Shared Value: Evolution in Capitalism
In An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith in 1776 wrote that the pursuit of self-interest would in itself result in social good. In his words:
“Every individual necessarily labours to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it ... He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”
The evolution of capitalism, the single most powerful tool to create economic wealth, has since taken a more conscious approach by those who have stood on Smith’s very shoulders. Businesses are starting to realise that growing the balance sheet by solving social problems can enrich both the bottom line and the global community. In the shared value model, externalities are no longer considered unintended consequences of pursuing self-interest, but internal costs to the corporation. Greater carbon footprint means higher energy and transportation cost; factory pollution endangers the health of global communities where employers and customers live, affecting productivity and brand image; and there is business opportunity to be found in alleviating poverty. The more conscious among entrepreneurs are aware that social costs are business costs and doing good is not merely a feel-good-thing, but a smart and sustainable corporate strategy to grow revenue.
The need for a more evolved version of capitalism was accelerated by the US economic crisis in 2008, the subsequent Wall Street bailouts, the painfully prolonged recovery, and the widening gap between the rich and poor in emerging economies like India, which led to an erosion of public trust. More people have begun to question the capitalistic model’s ability to create socially responsible and inclusive growth.
But has the time come to reinvent capitalism itself?
Michael E Porter of Harvard University and Mark R Kramer, co-founders of Boston-headquartered FSG and creators of the term shared value, believe that capitalism has reached a point where it cannot evolve meaningfully without solving broader, social problems.
At FSG’s Shared Value Leadership Summit for 2012 in Boston, Porter and Kramer explored how capitalism can be used to address social issues.
Under this approach, businesses must evolve from a drop-in-the-bucket philanthropy model (donation, volunteering), to the limited impact Corporate Social Responsibility model (CSR, compliance with community standards and good corporate citizenship) to the third level, which is creating shared value (CSV): That is, creating deeper economic value by creating widespread societal value.
As an example, Porter pointed to the pharmaceutical industry, which he said is starting to realise that it missed the unmet needs of several billion low- and-middle-income customers in countries with lesser welfare systems than the West. Now, businesses that are building shared value are learning to redefine their customer.
“We know how to innovate for customers in rich countries. The real opportunity is to serve those other customers. This is going to be your biggest business opportunity,” Porter told the 85 summit participants, mostly senior corporate executives, adding that by doing so, businesses will regain a sense of purpose.
Porter pointed out that the process of creating shared value fundamentally changes the way a business defines itself. For example, Nestle no longer thinks of itself as a food company but as a company that delivers nutrition. Healthcare equipment company Thermo Fisher Scientific, where Porter serves on the board, thinks of itself as a company that enables customers to create a healthier, safer and cleaner planet.
But the process of creating shared value is at a nascent stage.
Kramer acknowledged that there is an ingrained scepticism—that if you’re doing something good for the world, you can’t make money off it. But the rise of social entrepreneurship, he said, is starting to change this mindset.
Implementing Shared Value in India
Indian corporations have a long history of doing good through CSR initiatives. But under the shared value approach, the potential to create inclusive economic growth is far greater when companies begin to find business opportunities in social problems.
Lalitha Vaidyanathan, a managing director at FSG, is currently spearheading the organisation’s initiative in setting up an office in India, where her clients include the Godrej Group, the Shakti Sustainable Energy Foundation, UN Women, The World Bank, and Eli Lilly. At FSG’s Shared Value Leadership Summit in Boston, Vaidyanathan said the two biggest constraints to business growth in India—shortage of skilled workers and poor infrastructure—offer companies immense business opportunities. Of the 350 million skilled jobs expected to be created by 2020, only two to four percent will involve vocational training.
In a case study of Godrej, Vaidyanathan said the group’s most pressing constraint was a shortage of skilled, external appliance service contractors. Indian customers expect service contracts with their purchases and qualified service people are a prerequisite for the company to grow future sales.
FSG enabled Godrej to develop a strategy for creating shared value—solving the group’s skills availability problem while providing employment to youth in rural and urban areas. By 2020, Godrej is set to train one million youth in vocational areas that align with the corporation’s business needs. The group is also poised to create greener products and thereby a greener environment.
Vaidyanathan’s advice to companies in India seeking to create shared value:
- Look for cluster opportunities.
- Leverage social value investments with government and NGOs.
- Use innovation to fundamentally reinvent your approach—incremental changes won’t create the necessary impact.
Abbott Laboratories has created a shared value model in India that is enabling the company to reach deeper into remote urban and rural areas while also creating employment opportunities for people from these regions.
Katherine (Kat) Woerner, manager, Global Citizenship and Policy at Abbott, said the company has trained and recruited salespeople from far-flung regions who then go back to their communities and spread awareness about Abbott’s products in the local language. The company has also provided employees with the resources to train doctors and nurses in their communities.
At the Moga Milk District in north India, Nestle has invested in farmer education to improve productivity and has set up water resources and a clinic to treat tuberculosis, thereby improving the health of farmers in the area.
But other companies have also created shared value without calling it that.
- Fabindia is growing its revenues while promoting the craft of artisans in rural areas.
- T.T.K. Healthcare sells the indigenously developed Chitra T.T.K. mechanical heart valve to low-income patients with rheumatic heart disease, who cannot afford the more expensive valves sold in the market.
- Narayana Hrudayalaya performs open-heart surgeries for less than $2,000 per operation compared to between $20,000 and $100,000 in the West and has shown comparable success rates. Aravind Eye Care and Sankara Nethrayalaya also provide low-cost medical care by leveraging economies of scale through bulk purchases of implantable lenses.
- Tata Motors’ Nano priced at $2,000 is currently the cheapest car in the market for entry-level customers. The company’s founder Jamsetji Tata was a visionary in creating Jamshedpur, a township in a remote area that today attracts some of the best talent in the country. Jamshedpur was among six cities in the world chosen to be a part of the United Nations Global Compact Cities Pilot programme. The other five were Melbourne (Australia), Porto Alegre (Brazil), Tianjin (China), Nairobi (Kenya) and Chicago (US).
Measuring Shared Value Creation
If more businesses are to accept a shared value approach, an accurate measurement of shared value creation is required. Investors need to see quantitative benefits that link shared value creation to bottom line growth. Metrics would have to show social returns from investments and business returns from solving social problems.
At the Shared Value Leadership Summit in Boston, Michael Porter said companies that practice shared value creation should show investors economic benefits from recycling, saving energy, or serving emerging markets.
“Show them by how much,” Porter said.
FSG offered some case studies in measuring shared value.
- By reconceiving products and markets, Intel increased its market share and improved student learning in emerging markets.
- By redefining productivity in the value chain, the InterContinental Hotels Group reduced operating costs through minimising the environmental footprint.
- By enabling clusters through investing in rural development, Nestle improved its supply of raw materials.
For companies seeking to measure shared value, FSG offers a list of diagnostic questions:
- Does your company have an explicit shared value strategy?
- Has your company defined intended business and social results of your shared value investments?
- Is shared value measurement clearly distinct from compliance, sustainability, impact assessment, and reputation measurement?
- Is your company collecting information on the inputs into these efforts, especially around your investment levels?
- Does your measurement approach prioritise specific results (rather than trying to measure every possible outcome) whenever possible?
- Is your company increasing value creation based on insights gathered on social and business issues?
- Companies committed to advancing shared value as a public good are launching the Shared Value Initiative (SVI).
“At this time, conversations are ongoing with a number of leading Indian companies to play a role in the SVI, although none are fully confirmed participants at this point,” says Justin J Bakule, Director at FSG.
Bakule says the goals of the SVI are to increase the rate of adoption of shared value strategies by companies globally and to increase the effectiveness of practice among companies currently pursuing shared value strategies.
Shared Value at a Glance Definition: Shared value is a management principle where businesses grow their balance sheet through solving social problems.
Origin: The term Creating Shared Value (CSV) was presented by Michael E Porter of Harvard University and Mark R Kramer, Senior Fellow at the Harvard Kennedy School of Government, in a Harvard Business Review article in 2006. A follow-on article in 2011 won the McKinsey award of the year.
Scope: Grow market share by developing products and services for under-served geographies and low-and-middle-income consumers. Example: Affordable housing and healthcare in emerging markets.
Implementation: (i) By innovating and developing products and services that address unmet social needs (ii) By reconfiguring value chains, redefining productivity (iii) Creating a shared value ecosystem by enabling the development of clusters.
Measurement: Link metrics between business and societal progress. Invest in social causes that best grow the balancesheet.