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May 28, 2013

Shared Value: a new paradigm for corporate strategy

SVA Consulting was invited to join a meeting of practitioners and a Leadership Summit in Boston, US to explore the concept of ‘Shared Value’ and how to find and create it.[i]

Michael Porter from Harvard University: “When we get [Shared Value] into the capitalist bucket… we can scale.”

Professor Michael Porter is one of the most highly regarded thinkers in business. His frameworks, tools and ideas have informed most corporate strategies – particularly in the area of competitive behaviour – and increasingly communities and even countries are looking to Porter for advice on how to grow the wealth and well-being of their citizens.

So when Porter asserts that we need to use corporates, and the mechanisms of capitalism, to address ingrained social challenges, we would be wise to listen. Porter, and his co-author Mark Kramer, of FSG social impact consultants, have laid out their thinking on this concept of “Shared Value” in two key articles: “Strategy and Society in Harvard Business Review (HBR), December 2006; and “Creating Shared Value” in January 2011 also in HBR.

Addressing senior corporate executives and consultants at the third Global Shared Value Leadership Summit, Porter said that Shared Value occurs when we “…integrate societal issues and challenges into economic value creation”. In practical terms this means continuing to pursue a strategy of creating value for shareholders but in doing so addressing social challenges. As he said: “Shared Value is capitalism. Full stop.”

Porter noted that governments had failed to fix societies’ greatest problems, and that philanthropy didn’t have the resources. The “magic” (Porter’s word) of integrating money-making with social good is that, like any profitable activity, the mechanisms of capitalism work to grow and replicate the activity: “When we get [Shared Value] into the capitalist bucket… we can scale. We can sustain activity indefinitely. We can actually SOLVE problems!”

Where is Shared Value created?

Of course Porter and Kramer are not merely talking conceptually. There are an increasing number of examples of Shared Value at work.

These examples fall under three headings:

Firstly, companies reconceiving their products and services to either meet a societal need (at a profit) or to address an underserved or unserved market.

For example, in India, some 50 million people are estimated to suffer from diabetes, and less than 5% of this number is receiving appropriate, regular and consistent insulin treatment.  Eli Lilley, a major manufacturer and marketer of insulin, has developed general practitioner training; better in-pharmacy resources, including information packs and training for pharmacists; mobile-phone based patient support tools and health tracking tools; and innovative delivery products to support specific market segments. It is addressing the social challenge profitably.[ii]

In Australia, financial services companies are starting to access underserved (and high risk) markets by working with non-profit partners to address a real “market failure”, and to develop new, profitable customers. One example is the work done by Commonwealth Bank of Australia through its Community Business Finance Program.

Secondly businesses that have worked to address social (including environmental) issues in order to reduce costs in their value chain.

The International Hotel Group (IHG) has reduced energy consumption and improved margins while decreasing its environmental footprint.

Tesco – a large food retailer in the UK – realised that by having disabled people working at its checkouts it could reduce unemployment in this group and simultaneously reduce its staff turnover and improve the customer experience through this group’s commitment and loyalty.

Nestle – who have put Shared Value at the centre of its mission and under its logo, and who originally coined the term while working with Porter and Kramer – has (amongst other things) reduced water consumption per dollar of revenue from 4½ litres to 1½ litres over 10 years, as its current Chairman noted when he spoke at the Summit. Margins improve, and environmental impact decreases.

Thirdly, improving the local business environment, also described as “enabling local cluster development”, can involve building the capabilities of suppliers and civil institutions, or working to redesign the regulatory framework to enable trade while improving conditions.

For instance, Mars (and other buyers of cocoa) have worked extensively with growers in the Cote d’Ivoire to improve plant stock, horticultural skills and farming practice. This isn’t philanthropic: decreasing yields were driving farmers to change to other crops, and as a result supplies were decreasing and the price of cocoa was increasing. Self-interest has led to societal improvements.

Porter and Kramer are also quite adamant about what Shared Value is NOT.

…it isn’t Shared Value when it is done by an entity that is not driven by the profit imperative.

For a start, it isn’t philanthropy. Porter believes that there is an important role for philanthropy, and doesn’t assert that Shared Value can address ALL social and environmental challenges. Also, it is not corporate social responsibility (CSR) in which companies focus primarily on building their reputation through activities that have limited connection to their business operations.

It is also clear that when we talk about Shared Value it is not about sharing existing value (which is, essentially, what philanthropy is) but about creating new value for both shareholders and the community, together.

Mark Kramer, who heads up FSG: “There is a lot more that business can do in addressing social issues”.

Furthermore, it isn’t Shared Value when it is done by an entity that is not driven by the profit imperative, and in which the “magic” of capitalist growth is absent. So a public institution, even if it’s ‘doing good’ is not creating Shared Value because profit is not there as a driver for growth.

During the meeting, consultants wrestled with some of the less clear definitions.

There remains some uncertainty about whether “cause related marketing” – the boosting of reputation and as a result customer preference through doing socially positive work – amounts to Shared Value.

Here in Australia we have a growing social enterprise sector. Where a non-profit social enterprise is sustainable without any subsidy (as, for example, the Goodstart early learning business is), then is it Shared Value? We think not: without the profit motive, and the potential for reinvestment in growth by shareholders who want to increase their returns, again the “magic” of capitalism doesn’t work.

Interestingly, the sector is experimenting with mechanisms by which non-profits can deliver returns to investors in a way that behaves somewhat like equity, for example social benefit bonds. If these mechanisms work, then it might be possible for non-profits to create Shared Value. However, in Australia the “non-profit” model offers benefits (in fundraising and taxation) specifically under the condition that the owners cannot get financial returns from the business.

Why isn’t Shared Value endemic?

Shared Value is undoubtedly a business strategy, and apparently a way for commercial entities to be more successful. And corporates invest hugely in their strategy development, so why isn’t Shared Value already everywhere?

A number of people at the meeting and at the Summit observed that there are examples of Shared Value in the great Quaker firms of the late 19th century. In the UK, some of the Quaker led businesses such as Cadbury and Rowntree provided more worker benefits than most employers of their day. Cadbury built the village of Bournville for its workers complete with schools, leisure facilities and parks. It also knew a healthy workforce was a productive workforce, and employed doctors and dentists at a time when there was still child labour in Britain.

…it’s unusual for the people who understand and “own” the social issues in corporations to actively engage with … the “strategy team”.

But there are barriers to implementing a Shared Value strategy. In the first place Shared Value initiatives can take longer to pay-back than alternative investments (the overall expected benefit might be greater, but it takes longer before it is realised).

Peter Brabeck-Letmathe, Chairman of Nestle, observed that publicly-owned businesses that report to the share market are driven by three-month reporting cycles and have to demonstrate continual growth. Also the average stay of a CEO is three years. It’s no wonder that short-termism prevails. Interestingly, Nestle is privately owned, and so it can circumvent this challenge. Solving this will likely require educating the market to take a longer-term perspective on Shared Value initiatives, and may well remain a significant obstacle.

Secondly, the risks in Shared Value are frequently poorly understood, and a risk-averse board may overestimate downside, or discount the likelihood of success. Because there are elements outside of management control e.g. changing the behaviour of suppliers, it can feel much more risky. Engaging with experts – the people who understand what the dynamics of the system or issue are might help to address this concern. Experts may potentially be from non-profits who work in that area.

Non-profits can also spot opportunities to support corporations to improve their competitiveness. For example, NGO Technoserve works to improve the lives of poor small-holder farmers in the developing world through partnering with corporations. Technoserve helps to build competitive agricultural clusters recognising that increasing farmers’ yields will only create lasting benefit if there are buyers for their crops, other enterprises to process the crops, and an efficient logistical infrastructure locally. Actively engaging corporations is essential in achieving this.[iii]

It was also suggested that an important role of philanthropy (and indeed government) is “proof of concept”, and acting as an incubator for potentially profitable ideas. Grand Challenges Canada was proposed by its CEO Peter Singer at the Summit as just such an incubator for Shared Value opportunities in the area of global health.

Thirdly, it’s unusual for the people who understand and “own” the social issues in corporations to actively engage with (or even “speak the same language” as) the “strategy team”. Social challenges tend to sit in CSR: practitioners may not even be trained and skilled in the financial analysis that is used to assess the potential for a project to create shareholder value. A number of practitioners observed that if the CEO and senior executive were not “on board”, the thinking would be unlikely to gain traction. The key reason being that the office of the CEO is frequently the only point in the organisation where social issues (other than immediate risks to operating profit) and business performance come together.  And if the executive are not on board they are able to block the operationalisation of the strategy.

Finally, there is the vexed question of measuring and reporting social outcomes, which was raised repeatedly both during the practitioner work and at the Summit. Organisations working in the social arena continually face the challenge of monitoring performance against objectives that are less transparent and observable than financial performance. If corporates are to achieve both financial and social changes, they will need to incorporate some of our best learning in this area into their reporting. It is clear that more dialogue is required between for-profits and social sector organisations, so that clear goals can be set and effectively tracked.

How do I create Shared Value?

Despite the challenges, we are very sure that this thinking has immense potential to inform and energise Australian corporate strategy.

However, it is not entirely clear what process of corporate strategy development is most likely to lead to the identification of opportunities to create Shared Value. Should you start with business challenges and look for ways that addressing social issues might alleviate them? Or should you start by looking at social challenges and investigate ways that the corporation might profitably address them?

The answer is probably “a bit of both”: indeed the existing case studies fall into both camps. Certainly it will be important to iterate between the two: and in order for this to happen social experts and business experts will have to talk not just about philanthropy but about corporate strategy.

All companies can create Shared Value.

Consultants who genuinely understand shareholder imperatives and who have wide visibility of social and environmental issues and an understanding of what works to address them have a vital role to play.

SVA Consulting contains exactly such people: people who can see business opportunities in social challenges and who can see social solutions to business challenges.

Critically, the work to uncover Shared Value must be built into the development of corporate strategy, not be seen as an interesting and attractive adjunct to it. Based on our work to date in Australia, and with our colleagues at FSG and others from around the world, we believe that corporates will need to use experts and innovative problem-solving approaches.

The strongest proponents of Shared Value, including Porter and possibly even Bill Clinton (who supports the Shared Value Initiative through the Clinton Global Initiative and who sent a message of support to the Summit) can see the potential to change the role of the corporation to one of actually solving social problems.

We will continue to work with our colleagues at FSG and other members of the Shared Value professional network to develop thinking, practice and evidence. Porter made one final challenging assertion: “All companies can create Shared Value”. If this is true, it will require all for-profit businesses to completely rethink their approach to strategy.

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[i] SVA Consulting’s Executive Director, Duncan Peppercorn and Partner, Olivia Hilton attended a three day meeting working with FSG – the consultancy headed by Mark Kramer, Porter’s collaborator in the development of the Shared Value concept. They joined practitioners in Shared Value consulting from around the world to develop understanding of exactly what Shared Value is (and isn’t), and how to find and create it. They also attended the Global Shared Value Leadership Summit on 23 May.

[ii] This example, and most of the others, are investigated in more detail in Porter and Kramer’s articles.

[iii] Creating Shared Value, Harvard Business Review, Michael Porter & Mark Kramer

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