Wednesday, May 2, 2018

The importance of Creating Shared Value

Through the article Creating Shared Value, the authors – Michael E.Porter and Mark R. Kramer imply that the way we do business is viewed as a cause for social, environmental and economic problems that we are facing in our world today. They say that companies are still operating with an outdated approach to value creation. They are just looking at short term financial gains with their strategy and not the customer needs and broader influences that can determine long term success. Companies must make more of an effort to bring business and society back together and work together in harmony for the upliftment and mutual benefit.

The solution to create this harmony could be in following the principles of shared value which can be defined as policies and operating practices that enhance the competitiveness of a company while at the same time advancing the economic and social conditions in the communities in which it operates. It can be created in three ways – Reconceiving products and markets, Redefining productivity in the value chain, and Building supportive industry clusters at the company’s location.

An increasing number of companies known for their hard nosed business approach, like Google, IBM and Nestle are now adopting this principle. The authors further imply that every company should make decisions by looking at opportunities through the lens of shared value. This can lead to new approaches in the way business is done. It can create an environment where the scale of innovation is much greater and the companies using these principles not only have very high growth in the long term but also benefit the society.

An increasing number of companies known for their hard nosed business approach, like Google, IBM and Nestle are now adopting this principle. The authors further imply that every company should make decisions by looking at opportunities through the lens of shared value. This can lead to new approaches in the way business is done. It can create an environment where the scale of innovation is much greater and the companies using these principles not only have very high growth in the long term but also benefit the society.

There is a misconception that taking business decisions keeping society in mind is a waste of resources and misuse of money. Corporate responsibility programs are just carried out to enhance reputations. But they do not realize that not thinking about the society or the environment results in more harm to themselves. There are many ways companies can mould their strategies to enhance the way they use resources, energy, logistics, and procurement. Nestle is an interesting example of this. They realized that most coffees are grown in rural areas by small farmers who had limited produce due to primitive farming techniques. Nestle trained these farmers, guaranteed bank loans and provided resources like fertilizers and pesticides. They also established local infrastructure to measure quality which allowed them to pay a premium for better beans. This increased the earning of the farmers and reduced environmental impact of the farms while giving Nestle a reliable source of good coffee beans.

This example demonstrates how strategic investment not only benefited the company, but also helped in the upliftment of the local people and had an impact on environment conservation. Outsourcing to far out locations to save money creates inefficiencies and has hidden costs involved. Buying local results in suppliers getting stronger, increasing profits, hiring more people, thus benefiting everyone involved in the community. Success of companies like , Johnson & Johnson, ITC Limited, Coca-Cola, and Wal-Mart is testament to the fact that long term success hinges on changing strategy to ensure not only economic benefits for themselves, but also social upliftment in general.

Creating Shared Value

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. Shared value creation focuses on identifying and expanding the connections between societal and economic progress. Companies can create economic value while creating societal ways. Three distinct ways have been identified to achieve the same. 
The first is reconceiving products and markets. Companies can meet societal needs by better serving existing markets, accessing new ones or developing innovative products that meet societal needs. Food companies focusing on selling healthy products, digitization, industries pushing for environment friendly products are a few high level examples of companies can create huge societal gains. Many opportunities also arise from serving in developing and disadvantaged countries. Vodafone’s M-PESA mobile banking service in Kenya is such an example which now constitutes 11% of the national GDP. 
The second way of creating shared value is through redefining productivity in the value chain. Company productivity is defined via energy use, environmental impact, resource use, employee heath and working conditions, skills and lastly supplier productivity.Companies can improve the quality, quantity, cost, and reliability of inputs, production processes, and distribution systems, while simultaneously acting as a steward for essential natural resources and driving economic and social development. For instance, Walmart improved their logistics by cutting down on transportation. By doing this they not only lowered carbon emissions but also saved $200million in costs. This is a great example of the role of energy use and logistics in creating shared value. Another examples in other categories include Johnson & Johnson saving $250million in healthcare costs by investing in employee wellness programs. 
The third one is enabling local cluster development. This emphasizes the importance of local areas to the success of a company. Companies do not operate in isolation from their surroundings. To compete and thrive, they need a strong competitive context that includes reliable local suppliers, functioning infrastructure of roads and telecommunications, access to talent, and an effective and predictable legal system.For instance, at Nespresso, Nestlé worked to build clusters, which made its new procurement practices far more effective. It set out to build agricultural, technical, financial, and logistical firms and capabilities in each coffee region, to further support efficiency and high-quality local production.
The three avenues for creating shared value are also mutually reinforcing. Shared value creation might also require heightened levels of collaborations across for-profits/non-profits and private/public boundaries. Failing to do that might result in failure to tackle societal problems single handedly. Creating Shared Value also supersedes Corporate Social Responsibility in guiding the investments of companies in their communities, since the latter focuses only on reputation without being the key to company’s profitability. Therefore shared value is the next future form of capitalism imbibed with an understanding of competition and economic value creation. 


Shared Value applied to KaBOOM

In this blog post, I will compare the strategies of ITC and KaBOOM. Although ITC is a for-profit corporation, and KaBOOM is non-profit, there are several similarities between their strategies and how they create shared value. Additionally, I will summarize the arguments against shared value and its limitations.

Shared Value applied to KaBOOM
            Both ITC and KaBOOM serve underserved or overlooked markets: ITC has targeted poor pulp farmers in India, while KaBOOM targeted poor American neighborhoods without safe play spaces for kids. By catering to poorer farmers or neighborhoods, both companies are targeting sizeable markets that may have been overlooked by other companies. At the same time, both companies are improving the quality of life of their target markets, creating shared value.
            Another similarity between the two companies is how they organized a workforce to carry out specific tasks. In the case of ITC, they organized workers into self-sustaining groups for their paperboard initiative. By organizing pulpwood farmers, ITC was able to increase its supply of raw materials for paperboard production. At the same time, ITC’s initiative benefited the farmers and the environment. After training, farmers were able to rotate crops on their land, increasing their earnings. Additionally, they farmed crops on land that was previously unusable. KaBOOM organizes communities to work on playground builds. KaBOOM provided training and instruction manuals to community leaders. KaBOOM would also receive grants from local companies, such as Home Depot to fund its operations. As a result, children in communities with KaBOOM’s playgrounds would be healthier and happier. In both cases, each company’s strategy benefited both themselves and the communities they targeted, creating shared value.

Arguments Against Shared Value
One argument against creating shared value is that shared value encourages companies to focus on easily solvable social problems, instead of tackling long-term, difficult problems in society. Thomas Dyllick suggests that some problems are better solved by industry-wide initiatives, instead of the smaller-scale organizational changes proposed by the shared value article [1]. An example of this are the government initiatives to increase the fuel efficiency of cars. Left alone, companies would likely choose to not dramatically increase fuel efficiency of cars due to increased R&D costs. Additionally, many fuel efficient cars are smaller, meaning they are cheaper. Therefore, companies are less willing to sell cheaper cars due to their lower returns. However, government or industry-wide initiatives can push car companies to innovate and increase fuel efficiency by using hybrid technology.



How to guide your customers towards "good" and create shared value?

The HBR article Creating Shared Value includes ways to shift from a purely capitalist, profit based system to a both profit and social gain based system. When I hear companies purely based on profit, the first sector comes to my mind is the banking sector. Since I worked in the digital channels department of a bank for 2 years, I want to talk about how banks can create shared value through its digital platforms and bring new perspectives in favor of consumers’ financial healthiness.

Market trends show that there is a shift from traditional banking system into disruptive, non-bank applications and banking services that combine financial needs of consumers with non-bank moments in consumers’ life. For instance, payment services has started to infuse into messaging applications so that customers can more easily complete their money transfer transaction during talking to their friends about the dinner they had last night and one should pay to the other person. I believe the important idea behind this combination of financial services with daily interactions depend on understanding consumer necessities better and trying to answer them. As the article mentions: “For a company, the starting point for creating this kind of shared value is to identify all the societal needs, benefit, and harms...”, companies should first shift their focus to customer needs and re-evaluate their customers’ overall experience with their products. Going back to the banking example I gave, I believe banks have realized that financial system has been an enemy for customers for long time and now it is time for banks to position themselves as lifelong financial friends of customers. By repositioning themselves, banks could continue earning profit through not trying to push customers to spend more money, instead they can offer them products to help them keep their budget safe and manage their financials wiser. Hence, for me, this realization or enlightenment of banks started a new era of reconceiving products and market in banking industry, which is the first way of creating shared value according to the HBR article.

More specifically, I’d like to give some examples of banking products that I believe create societal gains in the long term. It has lately become popular for banks to implement smart decision making tools to their digital products, online and mobile platforms. These smart decision making tools track customers’ financial habits, such as spending patterns and budget management, and reflect, warn, offer related products or financial actions accordingly, in order to improve customer’s financial status. The goal behind these tools is not to lead customers to spend more but to push them towards maintaining their budget and accomplish their personal financial goals. Generally, customers are asked questions in the beginning, such as “How much would you like to spend on grocery shopping monthly?”, and the smart algorithm on the backend tracks customer’s money inflows and outflows, and guides them towards their personalized financial goal.

Adopting this approach helps banks to improve their competitive position (Because customers tend to like personalization in their budget management) and advance social conditions of individuals, resulting in the benefit of the overall community in the long term. Therefore, I believe banks can utilize digital platforms to focus on creating shared value and build innovative and disruptive services to connect competitive power and social advantages.

Industry clustering and its impact on society

The readings this week described the phenomenon of cluster development, and I was left thinking about Silicon Valley, where I went last summer to intern. So technically, clustering is the phenomenon where companies from the same industry are located quite close to each other. Silicon Valley is perhaps the best well known example. A large cluster of technology companies spanning from San Francisco till San Jose. There are many other examples are well. Like the financial district in downtown Manhattan having financial tech companies, or the Napa wine producing region north of San Francisco etc. So, how exactly are these clusters advantageous for the society? Companies within the cluster benefit the most, since now they can attract a large pool of skilled talent to move near that cluster and work for these companies. It is also good for skilled workers since they can switch companies without any relocation hassle. Some of these clusters are also based around a prestigious university (like Silicon Valley around Stanford), which keeps the talent pool refreshed. Clusters are also beneficial for new startups since a lot of the infrastructure required for companies to thrive is already present before they arrive. Also, since knowledge of state of the art technologies can be easily shared since firms are close by (like via conferences etc.), it helps in increased rates of innovation in the industry. For some companies, if there is a firm producing a certain product which they consume as their input in the same cluster, then this reduces costs like transportation etc. to a large extent. With clusters, a lot of different secondary businesses also sprung up nearby, like restaurants, grocery stores etc. which help provide more jobs and employment in the area. On the other hand, clustering does have disadvantages as well.  The price of housing and several other services increase in the area of the clusters. We all are aware about the exorbitant housing prices in San Francisco in California and Manhattan in New York. This leads to people shifting their homes slightly outside the clusters and this increases commute time, leading to a worse quality of since less time is left to devote to leisurely activities. This may also lead to the displacement of the native people, who lived there before the cluster formation, to a different location which is cheaper. All in all, I think industry clusters are quite beneficial for the society and its progress.

Starbucks and Shared Value

             Nowadays, most companies all over the world have a strong understanding of how to incorporate economic value with societal value. They know how important it is to include a shared value principle in their business strategy to make a profit.  Based on the article “Creating Shared Value,” the authors define the shared value principles as a concept that focuses on creating economic and social value by addressing the society needs. They indicated that shared value principles can be profitable while adding social value to the communities. The authors highlighted that in a capitalist system, companies focus on profits, which is a major cause of the environment and societal damages.  The authors show how the companies use the shared value principle in three ways:
•    reconceiving product and market
•    redefining productivity in the Value Chain
•    enabling local cluster development
The authors explained that shared value principles have a positive impact on the communities in terms of advancing their economy and prosperity. Moreover, shared value principles can benefit the customer by having a quality of product that meets their basic needs. In addition, food companies want to meet the societal needs by providing the finest product for health purpose. Many companies include the shared value approach in their mission statement and focus on applying it in different markets. Applying the shared value principle creates a mutual benefit that allows companies to enhance their production and service quality, and allows communities to improve their economy, develop their living situation, and grow their incomes.

             Starbucks has been known to apply the shared value principles of redefining productivity in the value chain and enabling local cluster development in their business strategy.[1] This approach has benefited many communities all over the world and increase the company profitability. Starbucks has been using shared value principle in their business strategy for a long time, which has led to enhancing their business performance. Starbucks was able to address the social needs in different communities like in Africa and South America. One of Starbucks’ business strategy goals is to have sustainable coffee products and help to develop the local farms. For Example, they found a business opportunity in Africa, Tanzania, to enhance their procurement of coffee beans (this approach of redefining productivity in the value chain to increases the quality of products). Starbucks identified the community needs and initiated a plan to develop the community. Starbucks provided loans to the local people and improved their skills in growing coffee beans by offering a training program. As a result, more jobs have been created and the living situations have improved. From a business standpoint, Starbucks was successful in securing a quality procurement for their business. Finally, Starbucks has applied the shared value principle to Tanzania farms by using the "Local Cluster Development approach." This approach allows the local people to gain skills in growing coffee beans and increasing their productivity. Moreover, the community benefited from Starbucks by adding a stable income source and gaining a vibrant economy.                              


The Effect of Globalization on Shared Value

It is hard to say at which scale we are creating shared value. Porter mentions how traditional company strategies look to the immediate future which deters them from making investments in what he calls shared value. This is because it takes smaller losses to end up making more gains after investing in the community they are serving. However I am interested in the longer frame than that, in a world where globalization has taken effect will we be able to serve our worldwide customers and create value for all of them the same?

Shared Value sounds like a concept that is pretty universally favorable for both sides, society and the business have a net positive result. However, I wonder if this is actually an approach that will continue to provide benefits to both sides in the future. One of the major things that might affect such a model being as successful as ITC’s is the effect of globalization and the ease at which we will be able to access materials and components from around the world.

In the case study of ITC, and its paperboards business, this was something that already played into the decisions that they made. At the point of changing strategies to invest heavily in forestry in India, the case says “the cost of importing pulp was significantly lower than investing in wood plantations in India.” Although this did not deter the chairman at the time, this is a very interesting statement as it could have been possible to make more profit for the company if it had instead imported supplies and not heavily invested in developing local wasteland. In this case was it the strictly the highest yielding option for the company? I think in this specific situation their investment did pay off and they were able to create shared value because of untapped resources in their community that they were able to use and constituted the customers that they care about. As globalization continues to expand, the target customers for which a company will care about will expand. In this case, there might not be such a specific customer base for which the company will look to benefit, rather it will be on the global scale. In ITC’s situation they had the untapped resources and were able to control the development of the entire ecosystem. In the future as all these resources are spread around the world, there might not be these unorganized groups for which the company can go in and organize they way that is most efficient for their specific need. It will get harder to create shared value as the world becomes smaller and all companies and all customers span a variety of communities.