Michael Porter has been speaking of "shared value" for a few years now. Shared value refers to the idea of creating economic value in a way that also creates value for society. This is a subject that is at the center of much of my work, albeit largely indirectly. This is an important topic that is unfolding and will reshape how businesses operate, how communities accelerate change, and how this benefits us all.
During a January 2011 Harvard Business Review (HBR) interview, Porter explains how shared value is the next evolution of capitalism. He makes a compelling argument for why businesses can no longer succeed by being profitable at the expense of society. Porter also points out that businesses are beginning to understand how they are mutually dependent on the communities in which they operate, and on the well being of their customers.
Porter believes that the pressures on businesses to be profitable should be for the benefit - not at the expense - of their local communities and society at large. Simply obeying the law is no longer sufficient. As brands try to better understand and then address the impacts associated with their products, they may need to reconfigure value chains (i.e. where their operations are located and what relationship they have with - and the impacts they have on - those communities) and redesign products that offer new value to customers. Evidence suggests that companies can improve profits, enhance their brand, and enter new markets by doing so (e.g. Nestlé creating a successful product line of nutrient-reinforced spices in malnourished communities in India or Vodafone expanding mobile banking to rural areas of Africa).
Porter does caution businesses not to simply go out and do good things. He believes that a company should not be doing good or developing a new philanthropic agenda as a trade-off for their impacts. Instead, they should embed shared value into their business strategies and decisions. Doing good things and looking at the impacts of decision making must be an integral way of doing business rather than an afterthought. Businesses that identify and seize existing opportunities to create economic profit by creating products and services that provide social, community and environmental benefits will succeed.
A recent HBR article expands on shared value by outlining Porter's common-sense steps that businesses should take to embed a strategic social mission into the corporate culture and to direct resources and intellectual capacity toward innovations that positively impact social problems. Porter contends that five elements must be present:
- Social purpose - Companies must focus on a social mission that is relevant to the business and then embed it into the business strategy. Shared value only works when businesses obtain value in return for their investments over some period of time. A strong connection with core business is essential.
- Defined need - Companies should go deeper in their analysis of conditions necessary for profitable business (e.g. local workforce, logistics) to include underlying social problems that could enhance the business if properly addressed. Solutions to such issues often require a partnership with multiple stakeholders (e.g. local NGOs, government, industry associations). Businesses will find it helpful to develop a better understanding of their stakeholders' capabilities and offerings.
- Measurement - Efforts are underway to create industry-based standards to measure and evaluate environmental impacts. Whether these potential standards include "value creation" remains to be seen. Companies would be wise to identify and track key performance indicators for their value creation initiatives. Linking these metrics to business profits, savings and indirect financial benefits (e.g. brand enhancement, recruitment or retention of talent) will be important. The company should also measure the benefits to other stakeholders (e.g. profitability of suppliers, skills, business acumen, self-esteem).
- The correct innovation structure - Porter proposes options for developing a framework for implementing shared value initiatives. Integrating values that align with a company's legacy or mission (e.g. nutrition for a food company) will leverage supporting talent and understanding of issues. Shielding the new social ventures from strict business requirements (e.g. profitability timeline) will allow for the additional time needed to start them up. Partnering with external funders (e.g. governments, foundations) will help to pilot an initiative until it is profitable and can be integrated into the business. Companies should also partner with external entrepreneurs to fill gaps in expertise when needed.
- Co-creation - Social problems are complex, including many subtle influences and underlying conditions. Companies should leverage the insights and capabilities of various stakeholders. Gaining the perspective and support of a wide range of stakeholders can provide a company with a better overall understanding of - and the capability to address - the issues and conditions that must be considered as solutions are designed and implemented. Community leaders or NGOs that are well respected by local communities can enhance a brand's image, while local businesses may be able to provide needed services.