According to a new paper out of Harvard Business School, it’s time to usher in a new phase of capitalism.
The paper, Creating Shared Value, says that CSR has, so far, only served as a band-aid on a broken system. It’s time, write the authors, to re-envision how how businesses make a profit as well as create broader value within their communities.
Written by Michael E. Porter, Bishop William Lawrence University Professor, Harvard University and Mark R. Kramer, senior fellow at Harvard’s Kennedy School of Government, and co-founder of consultancy FSG with Porter, the paper was published earlier this year in the Harvard Business Review.
They believe that in recent decades, companies, driven by shareholder focus on short-term gain, have grown to ignore their impact on their surrounding communities, focusing solely on creating profit – often to the detriment of their workers, the environment, and society. Not only that, they say, but we are approaching an era of resource scarcity and, given the lack of trust most people now have in big business, companies must change the way they operate.
Corporate social responsibility isn’t the answer, they say. In order for the new model to stick, the work companies engage in going forward must be profitable – not philanthropy. Otherwise, it will always come across as a soft side project. They write:
“Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.”
The key, Porter and Kramer write, is to create “shared value” – to engage in projects that are profitable and benefit society as a whole. They say, “The concept of shared values resets the boundaries of capitalism. By better connecting companies’ success with societal improvement, it opens up many ways to serve new needs, gain efficiency, create differentiation, and expand markets.”
According to the authors, by examining its products (from a benefits and harms standpoint), its supply chain, changing technology and environmental situations, and the unique needs of its customers, a company can identify potential opportunities for creating shared value. Additionally, they write, it may seem difficult at first, but it is an exercise that gets easier with a change in mindset.
Here are three areas in which that companies can create shared value.
Identify Underserved Customers
One way companies should look to create value is to identify customers they have been ignoring – for example, they write, investing in the growth of mobile technologies in emerging markets has the potential to create value for companies and for those emerging communities. For example, they say:
“In Kenya, Vodafone’s M-PESA mobile banking service signed up 10 million customers in three years; the funds it handles now represent 11% of that country’s GDP. In India, Thompson Reuters has developed a promising monthly service for farmers who earn an average of $2,000 a year. For a fee of $5 a quarter, it provides weather and crop pricing information and agricultural advice. The service reaches an estimated 2 million farmers, and early research indicates it has helped increase the incomes of more than 60% of them – in some cases even tripling incomes.”
Additionally, they point out, companies can create shared value by investing in new technologies that appeal to the changing sensibilities of existing markets. For example, “Sales of GE’s Ecomagination products reached $18 billion in 2009… GE now predicts that revenues of Ecomagination products will grow at least twice the rate of total company revenues over the next five years.”
Invest in Your Workforce to Increase Productivity
Another area where companies can build value is investing in their workforce, they write. By investing in healthcare and wellness programs, employers can boost productivity. For example, they write, Johnson and Johnson has seen significant returns on their investment in employee wellness.
“By helping employees stop smoking (a two-thirds reduction in the past 15 years) and implementing numbers other wellness programs, the company has saved $250 million on health care costs, a return of $2.71 for every dollar spent on wellness from 2002 to 2008.”
Finally, they say, building “clusters” is an important way companies can build shared value within their communities. Building clusters means investing in infrastructures, workforce development, technologies, and more, to improve the productivity and earning potential of employees and other individuals in the area. They write:
“When a firm builds clusters in its key locations, it also amplifies the connection between its success and its communities’ success. A firm’s growth has multiplier effects, as jobs are created in supporting industries, new companies are seeded, and demand for ancillary services rises. …Workforce development initiatives, for example, increase the supply of skilled employees for many other firms as well.”
Additionally, they explain:
“Early studies of cocoa farmers in the Cote d’Ivoire, for instance, suggest that while fare trade can increase farmers’ incomes by 10% to 20%, shared value investments can raise their incomes by more than 300%. Initial investment and time may be required to implement new procurement practices and develop the supporting cluster, but the return will be greater economic value and broader strategic benefits for all participants.”