Effective Leadership Sustainable Development

Michael Porter’s Approach: How to Create Shared Value in Business (Top 3 Tips)

Michael Porter's Approach: How to Create Shared Value in Business (Top 3 Tips)

Now to reinvent capitalism – new trends and examples of creating shared value: 

Capitalism has suffered from mistrust. As such, companies often get blamed for most of society’s environmental, social, and economic woes. This consequence is in spite of the countless CSR (corporate social responsibility) initiatives taken by firms around the globe.

So, in light of the strained capacity of NGOs and governments to discuss the most complex of society’s challenges, how can the business world restore public trust?

How can enterprises redefine the capitalism vision and unleash their potential in the meeting of social needs?

The solution, as espoused by Michael Porter, revolves around creating shared value (CSV).

Under this framework, economic value could expand while simultaneously solving societal challenges and needs.

When enterprises act as business operations (and not as charities), they can turn profitable and work towards improving the world. Examples of such measures include the social well-being of people by providing financial security, affordable housing, nutrition, public health, and environmental performance.

They will also create economic prosperity by making a profit and meeting people’s needs. A role that only businesses have when it comes to creating self-sustaining and infinitely scalable solutions.

Introducing Professor Michael Porter:

Michael Porter Image

So, how did the creating shared value theory come about?

Essentially, the shared value approach got coined by Porter. A leading authority on corporate and competitive strategy, Porter has written and talked a lot about the economic development and competitiveness of regions, states and nations.

He has also delved into the application of basic competitive principles to such social problems as health care delivery, corporate responsibility, and the environment.

Widely hailed as the father of modern strategy and business competitiveness, Porter generally gets recognised in various surveys and rankings as the most influential thought-leader in the world. This recognition is particularly in the areas of management and competitiveness.

At the time of writing, Porter is the Bishop William Lawrence University Professor within Harvard Business School, where he leads the widely known Institute for Strategy and Competitiveness.

Porter has also authored 125+ articles and 19 books on health care delivery, competition and strategy.

He has, also, served as a counsellor and adviser on strategy to nonprofit organisations, leading international corporations, and the governments of several nations.

Creating shared value

(Image Source: LatitudeFiftyFive)

Porter’s research on the economic development of the inner cities of America spearheaded the founding of a nonprofit initiative (termed The Initiative for a Competitive Inner City).

This initiative seeks to catalyse the development of businesses in and working out of inner cities. He serves as the Chair for this nonprofit.

The good professor also worked with Mark Kramer to co-found both The Center for Effective Philanthropy and the FSG.

Presently, Porter holds an M.B.A. and a Ph.D. from Harvard University as well as a B.S.E. (in aerospace engineering) from Princeton.

Throughout his career, he has received 30+ major honorary degrees and awards. He was also voted the most influential strategic thinker in the world by the Strategic Management Society.

What is Shared Value?

According to Porter, the purpose of large business needs to be redefined to lead to creating shared value, and not simply profit.

By so doing, this shared value creation by big business will drive the next wave of productivity growth and innovation in the global economy.

Professor Porter liaised with Mark R. Kramer to co-author a seminal Harvard Business Review article that introduced the concept of shared value.

His article “Creating Shared Value” has gone to be the single most influential model on how shared value could be integrated into public policy and business strategy.

As a management strategy, shared value is focused on the creation of measurable business value by companies through the identification and addressing of those social problems that intersect with business operations.

This framework also seeks to create new opportunities for governments, civil society organisations and companies for the express purpose of leveraging the power of market competition to address these problems.

Creating Shared Value:

Espoused by Mark R. Kramer and Professor Michael E. Porter in the January/February 2011 issue of the Harvard Business Review, shared value is taking root across the globe.

Amazing organisations such as One Young World and those listed below are leading the way through teaching and implementing shared value in their organisations.

Essentially, Mark R. Kramer and Professor Michael E. Porter identified three main ways of creating shared value. These include:

1. Reconceiving Markets and Products:

The first shared value strategy involves defining markets in terms of social ills or unmet needs. After that, companies, NGOs and governments develop effective services or products to remedy these conditions.

Example: BD developed a new safety syringe to reduce needle-stick injuries among healthcare workers. This product innovation was so profitable that it earned BD more than $2 billion (which is roughly a quarter of the revenues the company earned that year).

Statistics and forecast on global poverty rates by The Economist

(Source: Economist.com)

2. Redefining Value Chain Productivity:

The second shared value strategy requires a company (or its suppliers) to increase its productivity through the addressing of the environmental and social constraints in its value chains.

Example: Walmart improved delivery logistics and reduced packaging. As a direct result, the company saved more than $200 million that would otherwise have got spent in covering distribution costs. At the same time, the firm grew the quantities getting shipped.

 

Michael Porter's Value Chain Analysis Diagram


3. Enabling Local Cluster Development:

The third shared value strategy involves the strengthening of the competitive contents in the central regions where the company in question operates.

The sustainable developments must be in such a way that contribute directly (or otherwise) to the productivity and growth of the local community.

Example: CISCO launched the Networking Academy to specifically train four million network administrators (and more) around the globe. This notion significantly reduced the primary constraint that was affecting the growth of the company’s addressable server market.

Global wealth percentile based on region (chart)

(Source: Visual Capitalist)

Conclusion:

Over and above all, there is more to creating shared value than meets the eye.

As Porter espouses, shared value should not focus on the redistribution of the value created through donations and philanthropy.

The main difference between CSR and CSV is that CSV bases the whole business on CSR, whereas CSR itself is generally one or two departments of a company.

Similarly, CSV does not involve the inclusion of the values of shareholders in the general corporate decision-making process.

Instead, the focus of shared value must be on creating meaningful social and economic value.

The benefits of this will ultimately exceed the costs for society and business.

The framework, therefore, defines new roles for business in communities where enterprises innovate to make a profit while simultaneously advancing social progress.

About the author

Derin Cag

Derin Cag

Founder of Richtopia