Under a weight of global environmental and social issues, and the increasingly recognised need to re-calibrate the global system of commerce to enable global prosperity and well-being into the future, there have been a series of ‘light bulb’ moments from members of the global business elite. I have found it fascinating to see a number of notable stalwarts of the traditional ‘maximise shareholder wealth’ mantra come to their senses. One of the leading business strategy theorists of modern times is Michael Porter, whose work has advanced the ideas of globalised organisations and competitive strategy. Now 63 years old, Porter has finally realised that the greedy pursuit of wealth at all costs is un-sustainable, un-necessary and un-reasonable. Instead corporations and organisations generally should be driving towards Shared Value. I’ll let Mr. Porter explain...
“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... The legitimacy of business has fallen to levels not seen in recent history.”
“A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation that has emerged over the past few decades.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 [shareholder wealth & executive bonuses] 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?”
In my opinion it represents common sense in the extreme, however in agreeing with this assessment, it is necessary to accept that profit, ROE and increasing quarterly dividends are not the pinnacle of one’s engagement with a corporation as a business owner, shareholder or executive. However, it is important to note that Shared Value, along with one discussed in an earlier blog post – Social Business – are not necessarily departures from capitalism. Instead, they represent a new way of conceptualising the role of business in society and how to maximise their effectiveness considering metrics beyond those narrow fields mentioned above.
“Capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth... Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. [However] the purpose of the corporation must be redefined as creating shared value, not just profit per se... Reshape capitalism and its relationship to society and legitimize business again.”
“The solution lies in the principle of shared value, which 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 centre.”
“Shared Value blurs the line between for-profit and non-profit organisations. New kinds of hybrid enterprises are rapidly appearing.”
I see Shared Value representing the framework for a paradigm shift in global commerce. And that the Social Business is a subset of this new, ground-breaking way of thinking. A social business can be but one of many connotations of business models being designed, whereby societal value is embedded in the core activities and very fabric of an organisation. See my previous article ‘Tourism and Sustainability’ for a discussion on how this can be achieved.
“The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. The concept recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firms—such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches. Value is defined as benefits relative to costs, not just benefits alone.”
“Companies can create economic value by creating societal value. There are three distinct ways to do this: by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations. Each of these is part of the virtuous circle of shared value; improving value in one area gives rise to opportunities in the others. The concept of shared value resets the boundaries of capitalism. By better connecting companies’ success with societal improvement, it opens up many ways to serve new needs, gain efficiency, create differentiation, and expand markets. The opportunities will also differ markedly across industries and companies—but every company has them.”
A recent review of Shared Value in the Economist had mixed thoughts. The major concern raised was the actual implementation of the theory stating that...
“What does this mean in practice? Mr. Porter focuses on three things. First, the need to create market “ecosystems”, especially when selling to the poorest in developing countries; this may require firms to make partnerships with NGOs and governments. Second, expanding their value chains to include such unconventional partners. And third, creating new industrial clusters.”
It is clear that there is much more work to be done on this relatively new field of inquiry. As with any radical new concept, bodies of work are required to piece together the finer details. Regardless, this and other similar recent shifts in the thinking of global leaders are a welcome sign of the changing times.
Further reading
Harvard Business Review – “The Big Idea: Creating Shared Value” http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/1
Economist - Schumpeter “Oh, Mr Porter” http://www.economist.com/node/18330445
