This is the last in a series of three articles. In these short articles, we are looking at the role that big companies can play in the promotion of entrepreneurship through a process of creating shared value. The series is based on an article published by Michael Porter and Mark Kramer in the Harvard Business Review of January–February 2011 under the title: Creating shared value – how to reinvent capitalism and unleash a wave of innovation and growth.
In the previous two articles we argued that big businesses can and should play an active role in promoting entrepreneurship and small businesses. Businesses need ‘healthy’ communities to operate in, and communities need ‘successful’ businesses to provide them with products and services needed for good living. An over-focus on profit alone can alienate companies from the communities in which they operate. Company success thus cannot be measured only in terms of the profits they generate for their shareholders, but should also be measured in terms of the ‘social’ value such companies add to the communities in which they are involved. In this article we take a look at some specific initiatives that can be undertaken to move towards the creation of shared value.
The concept of shared value recognises that societal needs, and not only ‘economic’ needs, should define markets. It also recognises that social issues and weaknesses frequently create indirect internal costs to companies, and that companies cannot keep escaping this reality by simply relocating to other areas. Addressing societal challenges and constraints should therefore not necessarily be seen as contributing to raising costs. Instead, if invested wisely, it can bring increased productivity and expanded markets that can lead to increased profits.
Unfortunately businesses rarely see societal spending from a value perspective; they rather see it as a peripheral issue. Even social organisations (NGOs) and government entities often see success solely in terms of benefits achieved and money spent.
Shared value is not about redistribution of profits (hand-outs) – it is about expanding the total pool of economic and social value. This leads to a bigger pie of resources and revenue (and profit) that benefits all players in the value chain. Companies can thus create new economic value by investing in the creation of shared societal value.
There are different ways in which companies can create shared value. Three important ways mentioned by Porter and Kramer are described below.
Reconceiving products and markets
For many years businesses have focused on how to create demand while, missing the most fundamental question of all: “Is our product good for our customers?” Societal needs in both low-income and advanced communities are huge – health, better housing, improved nutrition, help for the aging, financial security, etc.
Companies need to redefine their products and services in terms of ‘what is good for the society’. With this focus (rather than a consumer-only focus), companies can concentrate on things such as creating better nutrition, saving of energy, and even reducing levels of debt in the societies they serve. This opens up whole new avenues for innovation and shared value.
Businesses are far more effective than governments and NGOs in motivating customers to embrace products and services which hold societal benefits, e.g. eating healthier food, saving energy, healthy lifestyle, safety, using environment-friendly products, etc.
The societal benefits of making available appropriate products to low-income and disadvantaged communities can be profound, while the profit benefits for companies can at the same time be substantial. A few examples will demonstrate this:
- In Kenya, Vodafone created its M-PESA mobile banking service. It signed up 10 million customers in three years and the funds it handled represented 11% of that country’s GDP in 2010.
- In India, Thompson Reuters developed a new monthly service for farmers which provides weather and crop information and advice to farmers for $5 per quarter. The service soon reached about 2million farmers and has helped more than 60% of them to increase their income – in certain cases with up to 300%.
In both cases, these companies also earned a good income in the process.
The starting point for creating this kind of shared value is to identify all the societal needs, benefits and harm that could be embodied in the company’s chain of products and services. Meeting these needs often requires redesigned products or different distribution methods. The opportunities to do things of this nature are not static – they constantly change as technology changes. There will always be new opportunities for innovative products.
Redefining productivity in the value chain
The value chains of companies will inevitably affect (and be affected by) numerous societal issues, such as health and safety; working conditions; and the effective utilisation of natural resources like water. Societal problems (e.g. high crime levels and alcohol abuse) can create huge economic costs in firms’ value chains.
Examples of the impact of redefining productivity include:
- By reducing its packaging and cutting 100 million miles from the delivery routes of its trucks, Walmart lowered carbon emissions and saved $200m in transport costs in 2009.
- By investing in employee wellness programmes, Johnson & Johnson has saved $250m on healthcare costs, while this also led to higher employee productivity
- By overhauling its supply chain, Marks & Spencer aim to save their retailers in the vicinity of £175m by 2016, while also reducing carbon emissions.
- Coca-Cola reduced its worldwide water consumption by between 9% and 12% by 2012.
- Dow Chemical managed to reduce its consumption of fresh water by nearly one billion gallons per annum – resulting in savings of $4m.
- India’s Jain Irrigation, a provider of drip irrigation systems, achieved a 41% compound growth rate in turnover over 5 years.
Renewed procurement practices and enabling local cluster development
The traditional approach to procurement is to commoditise and exert maximum bargaining power on suppliers to drive prices down. Today companies are realising that their success is affected by the supporting companies and infrastructure around them. Companies are beginning to understand that marginalised suppliers cannot remain productive and sustain their quality. As suppliers become stronger, their environmental impact can be reduced, which, in turn, improves their efficiency.
A good example of renewed procurement thinking can be found at Nespresso, one of the fastest growing divisions of Nestlé. As Nespresso expanded its market for premium coffee, it realised that it needed a reliable supply of specialised coffee beans. Most coffees are grown by small farmers in impoverished rural areas of Africa and Latin America and are typically trapped in a cycle of low productivity, poor quality and environmental degradation. Nestlé decided to tackle this challenge by redesigning its procurement process. It started to work intensely with its coffee growers, providing advice on farming practices, guaranteeing bank loans and helping to create secure inputs such as plant stock, pesticides and fertilizers. Nestlé also established local facilities to measure and monitor the quality of coffee at the point of purchase. All of this resulted in significant higher yields per hectare and a stabilised source of good quality coffee.
Behind the Nestlé example lies a far broader and deeper insight, namely the advantages of buying from capable local suppliers. When firms buy locally, their suppliers can become stronger, increase their profits, hire more people and pay better wages – all of which is to the benefit of the broader society. Shared value is created.
Companies are also now beginning to re-examine distribution practices from a shared value perspective. There are huge opportunities for new distribution models. For example, Hindustan Unilever is creating a new direct-to-home distribution system in Indian villages of fewer than 2 000 people, run by underprivileged female entrepreneurs. Unilever provides micro-credit and training and now has more than 45 000 entrepreneurs covering some 100 000 villages across 15 Indian states. This project (known as Project Shaki) benefits communities not only by giving women skills that often double their household income, but also by reducing the spread of communicable diseases through the increased access to hygiene products.
Businesses have to make a mind shift to understand that not all profit is equal. Profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of ‘company-and-community’ prosperity.
The ability to create shared value applies equally to advanced economies and developing countries. Although the specific opportunities may differ, every country and company has them.
Shared value holds the key to unlocking the next wave of business innovation and growth. It will also reconnect company success and community prosperity in ways that have been lost in the past as a result of an over-focus on creating financial profits and creating value for shareholders. It can become the next evolution in capitalism.
This approach can also pioneer a whole generation of social entrepreneurs backed by successful companies. By creating sustainable opportunities for social development, enterprises can scale up the creation of social value far more rapidly than purely social programmes, which often suffer from an inability to grow and become self-sustaining.
We can only trust that these examples will motivate local businesses to engage in value-sharing business activities.
De Wet Schoeman heads up the Centre for Applied Entrepreneurship.