Competitiveness, Shared value, and Social Progress

Competitiveness, Shared value, and Social Progress Michael Porter, Bishop William Lawrence University Professor at The Institute for Strategy and Competitiveness, based at the Harvard Business School, at the Porter Prize ceremony on competitiveness, shared value, and social progress. "We are starting to see tremendous breakthroughs to combine and integrate economic and social development and to see the role of business in both." "What we have learnt is that the endowment you inherit does not have value in itself." Competitiveness We are at a challenging point in the history of economy and in the development of society, all over the world, including our country US. I think we have started to see that the narrow view of different problems – economy, society and business are starting to merge and what we normally thought of as separate topics or agendas are really joined agendas and have come together in powerful ways. This is becoming increasingly clear in the whole area of development. We had a long tradition of thinking about economic development which is usually measured by GDP per capita. We also have a tradition to think about economic strategy to really raise the standard of economic development. This is an active discussion now in every part of the world. Every country in the world is trying to become competitive so that it can drive economic development, raise the prosperity of its citizen and do it in an inclusive way where it benefits many people and not just few who control most of the wealth in society. We talk about inclusive development everyday in US as we are now seeing a rising inequality in our society and are deeply concerned about what to do about that. But economic development is different from social development—needs for health, for environment, for nutrition are huge fields in social development. The people who do economic development are different from people who do social development. We have started to see though that the role of business is evolving and the expectation of business both in economic and social development is also evolving. So, we have 2 traditional fields of economic and social development and business sitting to its side, and we have started to seeing that these areas which were separate have started to blend in a variety of different ways. We are starting to see tremendous breakthroughs to combine and integrate economic and social development and to see the role of business in both. What we have understood is that economic development and social development are powerfully connected that if we are going to succeed in economic development we have to succeed in social development and vice versa. We can’t think of these things as different anymore. For the last 20-30 years we thought of these 2 entities to be different and there was a contest between economic progress and social progress. What we are understanding more and more is that there is no contest at all. There is a need to align and create synergy between the way we think about these 2 different things. The successful countries over the next 20-30 years are going to be the countries who would put these agendas together. They are not just going to be narrowly thinking either of economic development or social progress of the society. They are thinking of ways to synthesize these 2 fundamental aspects of human existence and human progress. India has been doing well but it has a long way to go to ultimately get to where it wants to be. Any true economic development requires competitiveness. We have to create a competitive economy if we are going to create an economy which supports jobs, and rising level of prosperity. Competitiveness helps to create a business environment and efficiency in the productivity of the economy that allows good jobs to be created. Efforts to artificially create jobs does not mean you are competitive and would not lead to a successful society. We are starting to understand that low wages are not success, and you are not competitive as you have low wages. If you have low wages it means you have not built the skill base, efficiency, infrastructure in your business environment to allow wages to be high and rising. So, we are learning all over the world now that to increase competitiveness we have to take the thinking to the next level to recognize its true character. The foundation of competitiveness in any nation, region, or state is endowment. Every location in the world is endowed with things like natural resources, geographical location, population, and group of people that have come to live there and work there. That endowment is essential for the ability of that location to be competitive. If you have a good location, a market place nearby, if you can access other markets very efficiently; that endowment improves competitiveness. If you have abundant natural resources, a large population of people living there, can provide competitiveness. What we have learnt is that the endowment you inherit does not have value in itself. To convert endowment into a really competitive advantage you have to build assets, skills and infrastructure, knowledge on top of the endowment, in order to make the endowment produce true prosperity and enhanced/rising prosperity for the citizens. In building competitiveness, we need 2 other layers, of policy and circumstance, which will allow us to be truly competitive. The first layer is macro economic competitiveness—it’s the foundation/overall platform in a society. We need to use our financial resources well and not have too much debt. We would also need to put in place the basic political institutions which work effectively, do their job and are relatively efficient in conducting the work that government must conduct. We need basic human development in order to have an opportunity to go anywhere in terms of economic development. This is the macro competitiveness level and it is critical. This becomes a first huge challenge in many developing countries. We have to get to this level of quality that enables moving beyond a low-income economy. The macro economic level, we have learnt, is also not enough. Just like endowments are not enough, just having sound economic policies, having effective political institutions is not enough either. They are necessary but they are not sufficient. What really creates competitiveness is what we call the micro economic competitiveness. That’s the capability of the actual business in the economy itself and that can be seen in 3 parts: Quality of business environment: We need to keep on raising the quality of the business environment if we are going to be more productive. It’s that productivity that would allow us to improve wages and standard of living. Every country is working in driving and improving the business environment in their country. We are benchmarking and trying to raise that bar. Capabilities of the companies themselves: You can’t have a competitive economy unless you have competitive firms that are efficient, that do business well, that are good at mobilizing their people, increasing their skills; and becoming more sophisticated and innovative over time. India is endowed with a lot of companies which are truly world class and are critical in raising the competitiveness and prosperity of the country. Notion of clusters: Clusters are where you can achieve critical mass of a whole group of companies in the same field that actually give you the power to drive much more productivity and much more innovative activity than when you talk about firms that are operating on their own. A good example of a cluster is the life sciences cluster in Massachusetts. This is by far the most innovative, dynamic, concentration of life sciences companies and related services and activities, and supporting industries in the world. This is the true lift-off factor in economic development and growth. When we build the cluster that’s where the jobs get created and new companies sprout up. This is where wages get driven up. Wages are higher when you have critical mass than when one or 2 firms are working by themselves. We find that patenting and innovative activities are concentrated where you have the critical mass because you have the ability and the flexibility to stimulate and motivate innovation. It has been proven by research that if you build a cluster you get more stability over the cycle. During the great recession in America, the regions/ locations/ cities that did best were the ones that had strong clusters. Those clusters were robust and they had more sophisticated competitive advantages, they had more flexibility to respond to the deep problems with the sharp economic downturn. A lot of new energy of economic development is about creating institutions that enable clusters to work, that stimulates collaboration across businesses in the clusters and so on. Much energy of economic development is not at the national level but at the regional / metropolitan level in cities and states. Regions and cities are the places where the energy is really happening and the economic policies must be created at the regional level for building its own economy, based on clusters and circumstances. Every city has to think about where it stands and about its business environment and the areas where it can be unique and establish world-class capability. As we diversify the economy and as we develop our economy, we understand it does not develop randomly. Growth in economy goes from strength to strength. If you have got strength in one cluster then it shows that you have the opportunity to grow in related clusters where you can take advantage of the skills, the infrastructure, the supplier base etc. We have to think about economic development strategically. It’s not about doing the same things, having the same policies as everybody else. Its about knowing your own particular region/ city/ state, where your areas of strengths are and where you have the critical mass of expertise and companies in a particular field and figuring out how to build that to diversify the economy. This is conceptually economic development that is relatively recently understood and I think it has huge role in India as India tries to continue to raise the standards of prosperity in a vast country with multiple regions and various different circumstances. Social Progress Having achieved economic development does not necessarily mean that we are done. An economic performance is not the only measure of success of society. There is a movement called “Beyond GDP Movement” which is building now for quite some time. The Human Development Index (HDI) and Human Development Report were the first efforts to do that. Amartya Sen was really the intellectual force behind that. HDI says that we have to look at GDP and also at basic health and education. More recently people have been talking about life satisfaction, happiness, what really matters is that we got to make sure that people feel fulfilled and happy so there is a lot of work around measuring that. What creates a fulfilled and happy society and citizen? All of these efforts have done good work and added a lot to our knowledge. We believe that we could take this to another level. We have to find a rigorous way to actually measure the health of the society and we came out with the social progress index. I have spent many years studying economic competitiveness and performance but last few years I have been thinking about social performance. We created the idea of Social Progress Index (SPI) to integrate the social and environment indicators and separate the economic indicators out. So, the first principle is we created the SPI which was just the environmental and social indicators and then we could look at how they would be related to economic indicators. The 2nd principle in measuring SP is to focus on outcomes and not how much money you spent, not how much you care but how much you are achieving in terms of whatever social area it is, nutrition, women’s rights etc. This way we create a very holistic measure of social progress in all countries whether poor, rich, or in between. We wanted to do this in a way which is sufficiently rich and granular so that it is actionable, it uses benchmarks to see how you are doing, and then hopefully drive change. To do that we have to be looking at specific things, you can’t be looking at broad principles because they are not really actionable. Let’s start with the definition. Social progress is the capacity of a society to first meet the basic needs of its citizens, shelter, and safety, and so on. Secondly, establish the building blocks which would allow both the citizen and the community to enhance and sustain the quality of their life. Thirdly to create the conditions that every individual could reach their full potential whatever that was. This was the definition that we evolved to. This led us to comprehensively look at all the literature on social development which is vast, and say how do we capture this and what is the best available data/ matrix that we have to measure the health of the society. The framework evolved into one we published in April 2014, the first version of the global SPI. It was able to cover 132 countries in the world. It covers the highest percentage of population in the world. It covers most of the important countries of the world although there were a few conspicuous countries which had to be left out since there was no data to accurately assess them. There are basic dimensions of human needs that emerge from literature and from all the work that we have done on well-being and opportunity. This effort is evolving and we have had a beta version and continue to refine this basic framework which has been relatively well accepted. For each of these areas there are some specific indicators of success in society that are based on internationally respected data, consistently developed across countries. Some come from World Bank, UN, individual NGO and we have gone through an extensive process and tried to make this a robust effort. Ranking of 132 countries was done and ranking emerged from the individual indicators, methodology and construct for an overall index. We can construct and cut this data in variety of ways. India ranks 102 and in general more advanced countries were higher and poor developing countries were lower. But there was a lot of variation. We had some wealthy countries that were doing so well at this and some medium countries that were also doing very well. What we are trying to do is to decompose the economic and the social and see how they are related together. There are outliers also like Saudi Arabia—quite high in income but well below where they should be in terms of their income and social progress. We see other countries fighting about their way. New Zealand, for instance, is more of an upper middle country and had the highest objective matrix of health of society of any country in the world. India is much lower income country and the social progress is little less than you would expect given the level of average income. India is a very complex country. It is large. There are lots of states. We are driving this measure down to the level of states, cities and over the years there would be lot more insights on what’s really going on here. India is currently underperforming on social progress relative to the level of economic development, but I want to caution that India is very heterogeneous in terms of lots of different groups/ regions and the idea of average score board is problematic. The countries that do best on social and economic indicators are the countries which are self-critical and can use the indicators to mobilize change. Shared Value What’s the role of business in society? The role is to create economic prosperity and build business by making a profit. Businesses success is not independent of society and the need that businesses meet are not independent of the needs of the society. That’s led to the development of notion of shared value. Historically we have thought of it in an evolving way. Traditionally, businesses would affect society by giving money and making donations. This mindset of business giving back is important and we support that. It energizes business to influence the community around it as if the business does not have a good influence then there are no prospects of business to grow and thrive. Beyond that companies have taken to CSR. Raising the bar in terms of citizenship, compliance, sustainable behaviour, not doing harm, not polluting the environment, mitigating the risks, preventing damage to society and discrimination against people. I am proud of business communities globally and the Indian business community in terms of their commitment to be good citizens, to be sustainable, to mitigate harms and impacts that the business are having that are not good and through this improving the trust of business. As business got focused on maximizing shareholder value and did not really think about the community, that led to a lack of trust and support in business in many parts of the world. We believe very strongly that philanthropy and CSR are not the most important effects of business on society. The way in business we can affect the society the most is through our business, through our products, and the way we produce our products. Through the way we source our raw materials and inputs through those products and through the way we create better infrastructure in the communities in which we are doing business. All these things are not social things. They are things that are tied to the fundamental profit and success of that business. We are coming to believe that at this moment in history the greatest opportunities for business are actually in meeting conventional economic needs, in addressing societal needs including environmental needs with the business model. Which means we do it in a way which makes profit. We are efficient enough to deliver important social needs in a high enough way that we can make profit. I want to emphasize that this should not be seen as balancing business vs society. Balancing suggests that we have to do different things to benefit society and different things to benefit business. We believe all of you need to think about how you can drive progress in society through your business in a way that allows your business to thrive. If we can produce a product like Unilever for instance, that allows people to have better health. You reduce diarrhea by having a market campaign for soap that helps people to wash hands. The impact that you can have is much more important/ significant than you can have with CSR or donation. If we want to move the needle in society we have to bring the meeting of social needs into the core of the thinking about strategy and about business. The problem with philanthropy and CSR is it is not self-sustaining. Every year we have to give more money. In CSR we have to spend more money but when we talk about shared value it is self-sustaining. You can come up with a product that really moves the needle on something for society, low income housing, better nutrition, better health, good environment. Way back in history this is what capitalism used to be. What we have in most countries of the world in terms of infrastructure, quality of life, housing, food, etc all the things that we depend on everyday, exist because of business and traditionally business used to think that way. Business used to think of critically driving and meeting the needs of the community and citizens but somewhere along the line in the last 20 years we have got so clever and sophisticated about strategy, business, finance, shareholder value that somehow the mindset blinded us to the tremendous impact we can have in society through our businesses itself. Ultimately business has a profound impact on economic development, business has an important stake in improving the clusters in which they are operating, and raising the bar in terms of business environment. Business also has a profound impact on social progress, on meeting human needs, on improving the quality of life, on creating opportunities for citizens. In terms of where the business should be playing, I think the social progress index with its green and its red and yellow boxes starts to create insights on where you might play, where are the needs in the society that you could possibly meet when you do business. We have to close the loop in society. We cannot have government fighting business, and business fighting NGOs, everybody pursuing their own issues. We have to see that we are on the same team, we have the same fundamental goals, though there is tremendous difference about how we think about the solutions. I think the more we think about the solutions, not as redistribution—take things/ money from one group and give it to another; the more we can see solutions around collaboration, innovation, and harnessing institutions for what they can do best, the more we would make progress.