In Conversation with Mark Kramer

In Conversation with Mark Kramer In an interaction with Mark Kramer, co-founder and Managing Director of FSG, a nonprofit consulting firm, he shares an in-depth view on the Shared Value construct, its many advantages and opportunities, and how it can be successfully applied in the developed and developing world. "Shared values says that you have got to be improving your customers well being because of the product you sell and the way you sell it." "I think the greatest human benefit of shared value will come in the developing world, where so many basic needs, so much basic infrastructure is missing." How do you think shared value is really working in redefining the capitalist way? I think shared value is redefining the way capitalism is operating and being conceptualized. We have always thought of companies as being pure economic players and the social and environmental impacts that they create did not have any impact on the company’s performance. As the world becomes much more complex, much more interdependent what we are finding is that these things that we thought were externalities really have tremendous internal cost. Historically, we thought of companies as purely economic creatures that did not need to take into account the social and environmental impacts or indeed the competitive impacts around them. What we are finding is that these things that we thought were externalities in fact have tremendous internal cost. We’re also finding that there are tremendous missed opportunities when companies are focused on only serving the well to do through traditional distribution channels at traditional pricing models. They miss most of the world’s population and there are immense opportunities to bring much-needed goods and services to people who today do not have access to them and this could be done profitably. We are seeing that shared value is redefining capitalism in two ways. One is thinking about the cost of operations and the value chain where we’re realizing you can improve these things by addressing the social, environmental issues that impact your business. Secondly in terms of new opportunities, creating new products and services that reach new markets or that help address the emergent societal needs. According to one school of thought, the world seems to be divided in two sets of thinking, wherein one set believes that capitalism is good and the other that it is evil. How do you think this gap can be bridged? I think it helps to bridge the gap by example. Capitalism I would agree with Michael Porter is a tremendously powerful force for innovation and for efficiency and for scale and these are things that government and NGOs cannot do as well. It is very hard for NGOs to scale, it is hard for governments to be innovative and efficient but this is where capitalism has pushed tremendous advances in the world over the last century. But, capitalism can do evil and I don’t think that unbridled capitalism without any government regulation or constraint is likely to result in a very fair or just society. There need to be some ground rules. What shared value enables us to do is to begin to first of all encourage companies to document the positive social benefits of their operations and encourage them to find new avenues and new products and new opportunities to do more things that create positive social benefits. Companies focused on shared value initiatives have undeniably created great social and environmental value and have been able to do it on a scale that non-profits are unable to match. The biggest criticism of the shared value concept has been that this is just another work for base of the pyramid (BOP) or this is just another name for frugal innovation. How do you counter this? The shared value concept is very much an umbrella concept and it absolutely overlaps with bottom of the pyramid, it absolutely overlaps with sustainability in many ways. Not every product that’s sold in bottom of the pyramid though is necessarily done so in a way that is good for people. Shared values says that you have got to be improving your customers well being because of the product you sell and the way you sell it. We see many examples in upper income markets and in developed countries of shared value. When Dow creates a cooking solution for fast food restaurants in the U.S., it reduces trans-fat and is heart healthy and that’s not a bottom of the pyramid product. Even when it overlaps with bottom of the pyramid and certainly bringing goods and services to people who don’t have access today is an important social benefit that doesn’t begin to describe the entire scope of it. I think the same thing is true of sustainability. Not everything that reduces an environmental footprint saves money. Those that do are legitimately shared value. Those that don’t may still be necessary, may still be important but they are not shared value. I think shared value is above all about competitive strategy and the competitive positioning of the company relative to others in its industry. I think these other concepts such as bottom of the pyramid are often seen as an ancillary piece to a company that is already thriving and focused on top of the pyramid and sustainability is often seen as a cost setter and something off to the side that has to be managed. Neither of these is typically seen as a dimension of the value proposition and the core competitive strategy of the company. Don’t you believe that competitive advantage has to be sustainable; otherwise, enterprises will lose out over a period of time. How does your construct overcome the whole ideological thing that’s happening right now? Certainly companies need to adapt to changing circumstances and what is absolutely true is that what was the competitive advantage may need to be modified or changed to be sustained in the face of innovation and other changes in the economy. Of course, it’s difficult for very large companies to change. We see in the start-up companies that they are the ones that have conquered the internet more than established ones because it’s so hard to change a large company that’s already at scale. There are lots of reasons why companies that have what appears to be a sustainable competitive advantage weren’t in fact able to sustain it. The basic idea that you’re serving a set of customer needs uniquely well because you have a laser like focus on just meeting their needs and you therefore understand them better than anybody else and can serve them better than anybody else and over time you’re able to refine your operations more and more to directly target and benefit and officially serve that clientele. If that’s true then other companies really cannot compete with you. I think shared value adds a new dimension, a social dimension to competitive positioning and so it is one more way in which a company can differentiate, can define the market it is serving and the benefits it’s providing to those customers. Shared value initiatives can develop a distribution model and a pricing model that meets the needs of customers at an affordable price. You’re saying that market based solutions will really solve the problems of the world and those solutions will have to imbibe the social aspect or the social construct in which they are operating. I believe the real value of your construct is actually going to come from the developing world or the world that is facing huge levels of disparity, from sanitation to health to education and so forth. I agree with you. I think the greatest human benefit of shared value will come in the developing world, where so many basic needs, so much basic infrastructure is missing. There is so much suffering and disease and poverty that could be eliminated. Although I agree that shared values greatest human impact will be in the developing world, I don’t believe that shared value is the answer to every problem in every way. There is a role for government and government policy that can never be taken over by private enterprise and there is also role for philanthropy and NGOs, because not every need can be met with market-based solutions. I believe that there is and always will be a need for cross sector solutions, for solutions that engage government and NGOs as well as companies. In a country like India where majority of the people are not covered by insurance, even the ones who are covered with insurance do not have adequate coverage. There are people who just do not have the kind of disposable income needed to go for insurance. That means it requires different actuarial thinking, it requires different sets of models. How do you think insurance companies should look at these constructs to create effective models? Insurance is a great example where we’re used to actuary models that are based on well-to-do populations and very expansive healthcare provisions. The key factor is how do you get the right risk profiles spread over a large enough population to make insurance viable. We’ve seen examples of a major mobile phone company in Africa that is providing health insurance because in doing so they’re reaching a huge and largely healthy population that enables them to actually bear the cost of the health insurance for those who are sick. In China, we’re seeing another partnership between an NGO and an insurance company that is working with factories. By getting into one of the large factories with 250,000 people they can get a broad enough base. These are very different ways of selling insurance, of devising the actuarial tables than what we are used to in the U.S. or in the developed world. There are viable business models there but you have to really understand the market. You have to find new ways of selling insurance and you have to build up enough experience to be able to develop the actuarial data that we don’t otherwise have. I think there will always be a role for government and healthcare. I don’t think that there is anyway around that but that doesn’t mean that there isn’t a supplementary role for insurance companies even for very low-income populations. Coming back to my earlier question of bridging the gap between have’s and the have not’s. What if the construct is not going to get to its full potential? Unfortunately we’ve seen that countries and regions that fall into a trap of poverty particularly when it’s combined with bad government can stay in that for a very long time. You get into this vicious cycle where there is no incentive for private investment and therefore there is very little innovation, there is very little new opportunity. Unless we can bring a shared value lens to situations like these, companies are not going to go in there and we’re not going to see economic growth and improvements in standard of living. The second thing I’ll say is that I don’t think it has to be about shared value. There is a much broader movement that redefines the role of corporations in society. We talk about it in terms of shared value and we think shared value helps you understand how to tie it to corporate strategy and operations but there are many others out there using different terms like conscious capitalism but are saying very similar things. Whether shared value as a concept prevails or not, I think the more enlightened understanding of what business brings to society and what business needs and depends on society for, that interdependence I think is becoming much more clear in many different ways. So whether shared value as a term is being taught in business schools or something else is taught, I think that the trend is irreversible. How do you foresee the shared value initiative having an impact on the system in India? If shared value helps provide a platform for discussion, for conversation, for innovation, for strategy, that it self is helpful. There are so many examples of wonderful shared value initiatives that are already underway in India. I think there is a very unique situation with the 2% CSR requirement and as the legislation is drafted, even though it does not directly apply to shared value investments by companies, I think it does enable partnerships between companies and NGOs that create shared value initiatives. There is no other country in the world that has a 2% law like that and I think the amount of money that could potentially channel in to shared value initiatives is tremendous. Anything else you would like to tell enterprises within India regarding shared value? That it is not about 2%, but about that 98%, about the major part of your business. One of the challenges of bringing shared value to India is that it has been such a rapidly growing economy. The leaders of business face a tremendous number of opportunities all of which are very attractive and the hard work of developing a new business model to reach a population that hasn’t been reached or to create new products that are more beneficial to customers sometimes doesn’t seem to be as necessary when there are so many other low-hanging fruit available. On the other hand I see that the leading families of India that own so many of these businesses are also very charitable. They see a patriotic duty in helping ensure that growth is inclusive and carries the entire population. Their businesses are in fact a powerful vehicle to help create social progress throughout India, than mere philanthropy. What do you think are the shortcomings with this construct that you would like to overcome in the future? I think we need to do a better job of explaining how shared value is tied to strategy and making it clearer to people that this is not just another term for corporate social responsibility. I think we need to be very clear by industry, what are the shared value opportunities in pharma, in banking and so on because the issues are often industry specific. I think we need to do some work around the role of government policy. In theory, business can actually solve some of these social problems that cost the government so much money. There is a strong argument for government subsidy but how do you put them in place in a way that really creates the right incentives and not the wrong ones. I think that there is a need for new financing mechanisms here. Healthcare is a great example where the cost of prevention is so much less than the cost of treatment or cure and yet we haven’t found a way to capture that savings in a way that can create a market. If we can capture those savings then there is tremendous money to be made. We really need some financing instruments that bridge some of these gaps in order to give companies the incentives and the profits to really go after some of the social problems that are costing our society so much money.

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