We are looking at finding an answer to the question whether the responsibility to create new economic activity through entrepreneurship and SMMEs should be left solely to potential and upcoming entrepreneurs, or whether existing companies and corporates also have a role to play in solving this challenge? This series of articles is based on an article published by Michael Porter and Mark Kramer in the Harvard Business Review (January–Febuary 2011) under the title: Creating shared value – how to reinvent capitalism and unleash a wave of innovation and growth.
When analysing the current situation, it becomes clear that the solution does not lie in incremental changes in the operational activities of big businesses, but a fundamental change in the way companies think about their role in society. This requires a change in the way managers think about business.
The current ‘alienation’ between societies and companies is the result of a too narrow view of capitalism where a business’s contribution to society is seen purely as making a profit and, in the process, supporting society by the provision of employment, wages, products and services, and paying taxes. This approach holds that business as usual brings sufficient social benefit and there the involvement stops. Solving social problems has been ceded to governments and NGOs. Corporate social responsibility largely became a reactive response to external pressures coming from government policies and social pressure groups. Meanwhile, government policies often regulated corporate social involvement in a way that made shared value more difficult to achieve. This resulted in communities having the perception that they benefitted little from the profits made by companies operating in their environments. They tend to perceive company profit to come at their expense and not to their benefit.
This was not always the case. In the past, the best companies took on a broad range of roles in meeting the needs of workers and communities. But as companies became over-focused on profitability and competition, and as competition became more fierce, the vertically integrated firm withdrew, forcing greater reliance to be placed on outside vendors (NGOs and governments) to address social and community needs. The result was that many businesses lost touch with the communities in which they were located. In many cases this dislocation lead to companies not having a clear ‘home base’ but rather seeing themselves as ‘global’ companies.
Modern strategic thinking and theory holds that successful companies must create distinctive value propositions that serve the needs (and mostly the wants) of a chosen set of customers and maximising shareholder dividends. However, companies have overlooked opportunities to meet fundamental societal needs and do not understand how societal harms and weaknesses affect their value chains. In understanding the business environment, managers and strategists have focused most of their attention on the industry in which the firm competes. The forgotten reality, however, is that the competitiveness of a company is closely linked to the health of the community around it. Businesses need ‘healthy’ communities and communities need ‘successful’ businesses – not only in terms of the profits they generate for shareholders, but also in terms of the actual value they add to the communities they are involved in.
The concept of shared value, in contrast, recognises that societal needs and not just traditional ‘economic’ needs define markets. It also recognises that social harms and weaknesses frequently create indirect internal costs for companies and that companies cannot keep escaping this reality by simply relocating to other areas. Addressing societal challenges and constraints should therefore not necessarily be seen as contributing to raising costs. Instead, if invested wisely, it can bring increased productivity and expanded markets that can lead to increased profits.
What is shared value?
Porter and Kramer define shared value as policies and practices that enhance the competitiveness and profitability of a company, while at the same time advancing the economic and social conditions in the communities in which it operates. It creates and expands the connection between societal and economic progress. Unfortunately businesses rarely see societal spending from a value perspective, but rather as a peripheral issue. Also social organisations (NGOs) and government entities often see success as solely in terms of benefits achieved and money spent.
Shared value is not about redistribution of profits (hand-outs) – it is about expanding the total pool of economic and social value. This leads to a bigger pie of resources and revenue (and profit) that benefits all players in the value chain. This principle is clearly demonstrated by research done into so-called fair trade practices where poor farmers are ‘helped’ by being paid more for their products (a form of hand-out which does not really make business sense).The income of such farmers typically increased between 10% and 20% as a result of this intervention. However, where a shared value approach was followed and the focus was put on improving farming practices and techniques to improve quality, and strengthening local clusters in order to improve collective efficiency, the income of such farmers can rise by up to 300%. Companies can thus create new economic value by investing in the creation of societal value.
The connection between competitive advantage and shared value
There are numerous ways in which addressing societal concerns can yield benefits to companies. Consider for example what happens when a firm invests in a wellness programme. Society benefits because employees and their families become healthier in general. The company also benefits in terms of decreasing employee absenteeism and loss of productivity. There are many areas where this kind of symbiosis can be created, e.g. energy and water quality and saving, environmental safety and health, social education, skills development, etc. Many business opportunities may arise from serving and developing disadvantaged communities and developing countries. The societal benefits of providing appropriate products and services to lower-income and disadvantaged consumers can be immense. Brazil, for instance, offers firms the prospect of reaching millions of new customers at the bottom of the pyramid.
Where societal responsibility is concerned, companies will have to make a mind shift from compliance (reactive) to value sharing (proactive). The benefits to societies and business culminating from this can play a significant role in restoring companies as important role players in their societies.
In the next article we will take a look at some specific initiatives that can be taken to move towards the creation of shared value.
De Wet Schoeman heads up the Centre for Applied Entrepreneurship.