Creating Shared Value Michael E. Porter, Mark R. Kramer; Harvard Business Review Summary The article “Creating Shared Value“, written by Michael E. Porter and Mark R. Kramer and published in the “Harvard Business Review“ in January 2011 deals with the idea of innovating the purpose of a corporation and their relationship to the government and social environment in order to identify unknown customer needs and expand the total pool of economic and social value.
In the introduction the authors explain that the problem of the contemporary, narrowed capitalistic conception is the reduced trust that people have in business, which is seen as the reason for all kinds of environmental, societal and economic problems. In this neoclassical view, social responsibility is seen by businesses as a constraint in economic success which arises costs; conducting business as usual was seen as spending enough social benefit. Many companies tried to increase their profits by means of restructuring and personnel reductions; at the same time, communities only perceived little benefit.
But according to Kramer and Porter, the competitiveness of a company and the wealth of a community is closely interrelated. On the one hand, Firms need a strong social environment to have enough demand and to be able to benefit from public assets, on the other hand communities gain workplaces by having strong businesses. Firms set corporate responsibility programs only to improve their image and as cheap as possible, not because they regarded it as a productivity driver.
Further more, they define themselves as “global“ and often do not have a home base which the authors declare as “something profoundly important“ in strategy theory in order to create value. Companies neglected the interrelation between a distinctive value creation and societal needs and focused more on the industry. For this reason the government had to arise laws restricting the success and competitiveness of the companies, disregarding that nowadays firms in the global economy can easily move elsewhere.
Porter and Kramer criticize the business models of most of the companies which focus on short-term profit maximization in contrast to long-term optimization, partially because the market forces them to do that, and did not pay attention to the most important customer needs and broader influences. It seemed that society and economy for a long time worked against each other. In the same time they request the companies to take the initiative in bringing business and society back together by focusing more on societal issues.
This idea is not about charity but about understanding the markets and competition. The authors call this model the “principle of creating shared value“. Increasing the shared value in this context is a self-interested concept to set policies and practices advancing the competitiveness of a company by means of enhancing the connection between economic as well as social conditions in their home community with the final goal to increase the total economic as well as societal value.
A necessary condition for managers is to develop new skills and knowledge about social affairs, but the government also has to adapt in a way that gives companies the opportunity to act profitable under these circumstances. The authors go a step further and describe the three distinct ways every company has to create societal as well as economic value. They also interact in a way that improving in one of them means rising opportunities in the other. The first issue is reconceiving products and markets.
It means that companies have to find out current unmet societal needs their products embody and try to fulfill them because innovations are nowadays the best business opportunities both in advanced and developing economies. An important point is that demand in this case is not static but very dynamic so that those opportunities arise frequently. Firms can reposition themselves quite often in order to absorb the grown potential. Especially in disadvantaged communities the demand is so high that firms can profit substantially by selling a large quantity to low prices; but sometimes new or redesigned roducts made for developing communities can also have applications to traditional markets. As a second way to create shared value the authors mention redefining and reexaminating productivity in the value chain which is largely influenced by societal issues. Misuse in those issues and externalities are costly both to the environment and the business. Firms can use synergies between economic and societal issues to raise satisfaction and create shared value.
Previously, a change in environmental performance was avoided because it arose too many short-time expenses, but nowadays it is clear that it can even increase product quality and aviod costs. This new thinking is also enabled by renewals in technology and may unlock new, unexplored economic value. In a following step, Porter and Kramer mention parts of the value chain where changes can be made and were already observed, for example the reexamination of energy use or logistics, especially shipping routes. Besides, heightened environmental awareness ensures new methods of resource use and advantages all parts of the value chain.
In the procurement area the traditional thinking of commoditization and price competition by only purchasing from small businesses in low wages countries changes into accessing to inputs and taking part in product production to ensure product quality and customer satisfaction. New distribution methods are developed to create shared value and lower environmental costs, e. g. iTunes or Kindle. Instead of holding down wage levels and diminishing health costs, many companies have learned that increasing the satisfaction and the welfare of their workers have a more positive impact on their results then called savings.
Because of high transportation and energy costs, a firm’s location gains more and more in importance and now all steps of the value chain tend to be closer together. The third way to create shared value, after Kramer and Porter, is enabling the local cluster development. A cluster, a geographic concentration of businesses and institutions, is seen as a necessary condition to maintain productivity and competitiveness because no company can be self-contained. So business is dependent on their environment, e. g. consisting of nfrastructure and supporting companies, and has to work on it. A lack of framework conditions arise internal costs, such as costs of logistics or the possible pool of workers, and has to be identified and mended by the company. Another key condition is the formation of open and transparent markets. As mentioned before, the company’s success is closely interrelated to their community; consequently a functioning cluster in their home base and further investments on it have multiplier effects such as increasing demand and job creation.
Their theory recognizes that societal needs define markets. Besides, social harms creating internal costs for firms can be prevented through increasing in technology and operations management. As a result, firms can even act more productive and expand their market environment. An important note is that the main goal is not to increase personal value but the total economic and social value, so this is not an issue about restructuring but developing shared value. While this article focuses more on the perspective of the companies, it also affects government and civil society.
Considering all the facts creating shared value is a meaningful concept to influence simultaneously societal and economic progress in order to raise total benefits. But not all profits are equal. The authors claim profits involving a social purpose because to their opinion these profits endure; they call it “right kind of profit“. As result, Kramer and Porter expect the next wave of global growth. The opportunities to create shared value are given, but perceiving the chance is up to the companies themselves and can be part of nearly every decision.