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Healthy businesses are intrinsically linked to healthy communities

Michael Porter, the recognized founder of the modern strategy field explains the importance of creating shared value

Published: Aug 10, 2016 06:09:40 AM IST
Updated: Aug 9, 2016 10:17:15 AM IST
Healthy businesses are intrinsically linked to healthy communities
Image: Siphiwe Sibeko / Reuters
Discovery, a provider of health plans for companies, was one of the first companies to embrace the field of Behavioural Economics, which ‘nudges’ people towards healthier behaviour.

The role of business in society has evolved over time, from a philanthropic approach, to corporate-social responsibility, to a model that you pioneered: Creating Shared Value. Please define it for us.
Creating Shared Value (CSV) is about the ability of a business to meet not just customer needs, but also fundamental human and societal needs through its business model. The traditional approach has been to run your business and think about its social impact as a separate set of considerations.  As you indicate, this began with a focus on philanthropy, and it evolved to employee volunteering and other initiatives that fall under the label of ‘corporate social responsibility’. The idea was to be a good corporate citizen by avoiding harm, being transparent and operating sustainably.

There is no question that all of these things remain important; but ultimately, the most powerful way in which any business can affect societal issues is through the business itself—through products and services that are designed to create both economic and social value.  In a sense, none of this is new: businesses have always attempted to meet societal needs—from creating jobs, to building housing, to producing food; but ultimately, this newer sensibility says that we should think about the very role of business as ‘meeting societal needs, at a profit’.  This is the underpinning of what capitalism is all about, but somehow it got lost along the way; the concept of CSV has opened up this line of thinking again, creating a whole new set of opportunities for companies in terms of strategy and product offerings.  

A shared-value initiative typically involves innovation on three levels. Please describe them.
If you think about how a particular company can address societal needs, there are three levels on which it can do that.  The first involves the product or service itself, and who it is sold to.  If a product is nutritious, for example, it can improve peoples’ health; while another product might improve environmental impact by minimizing the use of water or containing no ingredients that harm the environment.  Next, who is the product being sold to?  In just about every industry right now, there are vast unmet needs involving low-income customers in developing countries. Nobody has paid attention to these customers until recently, but the fact is, they have the same needs as the rest of us—and they represent profound opportunities for businesses to create shared value.  

Financial services is a great example. The biggest global market that currently exists in financial services is for low-income people in developing countries.  Higher-income people already have financial-services firms pounding on their doors, but low-income people—who really need simple things like a chequing account—are an underserved market.  Shared-value thinking has opened up the ability to see and embrace some of these markets.

The second level at which companies can innovate is through their value chain.  All businesses use resources—water and other natural resources, packaging of various types, etc.—and they can approach these things in a different way. Once you embrace shared value, you begin to see that you could purchase from suppliers in a way that benefits the supplier and the community—as well as your company.
Companies could also think about the way in which they hire and train employees—and do so in a way that benefits the community in which they operate. There is a fascinating thing going on in America right now, where a number of large companies are voluntarily raising the minimum wage.  Previously, they thought they were being clever by keeping  entry-level wages really low; but over time, they realized that—particularly with customer-facing employees—retention was very low, and these workers were not committed or loyal.  These companies are starting to embrace a shared-value way of thinking about dealing with front-line employees, by not only paying them more, but providing then with training, so they can develop new capabilities.  

The third level for shared-value innovation is the business environment itself. In many cases, when there are problems in a community—poor education, weak logistical systems or an absence of suppliers—those deficits also affect the businesses within it, because they affect efficiency and the ability to innovate. Shared value thinking opens up this third area, so that firms can take a proactive role in enhancing the business environment in the communities in which they operate.

Healthy businesses are intrinsically linked to healthy communities
Image: Courtesy: Rotman
Michael Porter is the Bishop William Lawrence University Professor at the Institute for Strategy and Competitiveness at Harvard Business School

CSV is actually something that business leaders are clamouring for, because they are tired of being attacked for being the ‘bad guys’.  Many of them want to have a clear purpose and a rationale for why they exist and how the community benefits from them. This time around, it’s not about charity or social responsibility—it’s about doing things that will enhance your firm’s operations over the long run.  There is a movement underway to collect examples and document the shared value opportunities that exist across sectors, and to think about how each sector could embed this approach into its models. Shared value has also turned out to be a driver of innovation.  

We’re excited about this momentum, and hopeful that, over time, we will see a change in the reputation of business in society. The hope is that we will progress to a place where it matters just as much—if not more—for business to ‘do good’ in society as it does for NGOs or other traditional actors.

What are some of your favourite shared-value examples?
In the developed world, Nestlé has been a pioneer in creating shared value.  Ironically, it emerged because it was one of the first companies to operate in the developing world: its people saw, first-hand, all of the unaddressed needs that existed, for nutrition and other products and services.  It literally transformed its food business, to the point that it understood that it is not really in the food business: it is in the nutrition business—the business of ‘providing healthy sustenance that enables people to live a healthier life’.  Out of that reformulation of its business came some obvious things, like ingredient changes—which many food companies are now pursuing;  Nestlé really kick-started the ‘food as medicine’ industry.    

A great example from the developed world is Discovery Health, which is now just called Discovery.  It now operates around the world, but it started out in South Africa, providing health plans for companies.  Its leaders had a very basic but powerful idea: that the best way to run a successful health plan—with very few claims coming in—is to keep your subscribers healthy. They were one of the first companies to embrace the field of Behavioural Economics, which ‘nudges’ people towards healthier behaviour. Their Vitality wellness program provides  incentives for people to be active, and to engage in a better diet.  

In short, they have been enormously successful in the health insurance business because their subscribers are healthier and happier—and they have now taken this idea and applied it to life insurance and a variety of other product areas.  With their life insurance, for example, your premium goes up or down depending on your engagement in the Vitality program.  Those who are active and healthy don’t need to worry, because their premiums will go down.  The idea is to tie the fundamental benefit to the consumer to the business model of your product or service.  

Can investors create shared value?
This is a topic that Mark Kramer and I are working on right now, and the answer is Yes: investors can create shared value by deploying capital in businesses that are meeting societal needs and have the potential to grow and earn good returns. 

Much of what investors do these days is more about trading; but ultimately, the real value of an investor is to place capital in a business that creates jobs and earns returns, and then monitor that business over time. The value of investing only goes up from there, when investors start to understand the concept of shared value and look for companies that can create it by developing a business model that addresses a societal need.  

What is emerging from all of this is ‘shared-value investing’, which  asks investors to understand that some of the most prominent companies in the future will be those who embrace shared value and tackle unmet needs. In our view, they will be the winners in the long run.  

The good news is, there has truly been a revolution in thinking in the investment community in this area.  The old-school, Milton Friedman idea was that the ‘social responsibility’ of business was to maximize profits.  Full stop.  As a result, many investors were initially skeptical about anything social, feeling that if a business was focused on a societal issue, that was not consistent with its fiduciary responsibility. But over time, investors have started to look for ways to engage in a more positive way in society.  The first phase of that was called ‘ethical investing’, whereby an investor would refuse to invest in a company that was doing ‘bad’ things—like tobacco or gun companies.  Then we moved to ‘socially-responsible investing’, which meant investing based on a company’s efforts to address environmental issues, via their score on indexes like the Dow Jones Sustainability Index.  This was really more about CSR: was a company being a good corporate citizen or not? Again, that is great, but ultimately, there is no evidence that there was any real value creation going on there.  

Today, we are starting to see a recognition that, if investors really want to drive social change and make the world a better place, they need to find companies that are creating shared value by  addressing an important societal issue with their business model.  The most extreme form of this is called ‘impact investing’, where you invest in companies that have a social mission at their core; but that tends to be a relatively small niche.  A broader view of shared value entails looking for companies from any sector that are competing with strategies and approaches that create shared value.  
The investment community is very cautious, and slow to change the way it thinks about evaluating companies and opportunities; but I predict that we are going to see much more of this over time.

Your colleague Mark Kramer has said that “business cannot succeed in a failing society.”  What are the implications for business leaders, going forward?
Mark and I agree very strongly that you can’t have a fundamentally healthy business without a healthy community, where the citizens are doing well and there is opportunity for growth.  Sure, you might be able to do well for a while—but ultimately, you will lose your legitimacy in the community if you are doing well while the community is doing poorly; and furthermore, you can’t continue to grow if a community is collapsing around you.  

It is equally true that you can’t have a happy community without having healthy businesses within it.  Business is the source of all uninherited wealth—apart from the natural resources sitting in the ground.  When a company can meet a need and net a profit, it can hire people, purchase goods and services, pay decent wages and grow.  Shared value is fundamentally about aligning the success of your company with the success of your community—through the recognition that you have a responsibility—and an economic opportunity—to improve the business environment and the fundamental health of the supporting community structure.

When you put all of these pieces together, it leads to an awareness that the greatest societal problems are usually also the biggest economic opportunities. We’re starting to get businesses engaged in society and in communities in a much more powerful way.  Again, I am not against philanthropy, volunteering or CSR—these are all wonderful and important things that we must continue to do; but ultimately, they are not going to move the needle.  The way to move the needle is to create shared value, because when you do that, you can scale. If you can serve ten customers with a shared value strategy, you can serve a million customers with it.  The traditional model that governments and NGOs depend on is, in a sense, subsidy: it involves donations and taxes, but fundamentally, there is just not enough money available to solve problems that way.  

Hopefully, we will look back at this as a very powerful and important period for business.  My colleagues and I have been very concerned about the growing disconnect between business and the ordinary citizen, and the increasing lack of support for business in many communities and countries.  The fact is, if completely lose support for business, we are in big trouble, because, as indicated, all wealth comes from it. You simply can’t have a healthy country without healthy businesses.  

The stakes are very high, but we are excited about what lies ahead. The new generation of business school students is acutely aware of the world’s problems, and they’re very anxious to be part of the solutions.  The next big frontier, I believe, is to get the investment community more deeply engaged in this way of thinking.

Three ways to create shared value

1. By reconceiving products and markets. This entails defining markets in terms of unmet needs or social ills and developing profitable products or services that remedy these conditions.
Example: Becton Dickinson developed a new type of safety syringe to reduce healthcare worker needle-stick injuries. This product innovation grew to $2 billion, approximately a quarter of the company’s revenue.
2. By redefining productivity in the value chain. This entails increasing the productivity of the company or its suppliers by addressing the social and environmental constraints in its value chain.
Example: By reducing packaging and improving delivery logistics, Walmart saved $200M in distribution costs while growing the quantities being shipped. Learn more about Walmart's shared value commitments

3. Through local cluster development. This entails strengthening the competitive context in key regions where the company operates in ways that contribute to the company’s growth and productivity.
Example: Cisco reduced a key constraint to growing its addressable server market by launching the Networking Academy to train over four million network administrators globally. Read the case example on Cisco's Networking Academy

- Michael Porter is the Bishop William Lawrence University Professor at the Institute for Strategy and Competitiveness at Harvard Business School. A leading authority on competitive strategy and the economic development of nations and regions, he is the author of 19 books and chairs Harvard Business School's program for newly appointed CEOs of large corporations.

[This article has been reprinted, with permission, from Rotman Management, the magazine of the University of Toronto's Rotman School of Management]

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