Shared Value

Definition Shared Value. Description

Shared Value is the principle that companies should create economic value by creating societal value.

Background of Shared Value: the Credit Crisis

In the first decennium of the 21st century an unfolding Network Economy and related economic Globalization cause a period of immense worldwide economic growth. Capitalism enables the world to develop quickly. There is a widespread belief that 'the sky is the limit'.

Greedy consumers, investors, shareholders, businesses, banks and even governments are trying to benefit as much as possible from the favorable conditions. They borrow money to buy products (incl. houses) and make leveraged investments in very lucrative, but also very risky ways.

Supervisory organizations, Corporate Governance regimes and Media fail to cope with the optimism, globalization, dynamics, greed and complexities of modern finance.

In 2007-2008 a sub-prime crisis occurs, followed by a mortgage (housing) crisis, credit crisis, bank and inter-bank crisis, and several country crises. Governments and supra-national organizations are taking draconic measures trying to avoid a total collapse of the global financial and economic system.

Consequences of the Credit Crisis. Effects

According to Michael E. Porter and Mark R. Kramer in "The Big Idea: Creating Shared Value" (HBR 2011 Jan /Feb), at the end of the decennium, the reputation of capitalism as an economic system comes under siege. Businesses, in particular financial institutions, are increasingly being viewed as having strived for excessive profits at the expense of society. Even if many businesses embraced Corporate Responsibility, they are still blamed and distrusted. This lack of trust leads politicians to deploy policies that undermine Competitiveness and economic growth.

Porter and Kramer argue companies must take the lead in bringing business and society back together by adopting the principle of 'Shared Value', instead of the usual Shareholder Value.

The Prevailing Shareholder Value Principle

At the core of a narrow view of capitalism lies the notion of 'shareholder value'. In short, the Shareholder Value Perspective emphasizes profitability over responsibility and sees organizations primarily as instruments of their owners. Shareholder value proponents believe that the success of an organization can be measured by things as share price, dividends and economic profit. They regard Stakeholder Management rather as a means than as an end/purpose in itself. They believe that social responsibility is not a matter for organizations, and think that society is best served by organizations pursuing self-interest and economic efficiency.

Porter's proposal: The Shared Value Principle

The Shared Value Principle means companies should strive for economic value by creating societal value (see picture). Creating societal value advances the economic and social conditions in the society in which the company operates.

Note that Porter mentions that when corporations are striving for societal value this is not philanthropy but acting in their own self-interest.

An interesting way to understand what Porter and Kramer suggest, is to compare the Shared Value Principle with Strategic (Instrumental) Stakeholder Management and Intrinsic Stakeholder Commitment. Porter's principle appears to have characteristics of both:

In the process of creating shared value, creating societal value is 'strategic' or 'instrumental' in the sense that the ultimate goal of any firm continues to be to realize economic value. This will ensure the invisible hand of Adam Smith and the core strength of capitalism as a source of building progress and wealth for all remain intact. Survival of the fittest would still prevail, but the creation of economic value will be done in a way that also creates value for society by addressing its needs and challenges.
In the process of creating shared value, creating societal value is 'intrinsic' in the sense that it is not just some initiative to boost the Corporate Reputation, nor merely an act of Corporate Responsibility, Sustainability or philanthropy, but a new philosophy, policy, Corporate Mission and purpose to enhance the competitiveness of a company and to achieve economic success for the firm, while simultaneously advancing economic productivity, growth, innovation and social conditions in the communities in which it operates.

Creating Shared Value

How to create shared value? In general, there are three mutually reinforcing ways in which shared value can be created:

By reconceiving products and markets (see Porter's Five Forces model) beyond their influence on the profitability of companies. Include the impact they have on customers (including those at Prahalad's Bottom of the Pyramid), on productivity, innovation and the business environment.
By redefining productivity in the Value Chain, reconsidering Outsourcing, the level of Vertical Integration, energy use, Logistics, use of resources, Procurement Strategies, distribution channels, etc.
By building supportive industry clusters at the company's locations (see Porter's Diamond Model).

We should not look for a trade-off between economic and societal value: societal benefits need not temper nor be a constraint on achieving economic benefits. Firms must look for intelligent, strategic, reconciled combinations (See: Dialectical Inquiry).

Shared Value Forum (6)

Porter's Shared Value Concept is a Breakthrough
"I discovered this astonishing concept recently during a sustainable development course at Imperial College (London).
Well, this is a good way to allow the game to go on (remember when you played Monopoly and the game would stop because one had all the money)...
And more seriously to integrate more externalities in the production costs. How can a plant process raw materials without water? If you're located in a place with a high hydric stress, you will need to reduce this risk...
And probably provide benefit simultaneously to the other stakeholders."

Alignment Indicators
"I am interested in finding indicators of strategic alignment between a business strategy and its CSR strategy, can anyone help me out?"

Creating Shared Value
"We can spend time debating the philosophy of SVP or experiment with integrating the SVP concept in the strategy conversation. As lead chapter author of sustainable globalization we developed 6 lenses for an enterprise to discuss. The assessment tool is here if you want the presentation it is here
Porter is on the right track. How enterprises approach SVP pragmatically will only happen if they take action. Talk only gets limited results."

Are Market Forces Forces of Nature?
"Just slightly worried by the idea that the market is a force of nature which somehow naturally moves to the point of highest welfare.
Firstly, there is nothing natural about market forces beyond psychology (rather than physics or biology) and secondly, humanity has developed precisely because we have learnt to effectively intervene in the control of water, animal and crop husbandry, disease, sun light (electricity) amongst practically all examples of human development.
Those who say it is nature that the market should be allowed to be free from government control do not see a problem controlling the natural physical advantages that other stronger individuals may have who may want to steal their property.
Nature is not a rationale for markets!"

Is the Shared Value Principle (SVP) New?
"SVP is identical to enlightened self-interest, as derived directly from Adam Smith's description of the benefits shared between the producer (Adam Smith's butcher, baker, etc) with the consumer.
And is the 'major economic crisis', not really a self-correction: desperately required after asset value inflation caused by artificially low interest rates? When the invisible hand is held back, it has a tendency to respond with a hard smack
So, no: there is no need for new theories of capitalism. Like most natural laws, it works quite well on its own - even if we do not like the consequences."

On our Way to an Improved Capitalism?
"The importance of above summarized Shared Value Principle (SVP) by competition-guru Porter working with with Mr. Kramer can hardly be overstated, and as far as I'm concerned the authors deserve to receive the Nobel Prize of Economics for their new Shared Value concept. Why?
On one hand it's clear that capitalism, shareholder value thinking, striving for economic value, human and businesses' greed and the invisible hand of Adam Smith are tremendously powerful mechanisms behind increasing wealth all over the world.
On the other hand it's also clear that these same related ideologies have once again led to a major economic crisis.
No doubt Porter's SVP is an important, thoughtful, balanced and prudent step in combining the strengths of capitalism with the need to avoid certain negative side effects.
The question now is: What will actually cause this change in capitalism to occur? Is it sufficient to use the new shared value paradigm while we re-apply Porter's own competition models? Certainly we need additional thinking and tools to implement the shared value principle... But do we also need the UN or the G-20, governments, (international) supervisory organizations, (international) law, governance, ethics to step in?"

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