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Economics

Creating shared value

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.

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.

Corporate Social responsibility (CSR) -- Creating Shared Value (CSV)

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.

Fair trade

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.

Is it possible to expand the pie?

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.

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Discussion

4 thoughts on “Creating shared value

  1. Hey Mattias,
    wow – a tough choice. The discussion about the end of capitalism is happening everywhere at the moment. The other day I read an article in “Die Zeit” shortly summarized that the end of capitalism because the society is satisfied and demand doesn’t increase anymore. The author also mentioned a redefenition or the formation of a completely new system.
    This is not the one I referred to but also very interesting http://www.zeit.de/2012/05/01-Kapitalismus/seite-2.

    Up until now, I haven’t heard about Creating Shared Value. Thus I am glad to profit from your post because as you describe this sounds very appealing and easy to apply.
    Curious to learn more about enterprises who already adapted this strategy I found this article (http://www.nestle.com/Media/NewsAndFeatures/Pages/Shaungcheng-milk.aspx) on the Nestlé Site. Basically Nestlé is supporting the development of China’s milk industry in order to improve productivity and sustainability. However this is an article on the official website of Nestlé, thus they of course only state positive things.

    Looking at various blog posts, there are even more projects as for example in India, where Nestlé invested over 500 miilion US $ to expand capacity (http://parasadenwala.blogspot.com/2012/01/nestle-celebrates-100-years-in-india.html).
    Still, I guess there must also be difficult challenges to meet when Creating Shared Value. Do you know about any in particular?

    The choice of your image fits the content very well and I really like the metaphor of expanding the pie, rather than sharing it. I think this is also a very good reminder for daily life!

    Posted by Fernanda | January 29, 2012, 9:01 pm
  2. Hi Mattias,
    First of all I have to say that I liked your introduction a lot. It reveals that business is neither bad nor good but that is your own choice what you make out of it. I hope I got that right?! Your post is really well-written, and I totally have to agree with Fernanda. The critique on our capitalist system is a widely discussed topic nowadays. Last month there was a really interesting discussion at the HWR. Professors from the FU, HU and the HWR discussed the crisis of the economic theories. One major aspect was that economics are constructed like natural sciences. The equilibrium theory of demand and supply is constructed like a physical law. However, our economy is constructed and influenced by humans, and is much more related to social sciences than to math.

    At the moment you can hear a lot, especially about one economist: Tomas Sedlacek is chief economist at the biggest bank in the Check Republic and Yale announced him to be one of the “5 Hot Minds in Economics”. His book Economics of Good and Evil goes back to the roots of economics. He describes that economics go back to the Bible, and that many economists used to be philosophers (for example Adam Smith). At some point in history economics changed and nowadays nearly all of the theories we learn in class assume that rationality is the base of our economic system, although it is proven that people act irrational and that there is no such thing as perfect competition or perfect information.

    http://www.focus.de/finanzen/news/tid-24916/tschechiens-star-oekonom-tomas-sedlacek-es-geht-um-werte-statt-wachstum_aid_709412.html

    http://www.dradio.de/dlf/sendungen/andruck/1670593/

    Sorry for writing that much but I really liked your topic!

    Posted by HannahJulianeVeronika | February 8, 2012, 9:19 pm
  3. Hi Mattias,

    just as Hannah I really like your topic – you chose a very actual and controversial one – the question concerning the future of capitalism – and you offered an interesting view of how the actual crisis should be used to change things. I think you did a good job in not just mentioning the advantages of this creating shared value concept but also in explaining the critical point of view.
    Furthermore, your post was clearly structured and therefore it was easy to follow your different aspects and ideas. Your illustrations are very fitting and supportive to your content.
    What I would be interested in, are there some companies that already (at least partly) follow the idea of shared value? How do you think could this idea be really implemented given that the main aim of a business is it to increase the value of the stockholder’s share – and that idea goes somehow against it? Just had a look whether I could find another interesting source about this topic, but I think my pre-commenters already mentioned the most important ones (in addition to yours). I personally would be very interested in reading more about this topic and would enjoy if you could dig even a little deeper into the shared value idea, so maybe the above mentioned sources might be interesting for you 🙂
    Well done!

    Posted by Elisa S. | February 11, 2012, 9:29 pm

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