Wednesday, April 27, 2016

Free-riding: A big problem for the CSV concept?

While reading Porter’s article on „Creating Shared Value“ (CSV), I wondered how free-riding might affect CSV efforts. Because society is really close aligned to the businesses operating in it, shared value efforts might also be exploited by competitors or other parties so that CSV activities might end up becoming Corporate Social Responsibility (CSR) activities. For further investigation of this consideration, I try to look at potential free-riding problems for the different ways to create CSV and how these are overcome in practice. The three different ways Porter identifies to create shared value are product and market reconcilement by avoiding internal inefficiencies, productivity redefinition in the value chain and a local cluster development.

Product and market reconcilement:
Products that meet societal needs, in particular by serving disadvantaged communities and developing countries, have the highest potential for product and market reconcilement according to Porter. Whether free-riding is an important aspect here, will rely on the entry barriers for new competitors (i.e. how large the first-mover advantage is), the exclusiveness of the investment, and governmental protection. Corruption can be a huge impediment here – not only does it draw the economic benefits to administration officers but it also violates all compliance regulations of businesses and thereby creates another trade-off. One example, in which corruption (as some form of free-riding because without CSV investments there would not be a business to demand money from) has massively harmed business entries and thereby potentially CSV by serving developing countries is the oil-rich Nigeria1. Other potential free-riding impediments arise from small first mover advantages: Often it takes considerable monetary efforts to develop a market and create society awareness – if (as often in the digital industry) others can simply use these efforts and capture large fractions of the market by simply offering a cheaper product, potential valuable investments are deterred.


Productivity redefinition in the value chain
How protectable and exclusive the CSV investments are, will also determine the potential effects of free-riding here. I would rule out the identified areas of energy use and logistics, resource use, distribution because there is no large interconnection between a smaller or more efficient resource usage and the competition. However, in terms of procurement, employee productivity, and location it seems much more difficult to protect the competitive advantage: Long-term contracts (which are e.g. common for resource exploitation investments2) can warrant acceptable protection here but often this is not possible or allowed – for example with employees. Without long-term contracts for incentives alignment, this could for example mean that in ITC’s Livestock Development program a competitor simply offers a little bit more for the now improved product quality and ITC would not benefit any longer from its CSV activities.

Cluster Development
Exclusiveness is also here a decisive aspect. Often, CSV activities, such as the mentioned Nestlé farmer development program, are made for long-term relationship communities. However, free-riding might occur in terms of education – supporting specific research partnerships can be attractive but what means are there to protect the advantageous effect of a general education improvement within the cluster? Who can guarantee that the investments made in the human capital are not simply absorbed later by another better-paying competitor, such as Uber lately with CMU’s Robotics Engineering Centre?

In conclusion, I would say that free-riding can be a decisive impediment to Porter’s suggested ways for CSV and need to be considered before making an investment. However, long-term contracts and relationships as well as governmental support, e.g. in the cluster development, can overcome many of them.


Sources:


Creating Shared Value (Porter and Kramer, Harvard Business Review, January-

February 2011)

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