STRATEGIC MANAGEMENT

Individual Assignment

Written by:
NIDYA HAPSARI [23]
Class 7D—DIV Accounting

Harvard Business Review

January—February 2011

Creating Shared Value

By: Michael E. Porter & Mark R. Kramer
 Strategic Management: HBR Jan – Feb 2011

Integrating Shared Value into Strategy

Societal needs, not just conventional economic needs, define markets, and social harms can create
internal costs for firms. (HBR Jan-Feb 2011 Ed)

Shared value, 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, is a new strategic innovation to replace the old narrow view of capitalism which believes
that a firm is largely a profit-oriented self-contained entity. The concept of shared value lies on the
premise that society value is able to be achieved by addressing sustainable economy progress
(trade-offs). Involving economy agenda, shared value is indeed a new form of capitalism and it is
part of controversy. It enables society to advance more rapidly while allowing companies to grow
even more. There are numerous ways in which addressing societal concerns can yield productivity
benefits to a firm, such as improvement in: energy use, water use, employee health, worker safety,
employee skills, supplier access and viability, and environmental impact.

Apparently, it is similar with Corporate Social Responsibilities (CSR), while it is not. CSR as a
philanthropy does differ from Corporate Shared Value (CSV) in terms of each basic value,
background, profit orientation, agenda determination, and source of income. If CSR is initiated for
doing well to others thus profit maximization is out of issue, agenda is determined by external
reporting and personal references, and it is affected by corporate footprint and CSR budget. On the
other hand, CSV targets both economic and social benefits (relative to cost), so that it is integral to
profit maximization as well as affected by the entire company budget. Its agenda is specific and
internally generated. CSR’s limited connection and short development are also behind the leverage
of shared value.

The blurring boundary between profit and non-profit leaves a question on how to distinguish them.
Understandable, because many fast-growing for-profit enterprises have implemented shared value

Integrating Shared Value into Strategy

concept into their profit-gaining or cost-minimization project. For example, WaterHealth
International uses innovative water purification techniques to distribute clean water at minimal cost
to more than one million people in rural India, Ghana, and the Philippines. At glance, WaterHealth
seems to be a non-profit entity, but it is not. WaterHealth uses this program to attract investor and,
also, add profit. Proven that, its investors include not only the socially focused Acumen Fund and the
International Finance Corporation of the World Bank, but also Dow Chemical’s venture fund. So the
blurring boundaries, on the contrary, sign that creating value is possible to be adopted by big
enterprises which mainly orient on profit.

In Support of Shared Value

Everybody agrees that a shared value lens is considered as win-win solution for both economic value
and value for society. Growing number of companies known for their hard-nosed approach to
business, such as GE, Google, IBM, Intel, Johnson & Johnson, Nestle, Unilever, and Wal-Mart, have
already enlarged on important efforts to create shared value by recognizing the intersection

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 Strategic Management: HBR Jan – Feb 2011

between society and corporate performance. Firms can escape from notion of externalities, i.e.
taxes, regulations, and penalties from social cost such as pollution, economy disparity, etc, by
shaping strategies for the firms themselves. Early studies of cocoa farmers in the Cote d’Ivoire, for
instance, suggest that while fair trade can increase farmers’ income by 10% to 20%, shared value
investments can raise their incomes by more than 300% (aside that firm is benefited too). This shows
mutual symbioses can work as broader strategic benefits. Companies will not be jeopardized by
social issues because they have prevented such problems. These problems may trigger new cost and
bad prejudice toward companies. Before employees demonstrate to get better salary and sufficient
facilities, many companies have already initiated Wellness Program which creates more present and
productive workforce. Thus, potential cost is altered into new benefit with shared value.

Shared value is a new way of understanding customers, productivity, and external influences on
corporate success. Nowadays, firms which have no competitive advantage are hard to win the
market. Rapidly-growing demand for innovative product and services push every firm to work on its
strength, either maintaining or discovering the new one. Companies will focus their strategies on
fulfilling this demand, initially for gaining profit and later for meeting society needs. Shared value is
today-best-alternative on visioning firm’s competitive advantage. Fact shows that several companies
have managed to combine either integration strategies or intensive strategies with shared value.
Microfinance was invented to serve unmet financing needs in developing countries and now it is
growing rapidly in US (market development). Coca-Cola has already reduced its worldwide water
consumption by 9% from a 2004 baseline to answer water crisis (product development). Coca-Cola
knows how to meet consumer latest needs on green choice and the effort is also part of product
propaganda. Given two exactly similar alternative of soft drink, customer will surely pick the one
who have better advantage based on customer’s recent demand, the one with more green choice.
Finally, profit maximization will not hamper society interest to live conveniently and securely. On the
contrary, shared value helps answering social, especially consumer, issues.

Ironically, outside parties, such as government, communities, and NGO, are often appointed as
company’s threat. While on shared value concept, these parties are identified as clusters which
effectively support each other. At Nespresso, Nestle also worked to build clusters, which made its
new procurement practices far more effective. It strengthened regional farmer co-ops by helping
them finance shared wet-milling facilities for producing higher-quality beans and also worked with
Integrating Shared Value into Strategy
Rainforest Alliance, leading international NGO, to teach more-sustainable farming practices.
Government regulations are opportunities for company to promote innovation. If government ban
certain application of industrial equipment for the sake of reducing pollution, then company have
chance to produce new environmental-friendly industrial equipment. Shared value is also pioneering
new party named social entrepreneurs, whose ability is to create shared value for company, not just
social benefit.

Resistance toward Shared Value

By any terminologies, shared value is still capitalism. Many examples mentioned in the article are
shop-lifting. They do not elaborate the real correlation between certain social success and shared
value program has been applied by company. For example, when the article mentioned the success
of Yara, the world’s largest mineral fertilizer company, in creating huge multiplier effects for people

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 Strategic Management: HBR Jan – Feb 2011

in Mozambique and Tanzania by improving ports and roads, it failed to explain how by creating ports
and roads only will boost the economy situation there. Why was that the best economy alternative?
Where is the social problem of not having port and roads (if the people have agreed their way)? It
even lacked in explaining the economy benefit for the company itself. Then what is it other than bias
engagement between Yara as producer and people in Mozambique and Tanzania as customer?
Without clear explanation, shared value is nothing but viscous circle that only benefit one side and
the article is merely fumbling apologist for predatory corporate greed and piracy.

Viewing upon companies’ perspective, profit from shared value is a long-term concept.
Undoubtedly, capital market will continue to pressure companies to generate short-term profits.
Shareholders can not all be convinced that by investing large sum of money for a very long period
may be able to result fantastically in the next five or ten years. These periods are required to invent
strategies, build infrastructures, and establish education and coordination within clusters. Survival of
the fittest versus capital market pressure will force the company to run dual policy. One is to
maintain its operating profit, and the other is to develop sustainable market. At the early period,
company must be ready to achieve less, even zero, gain. As well as, be ready for failure possibilities
on the newly-invented-strategies. The pressure will impact company’s consistency on developing
project for societal needs. Greatest needs should not be replaced by economy pressure in shared
value concept, unless it may remain the same as the previous concept.

Capitalism is reflected via its dependency and bias education. Companies might say that benefit is
also share to society, however the benefit will open new era of dependency as local will be more
attracted to work and cooperate with big company and leave their initial works. Once companies
withdraw their investment, cluster which has already been in reliance will be hopeless. Transfer of
knowledge does happen, but limited to company’s interest only. Hence, shared value can never
replace corporate social responsibilities. Profit oriented entity will, at the end, always source back to
its main goal whenever conflicts between economy and social issues appear internally.

Conclusion

Integrating Shared Value into Strategy

In my opinion, shared value holds the key to combine all involved parties working together in order
to approach both economic and societal needs. This is the new wave for profit-oriented entities to
fulfill community, government, and NGO’s demand. CSR is widely known as a merely-reputation-
oriented policy. Most of companies place insignificant budget allocation for CSR as it brings little
impact for company’s development. By integrating shared value into strategy, the company will
create betterment on its product and markets to be socially-accepted, redefine productivity in the
value chain, and build supportive industry clusters. Sustainable development should not be replaced
by market pressure as it may impact greater result at the end. However, CSR should still be
maintained as a purely-social oriented backup if the new concept is likely viewed as repressive
capitalism. But there should be clear explanation on how shared value may drastically convert
capitalism point of view and change public opinion for such superficial analysis which roles as
justification for repressive capitalism.