Part 3 – Michael Porter and Shared Value Concept

“The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.”

michael-porterMichael E. Porter is a leading authority on competitive strategy, the competitiveness and economic development of nations, states, and regions, and the application of competitive principles to social problems such as health care, the environment, and corporate responsibility; Generally recognized as the father of the modern strategy field, as has been identified in a variety of rankings and surveys as the world’s most influential thinker on management and competitiveness.He is the Bishop William Lawrence University Professor, based at Harvard Business School. His last visionary concept is about Creating Shared Value (developed together with Mark Kramer).

The capitalist system 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.
Even worse, the more business has begun to embrace corporate responsibility, the more it has been blamed for society’s failures. The legitimacy of business has fallen to levels not seen in recent history. This diminished trust in business leads political leaders to set policies that undermine competitiveness and sap economic growth. Business is caught in a vicious circle.

A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades. They continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success. How else could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell? How else could companies think that simply shifting activities to locations with ever lower wages was a sustainable “solution” to competitive challenges? Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The presumed trade-offs between economic efficiency and social progress have been institutionalized in decades of policy choices.

What we need to do is change our mindset.

There is no longer a fixed pie of value that forces us to try to maximize the amount of that pie that we can take home (meaning our competitors and our customers receive less value). Now, the pie is no longer a fixed size and we’re not playing in a zero-sum game. It is actually our job to try to make the pie bigger by increasing the amount of value that we offer to the consumer, meaning that both we and the consumer take home more pie. The consumer will realize this and even help us increase our slice of the pie. Analogies aside, we make an effort to create both economic and social value.

What this boils down to is beginning to think with the mindset that creating social benefits for the community is a powerful way to create this economic value for our business. We create products that are actually good for the consumer and fulfill their human needs, which in turn increases our profit. Our old model of trying to create a competitive advantage by cutting costs and improving features is no longer sustainable. A sustainable competitive advantage comes from creating shared value with more and more communities, meeting their underlying needs. If you can accomplish this, the consumer will even be less price sensitive.

Shared value is the ultimate differentiator.

The solution “involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”

Some of the other highlights:

New skills required. Leaders and managers must develop skills and knowledge that give them a keen appreciation of societal needs, the ability to work across profit/nonprofit boundaries, and a deep understanding of how business productivity serves more than shareholders.
Government’s role re-conceived. Regulators must create policies, regulations and laws in ways that support shared value rather than work against it.
Broaden the role of capitalism. Companies have taken too narrow a definition of capitalism. We should be looking to business to help solve the world’s great problems, the authors argue.

Michael Porter’s checklist, to determine how your organization can create shared value:

  • Could our product design incorporate greater social benefits?
  • Are we serving all the communities that would benefit from our products?
  • Do our processes and logistical approaches maximize efficiencies in energy and water use?
  • Could our new plant be constructed in a way that achieves greater community impact?
  • How are gaps in our cluster holding back our efficiency and speed of innovation?
  • How could we enhance our community as a business location?
  • If sites are comparable economically, at which one will the local community benefit the most?