resource use: Heightened environmental awareness and advances in technology are catalysing new approaches
- Procurement: By increasing access to inputs, sharing technology, and providing financing, companies can improve supplier quality and productivity
- Distribution: Companies are beginning to re-examine distribution practices from a shared value perspective
- Employee productivity: The focus on holding down wage levels, reducing benefits, and offshoring is giving way to an awareness of the positive effects a living wage, safety, wellness, training, and opportunities for advancement for employees have on productivity
Case study: How Nestlé tackled coffee sourcing challenges
Obtaining a reliable supply of specialised coffees is extremely challenging. Most coffees are grown by small farmers in impoverished rural areas of Africa and Latin America, trapped in a cycle of low productivity, poor quality, and environmental degradation that limits production volume.
To address these challenges, Nestlé redesigned procurement, working intensively with its growers, providing advice on farming practices, guaranteeing bank loans, and helping secure inputs such as plant stock, pesticides, and fertilisers. Additionally, Nestlé established local facilities to measure the quality of the coffee at the point of purchase. This enabled Nestlé to pay a premium for better beans directly to the growers and, thus, improve their incentives. Greater yield per hectare and higher production quality increased growers’ incomes, and the environmental impact of farms was reduced. At the same time, Nestlé’s reliable supply of good coffee grew significantly. Shared value was created.
As this examples show, reimagining value chains from the perspective of shared value provides important new ways to innovate and unlock new economic value that most businesses have missed.
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References:
This article is based on published information by Harvard Business Review. For the sake of readability, we did not use brackets or ellipses. However, we made sure that the extra or missing words did not change the publication’s meaning. If you would like to quote these written sources from the original please revert to the following link: