1_2_Creating shared value_R1101C-PDF-ENG (1).PDF

HBR.ORG January–February 2011 reprint R1101C The Big Idea...

HBR.ORG January–February 2011 reprint R1101C The Big Idea Creating Shared Value How to reinvent capitalism—and unleash a wave of innovation and growth by Michael E. Porter and Mark R. Kramer This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea Capitalism is under siege....Diminished to set policies that sap economic growth…. The purpose of the corporation must be CREATING SHA 2 HarvardisBusiness This document authorized for useJanuary–February Review 2011SABANA ([email protected]). only by UNIVERSIDAD CoPyRIgHT © 20114 Copying or posting HARvARd BUSIneSS is anPUBlISHIng SCHool infringement of copyright. CoRPoRATIon. Please All RIgHTS contact ReSeRved. [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org trust in business is causing political leaders Business is caught in a vicious circle.... redefined around HARED VALUE How to reinvent capitalism—and unleash a wave of innovation and growth by Michael E. Porter and Mark R. Kramer This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement Business Review of copyright. 3 Please contact [email protected] or 800-988-0886 for additional copies.  T The Big Idea CREATING SHARED VALUE The capitalist system is under siege. In recent years success. It is not on the margin of what companies business increasingly has been viewed as a major do but at the center. We believe that it can give rise to cause of social, environmental, and economic prob- the next major transformation of business thinking. lems. Companies are widely perceived to be prosper- A growing number of companies known for ing at the expense of the broader community. their hard-nosed approach to business—such as GE, Even worse, the more business has begun to Google, IBM, Intel, Johnson & Johnson, Nestlé, Uni- embrace corporate responsibility, the more it has lever, and Wal-Mart—have already embarked on im- been blamed for society’s failures. The legitimacy of portant efforts to create shared value by reconceiv- business has fallen to levels not seen in recent his- ing the intersection between society and corporate tory. This diminished trust in business leads political performance. Yet our recognition of the transforma- leaders to set policies that undermine competitive- tive power of shared value is still in its genesis. Real- ness and sap economic growth. Business is caught in izing it will require leaders and managers to develop a vicious circle. new skills and knowledge—such as a far deeper ap- A big part of the problem lies with companies preciation of societal needs, a greater understanding themselves, which remain trapped in an outdated of the true bases of company productivity, and the approach to value creation that has emerged over ability to collaborate across profit/nonprofit bound- the past few decades. They continue to view value aries. And government must learn how to regulate creation narrowly, optimizing short-term financial in ways that enable shared value rather than work performance in a bubble while missing the most against it. important customer needs and ignoring the broader Capitalism is an unparalleled vehicle for meeting influences that determine their longer-term suc- human needs, improving efficiency, creating jobs, cess. How else could companies overlook the well- and building wealth. But a narrow conception of being of their customers, the depletion of natural re- capitalism has prevented business from harnessing sources vital to their businesses, the viability of key its full potential to meet society’s broader challenges. suppliers, or the economic distress of the communi- The opportunities have been there all along but have ties in which they produce and sell? How else could been overlooked. Businesses acting as businesses, companies think that simply shifting activities to not as charitable donors, are the most powerful force locations with ever lower wages was a sustainable for addressing the pressing issues we face. The mo- “solution” to competitive challenges? Government ment for a new conception of capitalism is now; so- and civil society have often exacerbated the prob- ciety’s needs are large and growing, while customers, lem by attempting to address social weaknesses at employees, and a new generation of young people the expense of business. The presumed trade-offs are asking business to step up. between economic efficiency and social prog­ress The purpose of the corporation must be rede- have been institutionalized in decades of policy fined as creating shared value, not just profit per choices. se. This will drive the next wave of innovation and Companies must take the lead in bringing busi- productivity growth in the global economy. It will ness and society back together. The recognition is also reshape capitalism and its relationship to soci- there among sophisticated business and thought ety. Perhaps most important of all, learning how to leaders, and promising elements of a new model are create shared value is our best chance to legitimize emerging. Yet we still lack an overall framework for business again. guiding these efforts, and most companies remain stuck in a “social responsibility” mind-set in which Moving Beyond Trade-Offs societal issues are at the periphery, not the core. Business and society have been pitted against each The solution lies in the principle of shared value, other for too long. That is in part because economists which involves creating economic value in a way have legitimized the idea that to provide societal that also creates value for society by addressing its benefits, companies must temper their economic needs and challenges. Businesses must reconnect success. In neoclassical thinking, a requirement for company success with social progress. Shared value social improvement—such as safety or hiring the is not social responsibility, philanthropy, or even disabled—imposes a constraint on the corporation. sustainability, but a new way to achieve economic Adding a constraint to a firm that is already maximiz- 4 HarvardisBusiness This document for useJanuary–February Review authorized 2011SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact only by UNIVERSIDAD [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org Idea in Brief The concept of shared value— An increasing number of There are three key ways Every firm should look at which focuses on the connec- companies known for their that companies can create decisions and opportunities tions between societal and hard-nosed approach to busi- shared value opportunities: through the lens of shared economic progress—has the ness—such as Google, IBM, In- By reconceiving products and value. This will lead to new ap- power to unleash the next tel, Johnson & Johnson, Nestlé, markets proaches that generate greater wave of global growth. Unilever, and Wal-Mart—have By redefining productivity in innovation and growth for begun to embark on important the value chain companies—and also greater shared value initiatives. But By enabling local cluster benefits for society. our understanding of the po- development tential of shared value is just beginning. Societal needs, not just conventional economic needs, define markets, and social harms can create internal costs for firms. ing profits, says the theory, will inevitably raise costs cies in education. And addressing societal harms and reduce those profits. and constraints does not necessarily raise costs for A related concept, with the same conclusion, is firms, because they can innovate through using new the notion of externalities. Externalities arise when technologies, operating methods, and management firms create social costs that they do not have to bear, approaches—and as a result, increase their produc- such as pollution. Thus, society must impose taxes, tivity and expand their markets. regulations, and penalties so that firms “internalize” Shared value, then, is not about personal values. these externalities—a belief influencing many gov- Nor is it about “sharing” the value already created ernment policy decisions. by firms—a redistribution approach. Instead, it is This perspective has also shaped the strategies of about expanding the total pool of economic and firms themselves, which have largely excluded social social value. A good example of this difference in and environmental considerations from their eco- perspective is the fair trade movement in purchas- nomic thinking. Firms have taken the broader con- ing. Fair trade aims to increase the proportion of text in which they do business as a given and resisted revenue that goes to poor farmers by paying them regulatory standards as invariably contrary to their higher prices for the same crops. Though this may interests. Solving social problems has been ceded to be a noble sentiment, fair trade is mostly about governments and to NGOs. Corporate responsibility redistribution rather than expanding the overall programs—a reaction to external pressure—have amount of value created. A shared value perspective, emerged largely to improve firms’ reputations and instead, focuses on improving growing techniques are treated as a necessary expense. Anything more and strengthening the local cluster of supporting is seen by many as an irresponsible use of sharehold- suppliers and other institutions in order to increase ers’ money. Governments, for their part, have often farmers’ efficiency, yields, product quality, and sus- regulated in a way that makes shared value more dif- tainability. This leads to a bigger pie of revenue and ficult to achieve. Implicitly, each side has assumed profits that benefits both farmers and the companies that the other is an obstacle to pursuing its goals and that buy from them. Early studies of cocoa farmers in acted accordingly. the Côte d’Ivoire, for instance, suggest that while fair illustration: lorenzo Petrantoni The concept of shared value, in contrast, rec- trade can increase farmers’ incomes by 10% to 20%, ognizes that societal needs, not just conventional shared value investments can raise their incomes by economic needs, define markets. It also recognizes more than 300%. Initial investment and time may be that social harms or weaknesses frequently cre- required to implement new procurement practices ate internal costs for firms—such as wasted energy and develop the supporting cluster, but the return or raw materials, costly accidents, and the need will be greater economic value and broader strategic for remedial training to compensate for inadequa- benefits for all participants. This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement Business Review of copyright. 5 Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea CREATING SHARED VALUE The Roots of Shared Value This perspective has permeated management At a very basic level, the competitiveness of a com- thinking for the past two decades. Firms focused on pany and the health of the communities around it enticing consumers to buy more and more of their are closely intertwined. A business needs a success- products. Facing growing competition and shorter- ful community, not only to create demand for its term performance pressures from shareholders, products but also to provide critical public assets managers resorted to waves of restructuring, per- and a supportive environment. A community needs sonnel reductions, and relocation to lower-cost successful businesses to provide jobs and wealth cre- regions, while leveraging balance sheets to return ation opportunities for its citizens. This interdepen- capital to investors. The results were often com- dence means that public policies that undermine the moditization, price competition, little true innova- productivity and competitiveness of businesses are tion, slow organic growth, and no clear competitive self-defeating, especially in a global economy where advantage. facilities and jobs can easily move elsewhere. NGOs In this kind of competition, the communities and governments have not always appreciated this in which companies operate perceive little benefit connection. even as profits rise. Instead, they perceive that prof- In the old, narrow view of capitalism, business its come at their expense, an impression that has contributes to society by making a profit, which sup- become even stronger in the current economic re- ports employment, wages, purchases, investments, covery, in which rising earnings have done little to W and taxes. Conducting business as usual is sufficient offset high unemployment, local business distress, social benefit. A firm is largely a self-contained entity, and severe pressures on community services. and social or community issues fall outside its proper It was not always this way. The best companies scope. (This is the argument advanced persuasively once took on a broad range of roles in meeting the by Milton Friedman in his critique of the whole no- needs of workers, communities, and supporting tion of corporate social responsibility.) businesses. As other social institutions appeared on the scene, however, these roles fell away or were del- egated. Shortening investor time horizons began to narrow thinking about appropriate investments. As the vertically integrated firm gave way to greater reli- What Is “Shared Value”? ance on outside vendors, outsourcing and offshoring The concept of shared value can be defined as policies and operat- weakened the connection between firms and their ing practices that enhance the competitiveness of a company while communities. As firms moved disparate activities to simultaneously advancing the economic and social conditions in the more and more locations, they often lost touch with communities in which it operates. Shared value creation focuses on any location. Indeed, many companies no longer identifying and expanding the connections between societal and recognize a home—but see themselves as “global” economic progress. companies. The concept rests on the premise that both economic and social These transformations drove major progress progress must be addressed using value principles. Value is defined in economic efficiency. However, something pro- as benefits relative to costs, not just benefits alone. Value creation foundly important was lost in the process, as more- is an idea that has long been recognized in business, where profit is fundamental opportunities for value creation were revenues earned from customers minus the costs incurred. How- missed. The scope of strategic thinking contracted. ever, businesses have rarely approached societal issues from a value Strategy theory holds that to be successful, a perspective but have treated them as peripheral matters. This has company must create a distinctive value proposi- obscured the connections between economic and social concerns. tion that meets the needs of a chosen set of custom- In the social sector, thinking in value terms is even less common. ers. The firm gains competitive advantage from how Social organizations and government entities often see success solely it configures the value chain, or the set of activities in terms of the benefits achieved or the money expended. As govern- involved in creating, producing, selling, delivering, ments and NGOs begin to think more in value terms, their interest in and supporting its products or services. For decades collaborating with business will inevitably grow. businesspeople have studied positioning and the best ways to design activities and integrate them. However, companies have overlooked opportuni- ties to meet fundamental societal needs and misun- 6 HarvardisBusiness This document for useJanuary–February Review authorized 2011SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact only by UNIVERSIDAD [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org derstood how societal harms and weaknesses affect In advanced economies, demand for products value chains. Our field of vision has simply been too and services that meet societal needs is rapidly grow- narrow. ing. Food companies that traditionally concentrated In understanding the business environment, on taste and quantity to drive more and more con- managers have focused most of their attention on sumption are refocusing on the fundamental need the industry, or the particular business in which the for better nutrition. Intel and IBM are both devising firm competes. This is because industry structure ways to help utilities harness digital intelligence in has a decisive impact on a firm’s profitability. What order to economize on power usage. Wells Fargo has been missed, however, is the profound effect has developed a line of products and tools that help that location can have on productivity and innova- customers budget, manage credit, and pay down tion. Companies have failed to grasp the importance debt. Sales of GE’s Ecomagination products reached of the broader business environment surrounding $18 billion in 2009—the size of a Fortune 150 com- their major operations. pany. GE now predicts that revenues of Ecomagina- tion products will grow at twice the rate of total com- How Shared Value Is Created pany revenues over the next five years. Companies can create economic value by creating In these and many other ways, whole new av- societal value. There are three distinct ways to do enues for innovation open up, and shared value is this: by reconceiving products and markets, redefin- created. Society’s gains are even greater, because B ing productivity in the value chain, and building sup- businesses will often be far more effective than gov- portive industry clusters at the company’s locations. ernments and nonprofits are at marketing that mo- Each of these is part of the virtuous circle of shared tivates customers to embrace products and services value; improving value in one area gives rise to op- that create societal benefits, like healthier food or portunities in the others. environmentally friendly products. The concept of shared value resets the bound- aries of capitalism. By better connecting companies’ success with societal improvement, it opens up many ways to serve new needs, gain efficiency, cre- ate differentiation, and expand markets. The ability to create shared value applies equally Blurring the to advanced economies and developing countries, Profit/Nonprofit Boundary though the specific opportunities will differ. The op- portunities will also differ markedly across industries The concept of shared value blurs the line between for-profit and and companies—but every company has them. And nonprofit organizations. New kinds of hybrid enterprises are rapidly their range and scope is far broader than has been appearing. For example, WaterHealth International, a fast-growing for- recognized. [The idea of shared value was initially profit, uses innovative water purification techniques to distribute clean explored in a December 2006 HBR article by Michael water at minimal cost to more than one million people in rural India, E. Porter and Mark R. Kramer, “Strategy and Society: Ghana, and the Philippines. Its investors include not only the socially The Link Between Competitive Advantage and Corpo- focused Acumen Fund and the International Finance Corporation of the rate Social Responsibility.”] World Bank but also Dow Chemical’s venture fund. Revolution Foods, a four-year-old venture-capital-backed U.S. start-up, provides 60,000 Reconceiving Products and Markets fresh, healthful, and nutritious meals to students daily—and does so at Society’s needs are huge—health, better housing, im- a higher gross margin than traditional competitors. Waste Concern, a proved nutrition, help for the aging, greater financial hybrid profit/nonprofit enterprise started in Bangladesh 15 years ago, security, less environmental damage. Arguably, they has built the capacity to convert 700 tons of trash, collected daily from are the greatest unmet needs in the global economy. neighborhood slums, into organic fertilizer, thereby increasing crop In business we have spent decades learning how to yields and reducing CO2 emissions. Seeded with capital from the Lions parse and manufacture demand while missing the Club and the United Nations Development Programme, the company most important demand of all. Too many companies improves health conditions while earning a substantial gross margin have lost sight of that most basic of questions: Is our through fertilizer sales and carbon credits. product good for our customers? Or for our custom- The blurring of the boundary between successful for-profits and non- ers’ customers? profits is one of the strong signs that creating shared value is possible. This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement Business Review of copyright. 7 Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea CREATING SHARED VALUE The Connection Between Competitive Advantage and Social Issues There are numerous ways in which addressing societal concerns can yield pro- ductivity benefits to a firm. Consider, for example, what happens when a firm invests in a wellness program. Society benefits because employees and their families become healthier, and the firm minimizes employee absences and lost are helping the poor save money securely and trans- productivity. The graphic below depicts some areas where the connections are forming the ability of small farmers to produce and strongest. market their crops. In Kenya, Vodafone’s M-PESA mobile banking service signed up 10 million cus- tomers in three years; the funds it handles now rep- Environmental Impact resent 11% of that country’s GDP. In India, Thomson Reuters has developed a promising monthly service for farmers who earn an average of $2,000 a year. For energy supplier access and a fee of $5 a quarter, it provides weather and crop- use viability pricing information and agricultural advice. The service reaches an estimated 2 million farmers, and early research indicates that it has helped increase the incomes of more than 60% of them—in some cases even tripling incomes. As capitalism begins to Company work in poorer communities, new opportunities for Productivity economic development and social progress increase water employee skills exponentially. use For a company, the starting point for creating this kind of shared value is to identify all the soci- etal needs, benefits, and harms that are or could be embodied in the firm’s products. The opportunities are not static; they change constantly as technology employee worker evolves, economies develop, and societal priorities health safety shift. An ongoing exploration of societal needs will lead companies to discover new opportunities for differentiation and repositioning in traditional mar- kets, and to recognize the potential of new markets they previously overlooked. Equal or greater opportunities arise from serving Meeting needs in underserved markets often disadvantaged communities and developing coun- requires redesigned products or different distribu- tries. Though societal needs are even more pressing tion methods. These requirements can trigger fun- there, these communities have not been recognized damental innovations that also have application in as viable markets. Today attention is riveted on In- traditional markets. Microfinance, for example, was dia, China, and increasingly, Brazil, which offer firms invented to serve unmet financing needs in develop- the prospect of reaching billions of new customers ing countries. Now it is growing rapidly in the United at the bottom of the pyramid—a notion persuasively States, where it is filling an important gap that was articulated by C.K. Prahalad. Yet these countries unrecognized. have always had huge needs, as do many develop- ing countries. Similar opportunities await in nontraditional Redefining Productivity communities in advanced countries. We have In the Value Chain learned, for example, that poor urban areas are A company’s value chain inevitably affects—and America’s most underserved market; their substan- is affected by—numerous societal issues, such as tial concentrated purchasing power has often been natural resource and water use, health and safety, overlooked. (See the research of the Initiative for a working conditions, and equal treatment in the Competitive Inner City, at icic.org.) workplace. Opportunities to create shared value The societal benefits of providing appropriate arise because societal problems can create economic products to lower-income and disadvantaged con- costs in the firm’s value chain. Many so-called ex- sumers can be profound, while the profits for com- ternalities actually inflict internal costs on the firm, panies can be substantial. For example, low-priced even in the absence of regulation or resource taxes. cell phones that provide mobile banking services Excess packaging of products and greenhouse gases 8 HarvardisBusiness This document for useJanuary–February Review authorized 2011SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact only by UNIVERSIDAD [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org By reducing its packaging and cutting 100 million miles from the delivery routes of its trucks, Wal-Mart lowered carbon emissions and saved $200 million in costs. are not just costly to the environment but costly to vices. Triggered by energy price spikes and a new the business. Wal-Mart, for example, was able to awareness of opportunities for energy efficiency, address both issues by reducing its packaging and this reexamination was under way even before car- rerouting its trucks to cut 100 million miles from its bon emissions became a global focus. The result has delivery routes in 2009, saving $200 million even as been striking improvements in energy utilization it shipped more products. Innovation in disposing through better technology, recycling, cogeneration, of plastic used in stores has saved millions in lower and numerous other practices—all of which create disposal costs to landfills. shared value. The new thinking reveals that the congruence We are learning that shipping is expensive, not between societal progress and productivity in the just because of energy costs and emissions but be- value chain is far greater than traditionally believed cause it adds time, complexity, inventory costs, and (see the exhibit “The Connection Between Competi- management costs. Logistical systems are begin- tive Advantage and Social Issues”). The synergy in- ning to be redesigned to reduce shipping distances, creases when firms approach societal issues from streamline handling, improve vehicle routing, and a shared value perspective and invent new ways the like. All of these steps create shared value. The of operating to address them. So far, however, few British retailer Marks & Spencer’s ambitious over- companies have reaped the full productivity benefits haul of its supply chain, for example, which involves in areas such as health, safety, environmental perfor- steps as simple as stopping the purchase of supplies mance, and employee retention and capability. from one hemisphere to ship to another, is expected But there are unmistakable signs of change. Ef- to save the retailer £175 million annually by fiscal forts to minimize pollution were once thought to 2016, while hugely reducing carbon emissions. In inevitably increase business costs—and to occur the process of reexamining logistics, thinking about only because of regulation and taxes. Today there outsourcing and location will also be revised (as we is a growing consensus that major improvements in will discuss below). environmental performance can often be achieved Resource use. Heightened environmental with better technology at nominal incremental cost awareness and advances in technology are catalyz­ and can even yield net cost savings through en- ing new approaches in areas such as utilization hanced resource utilization, process efficiency, and of water, raw materials, and packaging, as well as quality. expanding recycling and reuse. The opportunities In each of the areas in the exhibit, a deeper under- apply to all resources, not just those that have been standing of productivity and a growing awareness of identified by environmentalists. Better resource uti­­ the fallacy of short-term cost reductions (which of- lization—enabled by improving technology—will ten actually lower productivity or make it unsustain- permeate all parts of the value chain and will spread able) are giving rise to new approaches. The follow- to suppliers and channels. Landfills will fill more ing are some of the most important ways in which slowly. shared value thinking is transforming the value For example, Coca-Cola has already reduced its chain, which are not independent but often mutu- worldwide water consumption by 9% from a 2004 ally reinforcing. Efforts in these and other areas are baseline—nearly halfway to its goal of a 20% reduc- still works in process, whose implications will be felt tion by 2012. Dow Chemical managed to reduce for years to come. consumption of fresh water at its largest production Energy use and logistics. The use of energy site by one billion gallons—enough water to supply throughout the value chain is being reexamined, nearly 40,000 people in the U.S. for a year—result- whether it be in processes, transportation, buildings, ing in savings of $4 million. The demand for water- supply chains, distribution channels, or support ser- ­saving technology has allowed India’s Jain Irrigation, This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement Business Review of copyright. 9 Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea CREATING SHARED VALUE a leading global manufacturer of complete drip irri- Obtaining a reliable supply of specialized coffees gation systems for water conservation, to achieve a is extremely challenging, however. Most coffees are 41% compound annual growth rate in revenue over grown by small farmers in impoverished rural areas the past five years. of Africa and Latin America, who are trapped in a Procurement. The traditional playbook calls for cycle of low productivity, poor quality, and environ- companies to commoditize and exert maximum bar- mental degradation that limits production volume. gaining power on suppliers to drive down prices— To address these issues, Nestlé redesigned procure- even when purchasing from small businesses or ment. It worked intensively with its growers, pro- subsistence-level farmers. More recently, firms have viding advice on farming practices, guaranteeing been rapidly outsourcing to suppliers in lower-wage bank loans, and helping secure inputs such as plant locations. stock, pesticides, and fertilizers. Nestlé established Today some companies are beginning to under- local facilities to measure the quality of the coffee stand that marginalized suppliers cannot remain at the point of purchase, which allowed it to pay a productive or sustain, much less improve, their premium for better beans directly to the growers quality. By increasing access to inputs, sharing tech- and thus improve their incentives. Greater yield per nology, and providing financing, companies can hectare and higher production quality increased improve supplier quality and productivity while growers’ incomes, and the environmental impact of ensuring access to growing volume. Improving pro- farms shrank. Meanwhile, Nestlé’s reliable supply ductivity will often trump lower prices. As suppliers of good coffee grew significantly. Shared value was get stronger, their environmental impact often falls created. dramatically, which further improves their efficiency. Embedded in the Nestlé example is a far broader Shared value is created. insight, which is the advantage of buying from ca- A good example of such new procurement think- pable local suppliers. Outsourcing to other locations ing can be found at Nespresso, one of Nestlé’s fastest- and countries creates transaction costs and ineffi- T growing divisions, which has enjoyed annual growth ciencies that can offset lower wage and input costs. of 30% since 2000. Nespresso combines a sophisti- Capable local suppliers help firms avoid these costs cated espresso machine with single-cup aluminum and can reduce cycle time, increase flexibility, foster capsules containing ground coffees from around the faster learning, and enable innovation. Buying lo- world. Offering quality and convenience, Nespresso cal includes not only local companies but also local has expanded the market for premium coffee. units of national or international companies. When firms buy locally, their suppliers can get stronger, in- crease their profits, hire more people, and pay better wages—all of which will benefit other businesses in the community. Shared value is created. Distribution. Companies are beginning to re- examine distribution practices from a shared value The Role of Social perspective. As iTunes, Kindle, and Google Scholar Entrepreneurs (which offers texts of scholarly literature online) Businesses are not the only players in finding profitable solutions demonstrate, profitable new distribution models to social problems. A whole generation of social entrepreneurs is can also dramatically reduce paper and plastic usage. pioneering new product concepts that meet social needs using Similarly, microfinance has created a cost-efficient viable business models. Because they are not locked into narrow new model of distributing financial services to small traditional business thinking, social entrepreneurs are often well businesses. ahead of established corporations in discovering these opportuni- Opportunities for new distribution models can ties. Social enterprises that create shared value can scale up far be even greater in nontraditional markets. For ex- more rapidly than purely social programs, which often suffer from ample, Hindustan Unilever is creating a new direct- an inability to grow and become self-sustaining. to-home distribution system, run by underprivi- Real social entrepreneurship should be measured by its abil- leged female entrepreneurs, in Indian villages of ity to create shared value, not just social benefit. fewer than 2,000 people. Unilever provides micro- credit and training and now has more than 45,000 entrepreneurs covering some 100,000 villages 10 Harvard This document Business Review is authorized January–February for use only 2011SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact by UNIVERSIDAD [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org By investing in employee wellness programs, Johnson & Johnson has saved $250 million on health care costs. across 15 Indian states. Project Shakti, as this distri- bon emissions but also by a greater recognition of bution system is called, benefits communities not the productivity cost of highly dispersed production only by giving women skills that often double their systems and the hidden costs of distant procurement household income but also by reducing the spread discussed earlier. Wal-Mart, for example, is increas- of communicable diseases through increased access ingly sourcing produce for its food sections from lo- to hygiene products. This is a good example of how cal farms near its warehouses. It has discovered that the unique ability of business to market to hard- the savings on transportation costs and the ability to-reach consumers can benefit society by getting to restock in smaller quantities more than offset the life-altering products into the hands of people that lower prices of industrial farms farther away. Nestlé need them. Project Shakti now accounts for 5% of is establishing smaller plants closer to its markets Unilever’s total revenues in India and has extended and stepping up efforts to maximize the use of lo- the company’s reach into rural areas and built its cally available materials. brand in media-dark regions, creating major eco- The calculus of locating activities in developing nomic value for the company. countries is also changing. Olam International, a Employee productivity. The focus on holding leading cashew producer, traditionally shipped its down wage levels, reducing benefits, and offshor- nuts from Africa to Asia for processing at facilities ing is beginning to give way to an awareness of the staffed by productive Asian workers. But by opening positive effects that a living wage, safety, wellness, local processing plants and training workers in Tan- training, and opportunities for advancement for zania, Mozambique, Nigeria, and Côte d’Ivoire, Olam employees have on productivity. Many companies, has cut processing and shipping costs by as much as for example, traditionally sought to minimize the 25%—not to mention, greatly reduced carbon emis- cost of “expensive” employee health care coverage sions. In making this move, Olam also built preferred or even eliminate health coverage altogether. Today relationships with local farmers. And it has provided leading companies have learned that because of lost direct employment to 17,000 people—95% of whom workdays and diminished employee productivity, are women—and indirect employment to an equal poor health costs them more than health benefits number of people, in rural areas where jobs other- do. Take Johnson & Johnson. By helping employees wise were not available. stop smoking (a two-thirds reduction in the past These trends may well lead companies to remake 15 years) and implementing numerous other well- their value chains by moving some activities closer ness programs, the company has saved $250 mil- to home and having fewer major production loca- lion on health care costs, a return of $2.71 for every tions. Until now, many companies have thought that dollar spent on wellness from 2002 to 2008. More- being global meant moving production to locations over, Johnson & Johnson has benefited from a more with the lowest labor costs and designing their sup- present and productive workforce. If labor unions ply chains to achieve the most immediate impact on focused more on shared value, too, these kinds of expenses. In reality, the strongest international com- employee approaches would spread even faster. petitors will often be those that can establish deeper Location. Business thinking has embraced the roots in important communities. Companies that myth that location no longer matters, because logis- can embrace this new locational thinking will create tics are inexpensive, information flows rapidly, and shared value. markets are global. The cheaper the location, then, the better. Concern about the local communities in As these examples illustrate, reimagining value which a company operates has faded. chains from the perspective of shared value will of- That oversimplified thinking is now being chal- fer significant new ways to innovate and unlock new lenged, partly by the rising costs of energy and car- economic value that most businesses have missed. This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement Business Review of copyright. 11 Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea CREATING SHARED VALUE Enabling Local Cluster Development training, transportation services, and related indus- No company is self-contained. The success of every tries also boost productivity. Without a supporting company is affected by the supporting companies cluster, conversely, productivity suffers. and infrastructure around it. Productivity and inno- Deficiencies in the framework conditions sur- vation are strongly influenced by “clusters,” or geo- rounding the cluster also create internal costs for graphic concentrations of firms, related businesses, firms. Poor public education imposes productivity suppliers, service providers, and logistical infra- and remedial-training costs. Poor transportation in- structure in a particular field—such as IT in Silicon frastructure drives up the costs of logistics. Gender Valley, cut flowers in Kenya, and diamond cutting in or racial discrimination reduces the pool of capable Surat, India. employees. Poverty limits the demand for products Clusters include not only businesses but institu- and leads to environmental degradation, unhealthy tions such as academic programs, trade associations, workers, and high security costs. As companies have and standards organizations. They also draw on the increasingly become disconnected from their com- broader public assets in the surrounding community, munities, however, their influence in solving these such as schools and universities, clean water, fair- problems has waned even as their costs have grown. competition laws, quality standards, and market Firms create shared value by building clusters transparency. to improve company productivity while address- Clusters are prominent in all successful and ing gaps or failures in the framework conditions growing regional economies and play a crucial role surrounding the cluster. Efforts to develop or at- in driving productivity, innovation, and competi- tract capable suppliers, for example, enable the pro- tiveness. Capable local suppliers foster greater logis- curement benefits we discussed earlier. A focus on tical efficiency and ease of collaboration, as we have clusters and location has been all but absent in man- discussed. Stronger local capabilities in such areas as agement thinking. Cluster thinking has also been Creating Shared Value: Implications for Government and C While our focus here is primarily on companies, to achieve the most impact for the least cost. Finding ways to boost productivity the principles of shared value apply equally to is equally valuable whether in the service governments and nonprofit organizations. of commercial or societal objectives. In short, the principle of value creation Governments and NGOs will be most Regulators would accomplish much more should guide the use of resources across effective if they think in value terms— by focusing on measuring environmental all areas of societal concern. considering benefits relative to costs—and performance and introducing standards, Fortunately, a new type of NGO has focus on the results achieved rather than phase-in periods, and support for tech- emerged that understands the importance the funds and effort expended. Activists nology that would promote innovation, of productivity and value creation. Such have tended to approach social improve- improve the environment, and increase organizations have often had a remark- ment from an ideological or absolutist competitiveness simultaneously. able impact. One example is TechnoServe, perspective, as if social benefits should The principle of shared value cre- which has partnered with both regional be pursued at any cost. Governments ation cuts across the traditional divide and global corporations to promote the and NGOs often assume that trade-offs between the responsibilities of busi- development of competitive agricultural between economic and social benefits are ness and those of government or civil clusters in more than 30 countries. Root inevitable, exacerbating these trade-offs society. From society’s perspective, it Capital accomplishes a similar objective through their approaches. For example, does not matter what types of organiza- by providing financing to farmers and much environmental regulation still takes tions created the value. What matters businesses that are too large for micro- the form of command-and-control man- is that benefits are delivered by those finance but too small for normal bank fi- dates and enforcement actions designed organizations—or combinations of nancing. Since 2000, Root Capital has lent to embarrass and punish companies. organizations—that are best positioned more than $200 million to 282 businesses, 12 Harvard This document for use January–February Business Review is authorized 2011SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact only by UNIVERSIDAD [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org missing in many economic development initiatives, improve framework conditions for the cluster spill which have failed because they involved isolated in- over to other participants and the local economy. terventions and overlooked critical complementary Workforce development initiatives, for example, investments. increase the supply of skilled employees for many A key aspect of cluster building in developing and other firms as well. developed countries alike is the formation of open At Nespresso, Nestlé also worked to build clus- and transparent markets. In inefficient or monopo- ters, which made its new procurement practices far lized markets where workers are exploited, where more effective. It set out to build agricultural, tech- suppliers do not receive fair prices, and where price nical, financial, and logistical firms and capabilities transparency is lacking, productivity suffers. En- in each coffee region, to further support efficiency abling fair and open markets, which is often best and high-quality local production. Nestlé led ef- done in conjunction with partners, can allow a com- forts to increase access to essential agricultural in- pany to secure reliable supplies and give suppliers puts such as plant stock, fertilizers, and irrigation better incentives for quality and efficiency while also equipment; strengthen regional farmer co-ops by substantially improving the incomes and purchasing helping them finance shared wet-milling facilities power of local citizens. A positive cycle of economic for producing higher-quality beans; and support an and social development results. extension program to advise all farmers on growing When a firm builds clusters in its key locations, it techniques. It also worked in partnership with the also amplifies the connection between its success Rainforest Alliance, a leading international NGO, to and its communities’ success. A firm’s growth has teach farmers more-sustainable practices that make multiplier effects, as jobs are created in supporting production volumes more reliable. industries, new companies are seeded, and demand In the process, Nestlé’s produc- for ancillary services rises. A company’s efforts to tivity improved. Civil Society through which it has reached 400,000 as well as government officials, to work farmers and artisans. It has financed on precompetitive issues that improve the the cultivation of 1.4 million acres of cluster and upgrade the value chain for organic agriculture in Latin America and all participants. This approach recognizes Africa. Root Capital regularly works with that helping small farmers increase their corporations, utilizing future purchase yields will not create any lasting benefits orders as collateral for its loans to farm- unless there are ready buyers for their ers and helping to strengthen corporate crops, other enterprises that can process supply chains and improve the quality of the crops once they are harvested, and purchased inputs. a local cluster that includes efficient Some private foundations have begun logistical infrastructure, input availability, to see the power of working with busi- and the like. The active engagement of nesses to create shared value. The Bill & corporations is essential to mobilizing Melinda Gates Foundation, for example, these elements. has formed partnerships with leading Forward-thinking foundations can also global corporations to foster agricultural serve as honest brokers and allay fears Illustration/photography: Name clusters in developing countries. The by mitigating power imbalances between foundation carefully focuses on commodi- small local enterprises, NGOs, govern- ties where climate and soil conditions ments, and companies. Such efforts will give a particular region a true competi- require a new assumption that shared tive advantage. The partnerships bring in value can come only as a result of effec- NGOs like TechnoServe and Root Capital, tive collaboration among all parties. This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement of Business copyright.Review 13 Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea CREATING SHARED VALUE Government Regulation and Shared Value The right kind of government regulation can detailed and expensive compliance pro- cesses on everyone. encourage companies to pursue shared value; the Regulation that discourages shared wrong kind works against it and even makes trade- value looks very different. It forces compliance with particular practices, offs between economic and social goals inevitable. rather than focusing on measurable social improvement. It mandates a particular Regulation is necessary for well- they set performance standards but approach to meeting a standard—block- ­functioning markets, something that do not prescribe the methods to achieve ing innovation and almost always inflicting became abundantly clear during the them—those are left to companies. Third, cost on companies. When governments recent financial crisis. However, the ways they define phase-in periods for meeting fall into the trap of this sort of regulation, in which regulations are designed and standards, which reflect the investment or they undermine the very progress that implemented determine whether they new-product cycle in the industry. Phase- they seek while triggering fierce resistance benefit society or work against it. in periods give companies time to develop from business that slows progress further Regulations that enhance shared value and introduce new products and pro- and blocks shared value that would im- set goals and stimulate innovation. They cesses in a way consistent with the eco- prove competitiveness. highlight a societal objective and create nomics of their business. Fourth, they To be sure, companies locked into a level playing field to put in place universal measure- the old mind-set will resist even well- encourage com­panies ment and performance- constructed regulation. As shared value to invest in shared reporting systems, with principles become more widely accepted, value rather than government investing however, business and government will be- maximize short-term in infrastructure for col- come more aligned on regulation in many profit. Such regula- lecting reliable benchmark- areas. Companies will come to understand tions have a number of ing data (such as nutritional that the right kind of regulation can actu- characteristics: deficiencies in each commu- ally foster economic value creation. First, they set clear and nity). This motivates and en- Finally, regulation will be needed to measurable social goals, ables continual improvement limit the pursuit of exploitative, unfair, or whether they involve energy beyond current targets. Finally, deceptive practices in which companies use, health matters, or appropriate regulations require benefit at the expense of society. Strict safety. Where appropriate, efficient and timely reporting antitrust policy, for example, is essential they set prices for re- of results, which can then be to ensure that the benefits of company sources (such as water) that audited by the government as success flow to customers, suppliers, and reflect true costs. Second, necessary, rather than impose workers. A good example of a company working to im- provements will help Yara grow its business but will prove framework conditions in its cluster is Yara, the support the whole agricultural cluster, creating huge world’s largest mineral fertilizer company. Yara real- multiplier effects. ized that the lack of logistical infrastructure in many The benefits of cluster building apply not only parts of Africa was preventing farmers from gaining in emerging economies but also in advanced coun- efficient access to fertilizers and other essential ag- tries. North Carolina’s Research Triangle is a notable ricultural inputs, and from transporting their crops example of public and private collaboration that has efficiently to market. Yara is tackling this problem created shared value by developing clusters in such through a $60 million investment in a program to areas as information technology and life sciences. improve ports and roads, which is designed to cre- That region, which has benefited from continued in- ate agricultural growth corridors in Mozambique vestment from both the private sector and local gov- and Tanzania. The company is working on this ini- ernment, has experienced huge growth in employ- tiative with local governments and support from the ment, incomes, and company performance, and has Norwegian government. In Mozambique alone, the fared better than most during the downturn. corridor is expected to benefit more than 200,000 To support cluster development in the communi- small farmers and create 350,000 new jobs. The im- ties in which they operate, companies need to iden- 14 Harvard This document Business Review is authorized January–February for use only 2011SABANA ([email protected]). Copying or posting is an infringement of copyright. Please contact by UNIVERSIDAD [email protected] or 800-988-0886 for additional copies.  For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org tify gaps and deficiencies in areas such as logistics, ternal influences on corporate success. It highlights suppliers, distribution channels, training, market the immense human needs to be met, the large new organization, and educational institutions. Then the markets to serve, and the internal costs of social and task is to focus on the weaknesses that represent the community deficits—as well as the competitive ad- greatest constraints to the company’s own produc- vantages available from addressing them. Until re- tivity and growth, and distinguish those areas that cently, companies have simply not approached their the company is best equipped to influence directly businesses this way. from those in which collaboration is more cost- Creating shared value will be more effective and ­effective. Here is where the shared value opportuni- far more sustainable than the majority of today’s ties will be greatest. Initiatives that address cluster corporate efforts in the social arena. Companies will weaknesses that constrain companies will be much make real strides on the environment, for example, more effective than community-focused corporate when they treat it as a productivity driver rather than social responsibility programs, which often have a feel-good response to external pressure. Or consider Not all profit is equal. Profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of company and community prosperity. limited impact because they take on too many areas access to housing. A shared value approach would without focusing on value. have led financial services companies to create in- But efforts to enhance infrastructure and institu- novative products that prudently increased access to tions in a region often require collective action, as home ownership. This was recognized by the Mexi- the Nestlé, Yara, and Research Triangle examples can construction company Urbi, which pioneered a show. Companies should try to enlist partners to mortgage-financing “rent-to-own” plan. Major U.S. share the cost, win support, and assemble the right banks, in contrast, promoted unsustainable financing skills. The most successful cluster development pro- vehicles that turned out to be socially and economi- grams are ones that involve collaboration within the cally devastating, while claiming they were socially private sector, as well as trade associations, govern- responsible because they had charitable contribution ment agencies, and NGOs. programs. Inevitably, the most fertile opportunities for cre- Creating Shared Value in Practice ating shared value will be closely related to a com- Not all profit is equal—an idea that has been lost in pany’s particular business, and in areas most impor- the narrow, short-term focus of financial markets tant to the business. Here a company can benefit the and in much management thinking. Profits involv- most economically and hence sustain its commit- ing a social purpose represent a higher form of ment over time. Here is also where a company brings capitalism—one that will enable society to advance the most resources to bear, and where its scale and more rapidly while allowing companies to grow even market presence equip it to have a meaningful im- more. The result is a positive cycle of company and pact on a societal problem. community prosperity, which leads to profits that Ironically, many of the shared value pioneers have endure. been those with more-limited resources—social en- Creating shared value presumes compliance with trepreneurs and companies in developing countries. the law and ethical standards, as well as mitigating These outsiders have been able to see the opportuni- any harm caused by the business, but goes far be- ties more clearly. In the process, the distinction be- yond that. The opportunity to create economic value tween for-profits and nonprofits is blurring. through creating societal value will be one of the Shared value is defining a whole new set of best most powerful forces driving growth in the global practices that all companies must embrace. It will economy. This thinking represents a new way of also become an integral part of strategy. The essence understanding customers, productivity, and the ex- of strategy is choosing a unique positioning and a This document is authorized for use only by UNIVERSIDAD SABANA ([email protected]). Copying January–February 2011 Harvard or posting is an infringement of Business copyright.Review 15 Please contact [email protected] or 800-988-0886 for additional copies.  The Big Idea CREATING SHARED VALUE > distinctive value chain to deliver on it. Shared value nation initiative, for example, is now producing a opens up many new needs to meet, new products stream of fast-growing products and services across to offer, new customers to serve, and new ways to the company. configure the value chain. And the competitive ad- A shared value lens can be applied to every major vantages that arise from creating shared value will company decision. Could our product design incor- often be more sustainable than conventional cost porate greater social benefits? Are we serving all the and quality improvements. The cycle of imitation communities that would benefit from our products? and zero-sum competition can be broken. Do our processes and logistical approaches maxi- The opportunities to create shared value are mize efficiencies in energy and water use? Could widespread and growing. Not every company will our new plant be constructed in a way that achieves have them in every area, but our experience has been greater community impact? How are gaps in our that companies discover more and more opportuni- cluster holding back our efficiency and speed of in- ties over time as their line operating units grasp this novation? How could we enhance our community as concept. It has taken a decade, but GE’s Ecomagi- a business location? If sites are comparable economi- cally, at which one will the local community benefit the most? If a company can improve societal condi- How Shared Value Differs tions, it will often improve business conditions and From Corporate Social Responsibility thereby trigger positive feedback loops. Creating shared value (CSV) should supersede corporate social responsibil- The three avenues for creating shared value are ity (CSR) in guiding the investments of companies in their communities. CSR mutually reinforcing. Enhancing the cluster, for ex- programs focus mostly on reputation and have only a limited connection to ample, will enable more local procurement and less the business, making them hard to justify and maintain over the long run. In dispersed supply chains. New products and services contrast, CSV is integral to a company’s profitability and competitive posi- that meet social needs or serve overlooked markets tion. It leverages the unique resources and expertise of the company to create will require new value chain choices in areas such as economic value by creating social value. production, marketing, and distribution. And new CSR CSV value chain configurations will create demand for equipment and technology that save energy, con- serve resources, and support employees. Creating shared value will require concrete and tailored metrics for each business unit in each of the three areas. While some companies have begun to > Values: doing good > Value:  economic and societal track various social impacts, few have yet tied them benefits relative to cost to their economic interests at the business level. > Citizenship, philanthropy, > Joint company and community Shared value creation will involve new and sustainability value creation heightened forms of collaboration. While some > Discretionary or in response > Integral to competing shared value opportunities are possible for a com- to external pressure pany to seize on its own, others will benefit from insights, skills, and resources that cut across profit/ > Separate from profit > Integral to profit maximization maximization nonprofit and private/public boundaries. Here, companies will be less successful if they attempt > Agenda is determined by > Agenda is company specific to tackle societal problems on their own, especially external reporting and and internally generated personal preferences those involving cluster development. Major compet- itors may also need to work together on precompeti- > Impact limited by corporate > Realigns the entire company tive framework conditions, something that has not footprint and CSR budget budget