In 2011, Michael Porter and Mark Kramer published a paper in the Harvard Business Review that spelt out the concept of creating shared value, adding a deeper social context to Porter’s extensive works on competitive strategy.
Whilst this concept has been getting more airtime lately, the words 'shared value' run the risk of (incorrectly) being interpreted as a voluntary activity for business, rather than a staple ingredient for success. As I argued in my recent piece (The future of shared value, November 21), shared value is just another name for ‘good business’.
Porter and Kramer identify three main activities that are sources of competitive advantage – and in this article, and over the following two weeks, I plan to look at each one in turn.
The first one is re-conceiving products and markets.
Essentially, it is about creating new product or market opportunities by addressing society’s greatest needs. In the past, too many businesses have been content to try and create ‘demand’ for goods and services that they produce, rather than focus on the unmet needs of society, such as improved health and nutrition.
For example, Nestle, as a global commodity food player, has chosen improvements in nutrition, water and rural development as its main areas of strategic focus, and is one of a handful of leading companies that explicitly refer to shared value in their corporate mantra.
In contrast, many investment banks promoted ‘toxic debt products’ prior to the global financial crisis in 2008. As someone who was involved in evaluating (and avoiding) those products at the time, I can confidently say that the short-term financial gains made by the banks and specialists who promoted them drove their existence. The taxpayer picked up the tab.
What’s driving this approach?
Porter and Kramer advocate the benefits of aligning business strategy with strong, underlying societal trends. They observe that many businesses have lost sight of whether their products are good for their customers and other stakeholders.
Since the financial crisis of 2008, several discussions have emerged on the need for a modified form of capitalism – for example, refer to the recent article by the global managing director of McKinsey & Co, Dominic Barton. Reform or be reformed – there has been little resistance to this notion.
A business cannot expect to operate in isolation. If its products serve no useful purpose or, even more significantly, impose a cost on society then there is a point where the earnings of the business are at risk. Think of issues such as problem gambling, waterway pollution, carbon emissions or the life-limiting, healthcare cost and productivity impacts of tobacco and asbestos.
Problems for business could evolve from a variety of sources, including:
- End customer and distributor risk; changes in purchasing habits
- Regulatory risk; governments legislate to change behaviour
- Financial risk; shareholders and financiers reduce or withdraw support
Where there is risk, there is also opportunity. A business whose ‘purpose’ is at odds with the community within which it operates may be easy prey for an existing or new entrant.
Porter and Kramer use the example of Wells Fargo, a US bank that has developed online tools to help customers budget, manage credit and pay down debt, as a business that is refocusing on what is good for its customers. Australian banks like St George have developed similar tools.
They also point to GE’s Ecomagination products, the division of GE that builds solutions for environmental challenges, as a business aligned with a major societal need. This division is forecast to have twice the rate of revenue growth as other divisions in the company.
Deconstructing the strategy
This business strategy is not about sustainability per se, it is about building sustainable earnings, and, as we know, a solid earnings stream is worth more in business value terms than a flimsy one.
Every business has a multitude of stakeholders, including customers, distributors, employees, regulators, suppliers, communities, media, regulators and so on. Aligning the purpose of our products with societal needs is a way of increasing the longevity of the earnings that flow from them.
We are talking about a strategy that fundamentally deals with relationships. It is about aligning the activities of the business with the elements of society that it touches.
Think about this from a resource perspective: we are outgrowing our planet, so all of the resources we have need to be focused on the areas that have the most impact, which is helping to drive the convergence of business and community interests. There are risks to bear and tremendous opportunities to be found in reconceiving products and markets.
The first step is to question and then continually re-question the societal benefits of our products. This should include constant surveillance of all of our stakeholders, so that changes can be detected and responses formed in a timely way.
Extending the social dimensions of our business activities, if done successfully, can be used to create enduring competitive advantages.
Phil Preston is a social innovation expert who provides strategic insight into the rapidly changing business and social environment. He can be contacted on firstname.lastname@example.org