Creating shared value

(Januar – Februar 2011) Hardvard Business Review Managing sustainable business. Springer, Dordrecht, 2019. 323-346. THE BIG IDEA CREATING SHARED VALUE DARKO M. MILOSEVIC Università LUM Jean Monnet PORTER, MICHAEL E. Harvard University MARK R. KRAMER The main question in Porter article “The capitalism is under siege” is: “How to reinvent capitalism”? Business has fallen and caught in a vicious circle. Government and civil society have often exacerbated the problem by attempting to address social weaknesses at the expense of business. The moment for a new conception of capitalism is now! The solution lies in the principle of shared value, in an outdated approach to value creation which involves creating economic value for society by addressing its needs and challenges, optimizing short-term financial performance and ignoring the broader influences that determine their longerterm success. Corporation must be redefined as creating shared value, not just profit per se. Society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up. Transformative power of shared value require leaders and managers to develop new skills and knowledge, bringing business and society back together, in new model which can emerging wave of innovation and productivity growth in the global economy, which will reshape capitalism and its relationship to society. (Januar – Februar 2011) Hardvard Business Review 1. INTRODUCTION The concept of shared value can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates. The concept blurring of the boundary between successful for-profits and nonprofits. As capitalism begins to work in poorer communities, new kinds of hybrid enterprises are rapidly appearing, social progress increase exponentially and new opportunities for economic development. The concept rests on the premise that both economic and social progress must be addressed using value principles. Value is defined as benefits relative to costs. Value creation is defined where profit is revenues earned from customers minus the costs incurred. There are three key ways that companies can create shared value opportunities: (1) by reconceiving products and markets; (2) by redefining productivity in the value chain; and (3) by enabling local cluster development. This will lead to new approaches that generate greater innovation and growth for companies—and also greater benefits for society. Main focuses are on global growth through using a new technologies, operating methods, and management approaches with better connections between societal and economic progress— as a result, this will be increase productivity and expand companies markets. To create economic value by creating societal value, companies can: reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations. A good example of difference in perspective is the fair trade movement in purchasing, which aims to increase the proportion of revenue that goes to poor farmers by paying them higher prices for the same crops. This leads to a bigger pie of revenue and profits that benefits both farmers and the companies that buy from them. By better connecting companies’ with societal improvement, its better ways to serve new needs, gain efficiency, create differentiation, and expand markets. Community needs successful businesses and business needs a successful community. From one side community provide jobs, and from another side business create demand for its products, provide critical public assets and supporte environment. Businesses will often be far more effective than governments and nonprofits are at marketing that motivates customers to embrace products and services that create societal benefits. These transformations drove major progress in economic efficiency. (Januar – Februar 2011) Hardvard Business Review 2. COMPETITIVE ADVANTAGE AND SOCIAL ISSUES The starting point for company is to identify new opportunities for differentiation of societal needs, potential benefits of new markets, to meeting that needs, redesigned products or distribution methods, and to identify harms that are or could be embodied in the firm’s products. A company’s value chain affects societal issues, such as natural resource, health, safety, working conditions, environmental performance, employee retention and capability. Major improvements in environmental performance can be achieved with better technology and cost savings through enhanced resource utilization, process efficiency, and quality. Today attention is riveted on India, China, and increasingly, Brazil, which offer firms the prospect of reaching billions of new customers at the bottom of the pyramid. Some of the most important ways in which shared value thinking is transforming the value chain are: Energy use and logistics. value chain is being reexamined, through better technology, recycling, cogeneration, and numerous other practices. Resource use. Environmental awareness and advances in technology mean better resource utilization which will permeate value chain and spread to suppliers and channels. Procurement. By increasing access to inputs, sharing technology, and providing financing, firms can improve supplier quality and productivity while ensuring access to growing volume. 3. THE ROLE OF SOCIAL ENTREPRENEURS New product concepts of social entrepreneurs should be measured by its ability to create shared value, and meet social needs using viable business models.. Distribution. Microfinance has created a cost-efficient new model of distributing financial services to small businesses. Employee productivity. Johnson & Johnson has saved $250 million on health care costs, investing in employee wellness programs, and helping employees to stop smoking. Location. Olam International, which stopped shipping nuts from Africa to Asia opened local plants in Tanzania, Mozambique, Nigeria, and Cote d’Ivoire, and cut shipping costs by up to 25% while establishing deep roots in a community vital to its long-term survival. 3.1 Enabling Local Cluster Development Clusters play a crucial role in productivity, innovation, and competitiveness, because they supporting not only businesses infrastructure, but also institutions infrastructure such as schools and universities, trade associations, competition laws and standards organizations. Cluster development benefits both the company and society. Firms create shared value by building clusters to improve company productivity. A key aspect of cluster building in developing and developed countries alike is the formation of open and transparent markets. The big African exporter Flower Farming have a logistic infrastructure for direct distribution to the mass market retailers (Figures 1-2). (Januar – Februar 2011) Hardvard Business Review Figure 2. Flower Farming - Cluster Value Chain Fairtrade roses currently come from a small number of farms in Kenya and had an estimated retail value of over £4m in 1995, with 4% share in the world market, and growing faster than any of the top 10 countries. Figure 3. Flower Farming - Cluster Map (Januar – Februar 2011) Hardvard Business Review 3.2 Government Regulation and Shared Value Creating shared value will be more effective and far more sustainable with the law and ethical standards. Strict antitrust policy, for example, is essential to ensure that the benefits of company success flow to customers, suppliers, and workers. Regulation that blocking innovation and inflicting cost on companies slows progress and blocks shared value that would improve competitiveness. Regulation that enhance shared value set goals and stimulate innovation. Characteristics for well-functioning of markets are: 1. set clear and measurable social goals; 2. set performance standards; 3. define phase-in periods for meeting standards which give companies time to develop and introduce new products and processes; 4. put in place universal measurement and performance reporting systems, with government investing in infrastructure for collecting reliable benchmarking; 5. efficient and timely reporting results of regulations; All profit is not equal. Profit involving shared value enables society to advance and companies to grow faster. The opportunity to create economic value through societal value will be one of the most powerful forces driving growth in the global economy. New way of understanding customers, productivity, and the external influences on corporate success, creating opportunities for shared value, particular in areas most important to the business. Shared value opens up many new needs to meet, new products to offer, new customers to serve, and new ways to configure the value chain. 4. SHARED VALUE AND CORPORATE SOCIAL RESPONSIBILITY Creating shared value (CSV) should supersede corporate social responsibility (CSR) in guiding the investments of companies in their communities. CSR programs focus mostly on reputation and have limited connection to the business, making them hard to justify and maintain over the long run. In contrast, CSV is integral to a company’s profitability and competitive position. Figure 4. Moving to Shared Value (Januar – Februar 2011) Hardvard Business Review It leverages the unique resources and expertise of the company to create economic value by creating social value. In both cases, compliance with laws and ethical standards and reducing harm from corporate activities are assumed. CONCLUSIONS The moment for an expanded view of value creation has come. Michel Porter and Mark Kramer predict that incorporating societal issues into strategy and operations is the next major transformation in management thinking. And they assert that shared value models represent nothing less than the next evolution of capitalism. In the three years since the article was published, Creating Shared Value (CSV) has gained credibility, legitimacy as a new way of doing business. The concept is now embraced by many of the world’s leading corporations like Nestle, Intel, Unilever, The Coca-Cola and Western Union, and the framework and language of shared value has spread beyond the private sector to governments, NGOs, civil society and academia. Future developments:  How can companies improving efficiency and engage more profitably by using shared value opportunity and CSR in the environment? (Januar – Februar 2011) Hardvard Business Review