Wednesday, April 27, 2016

CSR vs Shared Value

After reading Porter and Kramer’s Creating Shared Value, I think that the concept of shared value may be similar to corporate social responsibility (CSR) however they are quite different. While the concept of customer strategy and social responsibility and social impact are not new, I think the concept of share value is offering a more holistic approach. They are arguing for companies to actively seek solutions for the social problems in society, not only because it is the just thing to do but because it could potentially be profitable.  Most companies have a separate CSR program; however, the concept of share value urges companies to intertwine “doing good” for society within their company structure. It is a matter of a company that doing good vs. a company that is doing well by doing good.  One difference between CSR program and creating share value is that, in creating shared value is essential to company’s profitability and competitive position, whereas in a CSR program the program tends to only enhance companies’ reputation.  A CSR Program are more similar to philanthropy activities. Philanthropy activities are mostly the act of “giving away”. For example, in the agricultural sector, What If ITC would have just provided local framers with the E-Choupal with no further involvement? Potentially they risk not yielding the same results. But by actively engaging with the framers by providing training and a having physical location to assist them, they were able to empower the farmer which resulted in better product and places ITC in a better competitive position. Another difference is that if a company is utilizing the share value concept they will create product and services based upon existing social needs rather than creating consumer demand.  

Strategies That Fit Emerging Markets

Globalization is imminent in today’s world. With companies growing globally, identifying and studying the global markets suited for a company’s expansion has become the basic need of the hour.  The countries where a company chooses to expand is called an emerging market. It is usually meant for expansion and cost cutting. Therefore, most of the emerging markets are the developing countries where the labour is comparatively inexpensive and technologies are not at par. This creates issues in deploying the strategy implemented in the home country at the emerging markets.
The paper, ‘Strategies That Fit Emerging Markets’ is a detailed study of why the strategies fail, what tools can be used to choose suitable emerging markets for a business and discussed the Five context framework in detail. According to the paper, one of the reasons why the strategies fail are the institutional voids. The emerging markets lacking the sophistication in tools, services, operations, etc. create a void that the strategies in home countries fail to address. Also, unavailability of reliable sources to study the market conditions contribute to these failures. So new strategies need to be implemented for every new emerging market that a company wishes to operate in.
The paper suggests a five context framework to analyze the market conditions in the emerging markets.
1.      Political and social systems
Every country has various political as well as social norms that give or restrict its citizens and products from certain privileges. A detailed analysis of the sociopolitical aspect of the country is essential to design the strategy of operation in a given market.
2.      Openness
Every company must design its strategies around the country’s policy to openness. Openness refers to the country’s policy to allow multinational corporations access to its resources and willingness of the company to adopt new ideas.
3.      Product markets
A single reliable source to study the market in terms of customer preferences, etc. does not exist in the emerging markets. This aspect of market is extremely important in strategizing the product portfolio of the businesses as well as in defining the strategy.
4.      Labour markets
There is a possibility that emerging markets may lack skilled labour to handle the advanced tasks and capabilities of the business. Different countries also have different notion of the trainings and quality. Unless this aspect is deeply analyzed, it cannot be presumed from the available data.
5.      Capital markets
Financial decisions must be made only after carefully studying the capital market in various countries. Often the emerging markets lack credit-rating agencies, investment analysts, merchant bankers, or venture capital firms to raise capital.
To study these aspects of emerging markets, probing questions specific to businesses must be framed. Few other tools that maybe used to study markets are Country portfolio analysis, Political risk assessment, Market growth, GDP & Per capita income, Exchange rates, etc. Composite indices also provide ratings to develop businesses in various countries but it leaves out the soft infrastructure ratings and availabilities.

While all these tools can be used to devise strategy, they should not be directly used to make decisions on entering a market. A collaborative study of all the features best helps in analyzing and deciding on the markets as well as strategies.

How EasyPaisa in Pakistan was able to Create Shared Value

After reading through the article 'Creating Shared Value', I tried to identify a company which has been able to create a shared value. I recognized that the Telenor my previous employer has been able to do so by providing first of its kind digital mobile payments to its customers. 

Interestingly, the idea came from the basic pain of the consumers to line up for several hours at a bank or an authorized place where the monthly utility bills could be paid. This societal problem or an issue as discussed by Michael and Mark in the article 'Creating Shared Value' is very well explained. As the authors discuss, the shared value is created in three ways i.e. reconceiving products, productivity in value chain or employee productivity. 

Telenor was able to create value in terms of product as well as value chain productivity. For product, Telenor was the first company to introduce mobile payments and money transfer. The mobile payment first product was bill payment which reduced the basic pain in society enabling people to become self-sufficient and pay their bills at their convenience. Secondly, in terms of money transfer digitally allowed business avenues at different levels. One such new business opportunity was created for small shop owners or retail stores especially in far flung areas where banks were not available. The model that Telenor used for mobile money transfer was that, a person in one city can go to a e.g. retailer and do a transfer of money to someone in a village. But this transfer happened from retailer to retailer and the money sender and collector simply had to exchange money via a digital platform and sending and receiving money at their respective retailers. This complete model and business lifecycle excluded the need for any bank. The transfer was secured via identity card verification system.

The key learning is that shared value created in society and at economic level as well as increased business revenue opportunity for Telenor as well. The new jobs were created in the same process for the retailers who could now earn commission on top of each transaction they conducted for money transfer. This model was ideal for people whose bread earner lived someplace else but they had to send money back home. Hence, the overall goal achieved to support and grow society by addressing an issue in the society and by effectively enabling the sustainable model to help both company and society benefit from this new opportunity.

The Importance of Communicating Shared Value

The reading this week regarding creating shared value made me think of UPMC's investment (100 million over 10 years) in the Pittsburgh Promise scholarship program. This investment occurred several years ago, before they were generally thought of as a disliked entity among regional stakeholders and citizens. So, one would presume this was less about reputation management and more about affecting their future bottom line while "doing good." Their thinking behind this investment was to ensure they had a robust pool of workforce in which to hire and grow as a company. For them, and for all businesses, workforce development is integral to profit maximization.

However, I got to thinking if they actually maximized and put into full practice this example of CSV. Did they work, or have they worked closely with public schools to ensure their workforce demands are met? Have they communicated how the Promise has benefited the entire community as a whole and their company? I don't think this is the case. As a result, I believe the implementation of the program has behaved more akin to a corporate social responsibility program - because their connections to business profit seem to be limited. And, to boot, four "Promise" classes have graduated, so there are certainly measurements to show.

At the same time, maybe it's too early to tell. In the long run, a highly educated workforce and pool of talented college graduates may turn out to make UPMC more competitive in the long run.

Prevent your strategy from hitting a BRIC wall

"To fight and conquer in all your battles is not supreme excellence.  Supreme excellence consists in breaking the enemy’s resistance without fighting."
                                                                                     — Sun Tzu, The Art of War
In times like today, every company thinks beyond covering their costs and creating marginal value. They desire dominance, monopolistic control, and power. The easiest strategy during times like this is an expansion, mostly to emerging markets, like BRICS due to high demand and low capital requirement. BRICS is the acronym for an association of the five major emerging national economies: Brazil, Russia, India, China and South Africa.
While expanding to a new market, companies face a lot of resistance from the ‘enemy’. They need to assess the ‘enemy’, instead of just fighting the differences. But how? How do you identify the institutional voids in a country? What are the important aspects to analyze before delving into a market? Thinking about this reminded me of an article I read about Red Bull and their globalization strategy.
When you think of Red Bull, which country do you associate it with? I think of America, and so do most Americans. Red Bull is an Austrian brand and a major part of its globalization strategy is to reflect the culture of the country they are expanding to. When Red Bull was introduced in India, the Indian energy and sports drink market was still at a nascent stage. They analyzed the market to narrow down the avenues where they should adapt their business model.

-       Political and Social System: The Indian judiciary is highly bureaucratic and corruption is rampant. Power is held in the hands of the private sector rather than public organizations.
-       Openness: Since India is a relatively closed economy, Red Bull partnered with Rahul Narang Group (RNG) to form a joint venture to get a pulse of the Indian market and familiarize themselves with the consumers. They worked together for over a decade before parting ways.
-       Product Markets: With this decision Red Bull, the 4.2-billion Austrian energy drinks multinational, went solo in India and set up its own independent operations. “This important decision was made in order to step-change the presence and distribution of the world's leading energy drink Red Bull in India and reflects their belief in the phenomenal potential in India.” [1] This will result in better focus and direct communication, boosting the growth. The direct business relationship between Red Bull India and Distribution Partners is expected to enhance and further improve their relationship with the trade.
-       Labor Markets: India is known for a highly capable labor pool, available at a competitive rate. Red Bull made sure that they leverage this talent and thus recruited Indians, people who understand the customers, as executives.
-       Capital Markets: India has a strong, well-developed capital market. Red Bull utilized their profits from its overseas market to create small operations in India, growing at a steady 30% year on year.

After assessing the market, Red Bull modified their business model for India. An average Indian consumer is not used to a high priced, non-alcoholic beverage with the motive of providing an extra burst of energy to power through the day. In the Indian culture, such drinks are perceived to be alcoholic, and consumers tend to stay away from them. So, Red Bull devised a marketing strategy to connect with the consumers and help them connect with the brand. Red Bull designed engaging TV advertisements since television is the most widely used communication medium in India. They broadcasted it on Indian and English shows, to attract a variety of consumers. It helped them tap into the Indian consumer’s curiosity by mimicking a recent event or relatable experiences. They also started sponsoring adventure sports and rock concerts in India, which introduced more people to the drink.

Red Bull is currently estimated to control close to 75% to 80% of the Indian energy drinks market. With the wings, Red Bull certainly flew over the BRIC wall!   


How companies are creating shared value in today's world

“Shared value is about tackling societal problems with a capitalist business model… When we can get the activity into the capitalism bucket, we create magic because we can scale!” – Michael Porter

In the past, companies always interacted with the society to go good in philanthropic terms. Simple donations for the good of humanity transformed into organizations strategically allocating their resources and aligning their core competencies to reduce the harmful effects caused by environmental and social problems. In the modern day – this is called Corporate Social Responsibility, or CSR. Michael Porter always said that CSR is the fundamental building block for shared value and but then shared value is something which has the distinct property of scalability.

How did Nestle transform itself from standard food and Beverage company into one focusing solely on nutrition? How has GE shifted from a standard electronic appliances company to that which now focuses on alleviating environmental and healthcare issues? Both these companies have some of their revenues dwelling into CSR activities but it is the distinction between the two which helps us understand what these large-scale organizations are actually doing in their businesses to create value for the society.

Within the article, the authors Michael Porter and Mark R. Kramer have identified three ways in which shared value can be created:
     1.       Reconceiving products and services – This point focuses on the gaps on the unmet needs of the society, the ills currently present which are taking the community backward instead of forward and the solutions being researched and developed which can alleviate these conditions.
a.       Becton Dickinson and Company is an American medical technology company that deals in medical supplies and devices. In the mid 80’s, there were a number of needle-stick injuries and these were creating possibilities for easy transmission of the HIV virus amongst other infections. BD & C was the first to recognize this as a potential risk to the society and introduced the first safety syringe in the year 1988. This instantly became famous and grew to almost a $2bn product. It now accounts for at least a quarter of the company’s revenue.
      2.       Redefining productivity in the value chain – This point focuses on increasing the productivity of a particular company or its suppliers by addressing all of the social impacts within its own business chain.
a.       An excellent example for this would be the research Walmart did in studying the toilet supply chain in the years between 2008 and 2010. Walmart primary goal was to reduce costs for the society at large and at the same time conserve water being wasted on a large scale. To do this, it selected a dual flush toilet from Quality Craft. This had two buttons, one for the disposal of solid wastes and the other for disposal of liquid wastes. Walmart assured its customers that by choosing such a toilet, they would be able to pay for it within three years due to the reduced water spillage. After further collaborated amendments to packaging as well, Walmart succeeded in achieving this motive. In Springfield, Missouri for example, 11.9 million fewer gallons of water were needed by households, thus saving the town approximately $23,000 in sewage costs as well.
     3.       Local cluster developmentThis point primarily focuses on the company’s core competencies which lead it to develop the impact of its operation in the regions where it currently exist.
a.       A prime example of such a point would be the efforts that Windsor Electricals undertook in the state of Maryland so as to better enable itself with regard to construction trades. Initially Windsor Electricals was searching for a trained labor pool within other states and then relocating them to their headquarters. By partnering with a local school from Maryland itself, the company achieved innovative levels in improving the skillset of its own local labor pool and thus, generate a steady flow of well-trained worker for all jobs necessary. Not only did it drastically reduce costs in this effort, but it also helped tap into the job market and create a healthy number of professionals on the field.

Concluding, we can say that large-scale organizations have definitely done a lot to create shared value, but this is still in its nascent phase in the cycle. A lot still has to be done on a global scale so as to make this idea a full-fledged part of all company strategies.

The Chinese Lure

The lure of 1/3 of the world’s population is too great for many companies to ignore despite the risks associated with attempting to transfer the skillset and appeal of a western company to the East. As demonstrated by the “Mapping Contexts” section in Strategies that Fit Emerging Markets, the difference between advanced economies (e.g. US, Europe) and emerging markets (e.g. India, China) is staggering. The government controls, enforcement of laws, and openness of these economies is wildly different, so to assume that success on one half of the world will translate to success on the other half of the world is foolish.

There are many American companies that have tried their hand at capturing a portion of the Chinese market, many successful, and many unsuccessful. Surprisingly, some of the best American companies have had no success in certain markets overseas, Google and eBay in China. As mentioned in Strategies that Fit Emerging Markets, the company needs to tailor its product suite to the needs of the market, or else not enter that market. It seems that the success of these companies on their own turf led to an exaggerated confidence level in entering the new markets.
Google and eBay decided to go head to head with their respective counterparts in China, both failing to meet the needs of those markets.

“eBay was no match for TaoBao, China’s heavyweight company, in this industry. In an article for the Association of Computing Machinery, two Hong Kong-based professors cited TaoBao’s built-in instant messaging system as a reason for its edge over eBay China. Customers wanted to be able to see a seller’s online status and communicate with them easily — a function not seamlessly incorporated into eBay’s China system.”[1] Either eBay did not do its homework when deciding to compete in China, or it believed that their success in the US would pave the path into a large market share in China, neither of which proved to be true.

Google had a similar failure, though for a different reason. While they did compete directly with Baidu, “which initially catered to consumers by offering easy access to pirated media”1, Google faced massive opposition from the Chinese government due to censorship. Both of these obstacles however seemed surmountable to Google due to their success elsewhere.

These two obstacles show that despite the time, effort and money that an entity can put into an objective, some plans are doomed from the beginning due to either a lack of planning, lack of strategy, or both. There are many examples of American companies that have succeeded in foreign markets, China specifically, but Google and eBay are instructive examples because of the dichotomy between wild success in one market and utter failure in another.

ITC's Effective Vision is the Starting Point of its Success

After reading this week’s case about ITC’s Dairy Development Initiative, I was deeply impressed. As someone who has seen the market place for local farmers and dairy farmers in India, it dawned on me how incredibly difficult it must have been for ITC to bring individual farmers on board, and organize them into individual user groups. As in most rural areas around the world, processes and beliefs are usually passed down generationally and people are hesitant towards change. Social interaction in rural India is generally dictated by a stigma of “caste” and place in society. There are many rural development programs in India, but most are oriented towards providing infrastructure or bringing jobs to the community. It would be very difficult to bring farmers together if they were not already used to interacting with one another.

That being said, ITC still managed to produce multiple successful integrated value chains while creating shared value. It may be because understanding these nuances is addressed by ITC’s core competencies. It takes pride in understanding stakeholders and developing relationships. As we have learned, when processes and competencies are aligned towards an effective vision, successful results are produced.

It was apparent from the case that ITC has a clear vision. Management reiterated that creating shared value was of priority. This reminded me of an article we studied earlier, “Building Your Company’s Vision”. In this article, Collins and Porras defined that an effective vision consists of a core ideology and an envisioned future. ITC demonstrated that national development and societal value creation were part of its core ideology when Deveshwar chose to develop India’s pulpwood plantations instead of importing pulp.  It was cheaper to import pulp and the Bhadrachalam plant was not doing well, but ITC still stuck to its CSV approach.

In further evaluating ITC’s unique core ideology, I tried to identify its core values and core purpose. According to the case, its core values center around putting the “Country before Corporation and the Institution before the Individual”. This is supported by ITC’s commitment towards national growth and being an “Indian company”.  Its core purpose would be to create sustenance in India’s communities through educating and training self-sufficient user groups, and conserving natural resources. A second core purpose would be inclusive growth. It is clear that leveraging synergies between social initiatives and their products contributed to ITC’s success. According to ITC’s website, it identifies a “Triple Bottom Line”: Corporate Social Responsibility, Environment and Health Safety, and Promotion of Thought Leadership in Sustainability.

To complete ITC’s vision analysis, BHAGs and a picture describing the achievement of those BHAGs would need to be defined. Deveshwar expressed in his chairman’s address at the 104th AGM, that ITC envisions a future in which Indian products “compete and win” within the country and abroad. He speaks about the importance of world-class Indian products and securing their dominance in the global marketplace. This is a legitimate BHAG. It would take decades, and may or may not be achieved.

In conclusion, the success of ITC’s CSV approach surprised me. It managed to bring together fragmented markets and even works to replenish natural resources. After evaluating ITC’s unique vision, I am convinced that their effective vision is the starting point of their success.


Sharing Lots of Value in Little Space

Though the anti-neoliberal cynic in me took issue with some of the framing of the shared value article (“We can help people—all we have to do is make investments into increasing the productive capacity of the worker, then the worker will have money with which to buy things, and we will have even more money than we already do!”), what I found most compelling about the concept is that it involves scaling up in localities to sort of narrow the breadth of the business at large. Whereas the cynic in me saw environmental ethics and the need for sustainability repackaged as corporatism and dollar signs, the Strategy Development student in me saw the continuation of a theme that has run a through-line throughout the course: organizations need to pare things down.

Whether we are talking about value statements, strategy statements, blue oceans, or shared value, organizations focus too much energy on covering lots of ground, and can effectively spread themselves thin—whether in pursuit of market share or high profit margins. Meanwhile, the most successful organizations seem not to be born out of the goal to construct large piles of cash, but rather the goal to find a good, unique idea, do it, focus on it, hone it, and do it well. The rest is just noise.

Tying this into shared value, I think one of the biggest areas of opportunity for the theory of shared value—given the gravity with which the topic is treated (“how to reinvent capitalism” “capitalism is under siege”)—is marrying it to sustainable development, and the environmental activist community. Specifically, companies looking to create shared value might consider how they can do so within the framework of renewable development—renewable energy, after all, comes from installations like solar panels and wind farms, the excess energy from which can be resold to outside communities and thus act as a vehicle for in-community investment in certain contexts. Moreover, investing in renewables on a local level can help cut down on the need for fossil fuels—the transportation and extraction of which, it goes without saying, are energy-intensive and harmful to communities and industries.

Likewise, instituting worker co-ops, a popular idea within sustainability communities, could be a good way to promote shared value and both a literal, and figurative, sense of ownership of a company. It seems to me this is an important point around which corporate proponents of shared value and activist proponents of sustainable, communal living might coalesce. What is more, there are at least a few examples of success using a co-op model where corporations have been able to empower workers and consumers, while concerning themselves with their bottom lines—see, for example, REI.

It might be because I recently read the book This Changes Everything: Capitalism Vs. the Climate by Naomi Klein (sort of the antithesis of business school), but, doing this week’s reading, my senses were particularly attuned to finding ways in which the goals of corporate strategy and environmentalist community development might align. And while I might scoff (in my own way) at the bottom line of profit, I think there is more to dig up than first meets the eye. 

By paring strategies down and focusing on sustainability, there may be a path forward to corporate growth and community development that pleases most everyone.

Chobani: A New Shared Value Success Story

For a very long time Google has been the poster child of shared values. Both in media and in literature it has been consistently hailed for all the services it provides for its employees such as free hair cutting, free organic food, and spaces for recreational activities. Overall the verdict states that it is its relaxed and positive work environment that constructively inspires it employees.

However, recently, albeit one, through a significant step Chobani- greek yogurt manufacturers have given a new perspective to shared value. Business Insider reports that the company’s CEO- Hamdi Ulukaya, distributed 10% of the company shares within its employees. According to news analysis once Chobani goes public these shares may gain significant worth ranging anything from thousands to millions. As the CEO states that is not a gift that he is bestowing on his employees. Rather he wants to set an environment of shared purpose and responsibility. By this move the CEO has assured the future of its employees thus giving them more incentive towards working for the growth of the company. Also due to its responsible image the company may now be able to attract new consumers and retain loyalty of its existing ones.

Further this action goes beyond the company and the employees by showing the depth of its commitment towards the overall American economy. Previously Chobani has been known to pay its employees well above the minimum wage. The positives of these actions are reflected in the overall economy when the employees invest in assets such as homes and cars. Stemming from this the distributed 10% going to enter the market in various methods to be reinvested thus creating more opportunities.