Shared Value – The Concept
Mark R Kramer, Managing Director, FSG at the Shared Value Summit 2015 breaks down the concept of shared value and shares examples of how social impact can create benefits for businesses.
“Philanthropy is about sharing a piece of the pie. Shared value is about making the pie bigger for everyone. It is scalable and sustainable in a way that philanthropy is not.”
“The essence of strategy is about making choices as to what you do differently to deliver more value to your customers, and we are finding that the social dimension of that value is an unexplored competitive advantage for most companies.”
Business has an obligation to be “a good a citizen” to support the communities where it operates. Business should continue doing that, but that’s not enough. Companies thought of corporate social responsibility (CSR) about 30 or 40 years ago, but that is very different from philanthropy. According to our studies, CSR has been interpreted as minimizing harm, thinking about the company’s environmental footprint and reducing that, thinking about working conditions, the supply chain, the safety of the products and so on. While business needs to keep the focus on CSR but it would also mean missing an opportunity.
The opportunity that Michael Porter and I began to focus on was the idea of finding business opportunities in solving social problems or using business as a tool for social progress not out of philanthropy or CSR but as a business strategy.
It takes a different mindset to treat social problems as business opportunities, a willingness not just to be kind and considerate but to think about what is the business model and the return on investment. Once we start thinking that way, there is a tremendous reward both for the business and the society, that the traditional ways of engagement do not provide.
We focused on the synergy between business and society, the interdependence rather than the friction between them- which many activist groups and social sector organizations have tended to focus on. We found that the long-term success of companies is dependent on the social conditions in the regions where they operate. An educated and healthy workforce, infrastructure, distribution network and natural resources that could be used sustainably are an essential requirement.
In fact, there are things business can do to solve social problems that social sector organizations cannot. It was observed that if we have to raise the standard of living then; we need to engage in business; we need private enterprise to create the prosperity that provides incomes to people, tax revenues to government and the basis for philanthropy. Also, companies have an incentive to take a risk that most governments and nonprofit organizations or NGOs do not have. They also have scaled resources that dwarf that of government and the social sector. The firms have an opportunity to innovate, a drive for efficiency and are focused on whether the products, services and ideas they put out to get taken up. So when you have a business model that can address a social problem profitably, you can scale it up very easily as one has access to capital that the private, the social sector and government do not have. The model is sustained without depending on philanthropy or government revenues.
Not every problem can be solved through a business model. There is an inescapable role for government and social sector enterprises. There is, however, a new way to partner instead of seeing government, business and the social sector in opposition to each other. If they begin to find a common agenda, it turns out to be much more powerful.
Defining Shared Value
Shared value are strategies that simultaneously create value for society and create real economic value for the business and its shareholders. Shared Value does not mean sharing value that has already been created. Philanthropy is when you’ve already made money as a business, and you give some back to society. It also does not mean to share personal values. The values of the leaders of our companies are tremendously important to ensure that the companies operate with integrity. We are looking at creating social and economic value that has a measurable impact at scale.
The definition of shared value is interpreted differently across the globe. A lot of people think that creating shared value is just another word for CSR. Shared value is, in fact, a competitive strategy. It is an excellent opportunity for business to work with government, civil society and development agencies.
Understanding Shared Value with examples
Here are some examples to show what innovation and strategy mean and how we can get business to think differently so as to achieve social progress in the next decade. India has a number of smallholding farmers, and when there is a crop failure, these farmers have no way to feed their families. They would try to find alternate work, but everyone in the region would be doing the same thereby increasing competition. The farmer may try to sell their assets, but the same would be done by others too. It is impossible to think about a traditional model for crop insurance for the small farmers because the transaction costs of getting an agreement with a farmer and then measuring whether the crop was damaged are too expensive for these small farms. The success and failure of a crop are dependent on the amount of rainfall, and we have the data for this. A model has been created by ICICI Lombard wherein the farmer could do the entire transaction on their mobile phone and in person inspection of the farm was not required. The rainfall in the region has to be recorded. About 12 million farmers in India are insured through this model, which is profitable and scalable business model. This crop insurance model is very successful, and the sales are higher by 30% if an NGO approaches the farmers. It is an excellent example of how business can come up with an innovation that solves the social problem that NGOs have been working on.
Similarly, if we look at the issue of housing in India, we observe that a number of people are coming to the metropolitan cities but end up living in slums because they are unable to afford housing. Though the people are earning money, but, they do not have a way where they can get a loan from the bank. FSG came up with a fascinating model where they worked with architects to design small, inexpensive homes which could be sold for about $10,000 to $20,000 including a profit. So, FSG came up with a new micro mortgage market that enabled people with informal incomes to qualify for a loan. As a result, 80,000 homes have been built. It is a very attractive business model because when the builder makes a commitment to build it, people want these and they will put up a deposit equal to half the purchase price which in turn finances the construction. This becomes a very profitable model for the builder.
These are the kinds of innovations that are at the core of creating shared value. It’s about doing business differently, and designing solutions that work in markets that haven’t been addressed before. Philanthropy is about sharing a piece of the pie. Shared value is about making the pie bigger for everyone. It is scalable and sustainable in a way that philanthropy is not and it is only when a business earns a return that they can justify investing at scale.
Some years ago the growth strategy of General Electric, was going to be called Eco-Imagination program. It involved creating new products that were more energy-efficient. About $12 million was spent on research to find out about more energy-efficient devices. This money could not be dedicated to philanthropy because of a shareholder revolt. To justify the scale of investment, there had to be a real business case, and so shared value is found at this intersection between social need, business opportunity and the assets and expertise that a company brings. It operates its three levels- reconceiving needs, customers, markets and products, redefining productivity and the value chain keeping in mind the environmental impact and looking at the relationship with suppliers.
Abbott is also building up their nutrition business in India. Hence, they have to find local sources of milk which means working with smallholder farmers to improve their productivity in their value chain and not as philanthropy.
Lastly, it’s about enabling local cluster development. For, e.g.,. In India, Novartis has an Arogya Parivar program, which means healthy families. They were selling their products in the major cities, but they had no access to 70% of the rural population. The people living in villages were not educated and were still practicing Ayurvedic medicine. They did not have access to doctors, nurses and modern diagnosis or treatment. So, the first step was to educate and train the rural people especially women so that they could become health educators. By doing this awareness was created about symptoms, prevention, child care, etc. Health camps and mobile vans with doctors and nurses were organized in rural areas so that the local people could visit them for diagnosis. It is an entirely new way of distributing the products wherein many local clinics and pharmacists are a part of the distribution system. By doing so, Novartis is now reaching a market of 80 million people that they could not sell to before. The value chain has been altered, but they have also created a healthcare cluster that did not exist before. It also enables other healthcare companies to come in with other drugs and medicines.
Shared value creates a virtuous cycle where the social impact creates a business benefit, a business return that then justifies investing more and growing the social implications. It does not happen with philanthropy in most cases. Philanthropy may do good and achieve social impact, but it doesn’t do it in a way that comes back to the business that justifies this continued investment.
What is a strategy? There are a lot of companies that say our strategy is to be number one, but that’s not a strategy. There are a lot of businesses that say our strategy is to consolidate the industry through mergers, but that’s not a strategy. And there are others who say well we have a purpose to serve our customers, and that’s our strategy but again that’s an aspiration, it’s a mission, it’s a value statement but it’s not yet a strategy.
As stated by Michael Porter “Strategy is a specific set of choices that define the distinctive approach that your company is going to take that gives you a competitive advantage over others and would draw a distinction between operational effectiveness and strategic position.” Operational effectiveness is adopting best practices in your industry. It’s about keeping your costs low, being efficient in every way or running a race faster than your opponents. Strategic positioning is finding a unique place where you can deliver more value for people because of how you operate. It’s not running faster; it’s running a different race.
Companies have not traditionally thought about their social and environmental impacts and opportunities as part of their strategic position. They thought about reducing their environmental footprint and saving money in the course of their operational effectiveness but have they built social impact into their strategic positioning.
One great example is of a health insurance company called “Discovery Health Insurance” which is based out of South Africa but now operates all over the world. Adrian Goree started the company and according to him, insurance is about changing behavior. He worked with Nobel Prize-Winning behavioral economist to develop a set of incentives for their members. For, e.g., If you belong to a gym and visit it twice a week, they would pay 80% of the membership, but If you stop going, they stop paying. If you go to the grocery store, and you swipe a card, you’ll automatically be reimbursed 5% of whatever you spend on fresh fruit and vegetables but not junk food. Similarly, If one exercises regularly, one would get upgrades on Emirates Airlines. They discovered that they could offer their insurance at a lower price than their competitors and still make 42% profit margin on health insurance because they have been able to get their members to be healthier.
So shared value is about this idea of adding a social dimension to strategy, incorporating it in the value proposition. As stated by Michael Porter “A successful strategy is about having a unique value proposition and a distinctive value chain.” The work done by Discovery Health Insurance is different in their day-to-day operations from what any other health insurance company does, and this gives them their distinct advantage. They have to make trade-offs. They can’t serve the lowest price market because the model doesn’t work there and the choices have to fit together in a mutually reinforcing way – like their life insurance, and health insurance makes it harder for you to switch or get out of their program as it requires continuity over time.
The essence of strategy is about making choices as to what you do differently to deliver more value to your customers and increasingly we are finding that the social dimension of that value is the one truly unexplored competitive advantage for most companies.
Role of Government & Social Sector
Shared value creates a new agenda for government and civil society as well because the changes that have to happen to support new ways of doing business often need a policy basis behind them. They often need to involve NGOs who understand the populations and the markets.
With the new law where the companies have to spend 2% on CSR, there is a tremendous opportunity to work with the government. The corporates need to think about how to use the 2% not just for philanthropy but for shared value opportunities that strengthen the business and can improve lives on a scale with sustainability. To conclude we believe all profit is not equal. You can make money in a way that exploits society that takes away from people, that ignores social issues and social benefits, and ultimately we think that is self-defeating. Your greatest competitive advantage and the next competitive frontier of capitalism is really about figuring out where the social and environmental problems are, that your company is uniquely able to solve and make money doing it.
These are transcribed interviews, and we have tried to retain the tone of the verbal conversation.