For decades, there has been a prominent wall between resolving societal issues and achieving business goals. Mainly due to the fact that economists legitimized the idea that providing societal benefits leads to decreased amounts of profit, thus tempering a company’s economic success. Since the early 2000’s Porter and Kramer have been researching a concept with which this invisible wall can be finally torn down. In the following article, we will take a closer look at Porter and Kramer’s shared value creation concept, which was first introduced in the Harvard Business Review in 2006.
According to the neoclassical way of thinking, the resolving of societal issues imposes constraints on a corporation, which leads to decreasing profit margins. For a long time, philanthropy was looked down on, and corporate responsibility was only a mere reaction to external pressure. Corporate social responsibility programmes were created in order to improve firms’ reputation and were treated as necessary expenses – anything more was seen as irresponsible use of shareholders’ money.
In contrast, the shared value concept realized that besides conventional economic needs, societal needs also can define markets – and can create internal costs for firms if not treated right. Porter and Kramer (2011) have pointed out that resolving societal issues doesn’t necessarily mean raising costs and hindering development – quite the opposite, firms can innovate through using new technologies, management approaches and operating methods, thus increasing their productivity and efficiency, while also expanding their market. Shared value doesn’t mean that firms and societies would “share” the value that has already been created, but rather expanding the total pool of social and economic value.
To understand the shared value concept more, let’s take a look at the fair trade system and compare it to a company helping local farmers to improve their growing technology. Fair trade only means that a company pays a higher amount of money to their suppliers, who therefore will have slightly more money to operate – this simply is redistribution. On the other hand, if the company helps local farmers with education or with broadening their growing capacities through investments, the farmers can achieve a much higher increase in their incomes. Studies conducted on cocoa farmers in the Côte d’Ivoire shown, that fair trade can increase their incomes by 10% to 20%, while shared value investments can raise their incomes by more than 300%. In this example, fair trade resourcing is part of the conventional CSR concept, while educating farmers and investing in their growing capacities is part of the more elevated shared value concept.
According to the study, there are three key ways that companies can create shared value opportunities:
- By reconceiving products and markets – in advanced economies, the demand for products and services which meet certain societal needs is rapidly growing. Food companies are focusing on better nutrition rather than taste and quantity and tech companies are trying to harness digital intelligence in order to economize on power usage. When looking at opportunities from a different perspective, whole new avenues can open up for innovation.
- By redefining productivity in the value chain – a company’s value chain affects numerous societal issues, such as natural resource and water use, health and safety, working conditions and equal treatment in the workplace. Not only the value chain affects these issues, but it is also being affected by them. Solving issues revolving around energy-, water- and resource use, logistics, procurement, distribution or employee productivity can dramatically change a firm’s efficiency, thus creating shared value for the company and for its stakeholders.
- By enabling local cluster development – The success of every company is affected by the supporting companies and infrastructure around it. Innovation and productivity are heavily influenced by clusters, or geographic concentrations of firms. A key aspect of cluster building is the formation of transparent markets – In inefficient or monopolized markets where workers are exploited, where suppliers do not receive fair prices, and where price transparency is lacking, productivity suffers. The most successful cluster development programs are ones that involve collaboration within the private sector, as well as trade associations, government agencies, and NGOs.
Porter and Kramer have managed to propose a new way of strategic philanthropy, through which companies can create value not only for society, but for themselves as well. With their new approach to corporate social responsibility, they have torn down the wall which stood between neoclassical economics and corporate philanthropy.
(Porter, M.E. and Kramer, M.R., (2011), Creating shared value (CSV). Journal of Direct, Data and Digital Marketing Practice, 12(4), p.380.)