Often when I tell people that I’m studying business, I get a somewhat negative reaction. A reaction which implies that a business student has the one function of being yet another part of a exploiting capitalistic system.
In such situations my best reply is to tell them what I know about creating shared value.
An economic theory
Creating shared value was launched by Michael Porter, economist and professor at Harvard Business School, and Mark R. Kramer at Harvard University. Together they published the article Creating Shared Value: Redefining Capitalism and the Role of the Corporation in Society.
In an interview on HBR.org, the idea is presented as the next evolutionary step of capitalism. Why? Today many firms put corporate social responsibility (and personal social responsibility, PSR,) equal to charity spending, instead of developing a stronger connection between business and society. The idea has somewhat come to an end.
In various interviews, Michael Porter mentions that over the last 20-30 years, business has gone in a direction where profit maximizing is priority one and meeting needs of society is secondary. One example, which was also mentioned in Obamas speech “State of the Union 2012” the other day, is how banks in America sold mortgages to people in order to make profit, not to support the community.
The mantra by Milton Friedman, that companies are social responsible through making profit and creating jobs is not sufficient. It is to say that whats good for business is good for society, which is not true.
Porter and Kramer instead proposes that it is time for redifining capitalism, and that nutrition, health and fair trade should be more stressed – at a point where profit is not made on behalf of the consumers. They state, that business has made the relationship to society tense, which is not good. After all they are highly dependent on each other.
The main reason why creating shared value is important is not that the companies should be worse off and the society better off. Not at all. The main reason is that everyone would benefit.
How? The writers of the article mean that what is good for society is also good for business. They are right – the consumers in the in the society set the demand.
Even though farmers are delivering products, they often get a too small share of the total revenue when the good is finally sold. The challenge for many companies in this area of business is to support the farmers and make them become more efficient. As Porter says: “It is not about how to share the pie, but how to expand the pie”. Make the farmer get rewarded for participating. One proposal being made by Michael Porter is to train farmers to better grow crops and support them in the logistic chain. By doing this, they will get more productive and not only will the quality of the good increase, but the wages of the farmer will also rise.
So instead of spending shareholders money on organizations to showing off an interest in the society, the companies should invest more in the industry and the local community where they are operating. It is here they should put the effort, as the example of fair trade shows. It is to the product underlying human needs are related.
Objections on the idea
The idea sounds thrilling to many people, but is also questioned by some. One objection is that by enforcing such an idea implies also rebuilding the whole value chain (how firms create competitive advantages) and change, for instance, how supplies are being dealt with. Others claim that the there are evident problems with CSR, but that it can not be replaced by the idea of creating shared value
Also Michael Porter himself has been changing his opinion in this matter. Therefor the following quotation is particularly interesting.
“I would caution against the idea that creating shared value replaces past management thinking. Instead, it is additive. Let us not create a false dichotomy between shared value and the core economic principles of competition, but harness the connection.” –Michael Porter
The concept is though easy to understand and to adapt to. Social benefit creates economic value. And some enterprises have already started.