Shared Value - Nuova Vista

1 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 The Big Idea Capitalism is under to set policies that sap economic growth . The purpose of the corporation must be CREATING SH A. 2 Harvard Business Review January February 2011. For article reprints call 800-988-0886 or 617-783-7500, or visit trust in business is causing political leaders Business is caught in a vicious redefined around H ARED Value How to reinvent capitalism and unleash a wave of innovation and growth by Michael E. Porter and Mark R. Kramer January February 2011 Harvard Business Review 3. 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.

2 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, Nestl , 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.

3 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lies with companies preciation of societal needs, a greater understanding themselves, which remain trapped in an outdated of the true bases of company productivity, and the approach to Value creation that has emerged over ability to collaborate across profit/nonprofit bound- the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.

4 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.

5 The presumed trade-offs are asking business to step up. between economic efficiency and social prog ress 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.

6 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 Harvard Business Review January February 2011. For article reprints call 800-988-0886 or 617-783-7500, or visit 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 .

7 This will lead to new ap- power to unleash the next tel, Johnson & Johnson, Nestl , 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.

8 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.

9 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.

10 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 C te 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.