The rapid advance of society in all senses requires that organizations, in addition to being part of capitalism and satisfying the needs of the market, include in their development and growth the creation of shared value that allows them to improve both their conditions within the competition and the conditions of the environment they are part of, in order to show progress that is not only economic but also social and cultural.
At first the companies developed their relationship with the communities with charitable or philanthropic activities. Donations, breakfasts, chocolates or sponsorship at certain events are clear examples. Then came corporate social responsibility (CSR).
CSR implies a higher level in terms of sharing value with the community, but still constrained by the limits imposed by the demands of shareholders to generate higher profits. Investments in schools, training of residents, community activities, etc., configure larger social commitments.
The next level is the creation of shared value, whereby companies must align their capacity to create value with the needs of society. When both things occur at the same time, then we say that value has been created for society.
If we want to make an analogy in the field of satisfaction that is achieved in the community, we would say that activities of a philanthropic nature could satisfy the population for one day and CSR for a year. Instead, creating shared value is a lifelong experience.
Let's look at some examples. The application of the concept of creating shared value makes Alicorp no longer a food producer but a nutrition company. By developing campaigns for mothers to better feed their children, by supporting the community on issues related to nutrition, this emblematic Peruvian company goes to another level, as it creates value for society.
In the United States, McDonald's no longer talks about its products but about the work it does with farmers to make better lettuce, without using pesticides. The same with growing potatoes and working with farmers who raise cattle for meat production.
This alignment with the needs of the population means that companies reinvent themselves from being product companies to becoming solutions companies.
Thus, the well-known transnational Shell is moving away from the bias of being an oil company to become an energy company, investing in renewable and clean energy generation options such as solar and wind.
According to Porter and Kramer, companies today are no longer seen as solutions for society, but as problems; today, capitalism is almost a dirty word and it is necessary that it also contribute to creating social impact. Efficiency in the economy and the social process are not opposites; businesses must reconnect company success with social progress. Therefore, it is necessary to create economic value that generates social benefits beyond the natural ones of the company.
Shared value
These authors define the concept of shared value creation as: operational policies and practices that improve the competitiveness of a company, while helping to improve the economic and social conditions of the communities where it operates. Creating shared value focuses on identifying and expanding the connections between economic and social progress. The concept of shared value recognizes that social needs, and not just conventional economic needs, are what define markets.
However, companies still consider social issues as marginal and not as part of their business “core”, according to Porter and Kramer: companies continue to have a narrow vision of value creation, optimizing short-term financial performance. term within a bubble while ignoring the most important customer needs and ignoring the broader influences that will determine their long-term success. (Porter, 2011)
Michael Porter did not become a giant in the area of competition and strategy by tackling trivial problems. From the beginning of his career, he dealt with the most momentous and significant question in management: Why are some companies more profitable than others? An important question led to another: why are some industries always more profitable and what does that mean for a manager who is going to design a strategy ?; Why do some nations or regions prosper more than others, and what does that mean for business in a global age? (Magretta, 2011)
Professor Michael Porter said so. The classic responsibility of entrepreneurs and philanthropy are not enough to respond effectively to social needs. The purpose of companies must be redefined because their progress and existence depend on that. There is a way to do it. What does it consist of and how to put it into practice?
As stated by Melé, the theory of Corporate Citizenship can be condensed in the statement signed by 34 executive directors of the world's largest companies at the World Economic Forum in 2002: “Corporate citizenship refers to the contribution that a company makes to the society through its nuclear business activities, its social investment and philanthropic programs and its involvement in public policies ”. (Melé, 2007)
In the article "Strategy and Society", published in 2006 by Porter and Kramer, the authors argue that the strategy of companies must go beyond best practices, it must choose a unique position, do things differently from the competition; articulated under the concept of "Business Strategy". In this regard, Vidal mentions: Business strategy is the deliberate search for an action plan that develops the competitive advantage of a company and accentuates it so that it can grow and expand its market by reducing competition. The strategy articulates all the potentialities of Daena: International Journal of Good Conscience. (Vidal, 2011)
In order to create shared value, the vision must be translated into a clear strategy that focuses on a limited set of opportunities. A good strategy should be adjusted to reflect a company's unique positioning, capacity, and competitive landscape. A clear example of this is Nestlé, which in the last five years has pioneered a shared value approach. It has defined a clear strategy that focused on three key aspects: rural development, water use and nutrition. Focusing on nutrition, the company can differentiate its products while contributing to the health and well-being of consumers, the company does not neglect other areas, such as energy efficiency. Companies must develop a strategy that incorporates measurable objectives,robust shared value creation and leverage unique corporate assets. Nestlé is one of the world's largest food and beverage companies and the world leader in dairy and coffee. Located near Lake Geneva in Switzerland, the company employs approximately 280,000 people in 165 countries. The company was founded with shared value at its heart more than a century ago.
In 2005, three priority themes were selected to focus on: rural development, water use and nutrition. The first two areas were mainly related to the company's supply chain. Farmers produce most of Nestlé's raw materials. To meet Nestlé quality and reliability standards, farmers need strong rural economies, access to sufficient irrigation water and fertile soils. The third area focused on consumers: Nestlé saw products of superior nutritional value as a source of competitive differentiation. The company has held conferences in New York and London to explain the idea to investors and highlight the benefits for long-term wealth creation. It has created a Board of Directors, chaired by the General Director,moving toward shared value through Nestlé businesses. And most recently, he has launched a training program targeting all 280,000 employees ranging from forklift operators to C-suite executives to explain shared value and how it relates to their work. Another example of shared value in companies is the General Electric company's “healthy imagination” program implemented to produce significant social and financial benefits of shared value. GE is the market leader in companies spanning a wide range of industries. The company has had considerable success through its Ecomagination strategy, which works to reengineer thousands of GE products to reduce their environmental impact.This initiative generated more than $ 17 billion in revenue in 2008. Building on this approach, GE identifies its Division of Health Care as another opportunity to create shared value. To position itself ahead of these trends, GE launched Healthymagination, an integrated corporate strategy in 2008. While the strategy is just beginning, the first results are already impressive. Twenty-four new products have been developed, and the company is kicking off to create 100 innovations in 2015. A recent review of Healthymagination's philanthropic component, known as global health development, found that in Ghana the number of hospital deliveries is 50 percent, the use anesthesia and monitoring in surgery is as much as 250 percent higher, and outpatient care is up to 200 percent higher,depending on the condition. (Bockstette, 2011)
As has been pointed out, companies that decide on a transformation process towards shared value must understand that this implies a strategic effort extended to all individuals; an allocation of important management resources to impact the daily development of business activities. For this reason, it is essential that they have a clear horizon and strategic importance.
The particular orientation towards initiatives in this line begins when the presidency of the company takes ownership of the process and facilitates the formation of a management team with the capacity to make strategic decisions and assign resources. One of the first tasks of this management team is to form a group of executives, who identify possible initiatives to generate shared value.
Together, they will start the process of strategic transformation where they will co-observe their own reality and that of the environment, and will open their minds to change. This will allow them to identify and question the paradigms on which the business is based, the conditions that are an obstacle, those that are a strength and those that must be acquired. Only until then, the company will be prepared to identify and crystallize possible initiatives, as well as deepen knowledge about the benefits for the organization and society. The next step will be to design a business model that includes challenges and objectives, and prioritize the initiatives that will be implemented.
Professor Porter never tires of repeating it: “The companies that have the creation of shared value as a strategy are the ones that will be successful in the next 20 years. Shared value is the greatest opportunity for growth and innovation in the global economy, and the next chapter in the mindset of managers. ”
Shared value (CVC) should replace corporate social responsibility (CSR) as a guide for companies' investments in their communities. While CVC leverages a company's unique resources to create economic value by creating social value - and is an integral part of a company's profitability and positioning - CSR is primarily focused on reputation and has a limited connection to the business. This makes it difficult to justify and maintain in the long run.
The roots of shared value
Strategic theory says that to be successful, a company must create a distinctive value proposition that meets the needs of a chosen set of customers. It seeks to obtain competitive advantages with an adequate configuration of its value chain or through the set of activities involved in the creation, production, sale, delivery and support of its products or services.
The point is that they have paid more attention to the sector or business where they sometimes overlook the profound effect that location has on productivity and innovation.
Companies are focused on attracting consumers to buy more and more of their products. Faced with increasing competition and short-term pressure from shareholders, executives turned to successive restructurings, downsizing and relocations to lower cost regions. The most common results are commoditization, price competition, little real innovation, slow organic growth, and no clear competitive advantage.
With today's globalization, many companies no longer recognize a place as home, but see themselves as "global" companies. With vertical integration using external providers or offshoring, their connection with their communities was weakened, losing important opportunities for value creation.
Faced with these situations, the communities where the companies operate receive few benefits (layoffs, relocations…) when they simultaneously increase in business profits. Rather, they perceive that the profits of companies are produced at their expense, an impression that has been strengthened during the current recovery of the economy, where little has been done to alleviate high unemployment, the hardships of local companies and severe pressures on community services.
The concept of shared value can be defined as the policies and operational practices that improve the competitiveness of a company while helping to improve the economic and social conditions in the communities where it operates.
It redefines the limits of capitalism by better connecting the success of companies with the advances of society, opening up many ways to meet new needs, gain efficiency, create differentiation and expand markets. It is about creating economic value by creating social value. There are three different ways to do it:
There are three key ways that companies can have opportunities to create shared value:
Recognize products and markets. It's about addressing unmet needs to produce increased revenue and profitability. It is about increasing revenue growth, market share and profitability through the environmental, social and economic benefits generated through a company's products or services.
Redefine productivity in the value chain. How better management of internal operations increases productivity and reduces risks. We are talking about improvements in internal operations that reduce costs, improve access to raw materials and improve productivity achieved through environmental improvements, better use of resources, investment in employees, supplier capacity and other areas.
Development of local support clusters for the sector around the company's facilities. We are talking about creating shared value by improving the external environment for the company through investments in the community, strengthening local suppliers, collaborating with institutions in a way that helps increase business productivity.
Through the concept of shared value, it is possible to redefine better connecting the success of companies with the advances of society, it is possible to have a better vision of how to meet new needs, gain efficiency, create differentiation and expand markets.
Recognize products and markets.
The needs of society are enormous: health, better housing, better nutrition, help for the elderly, greater financial security, less environmental damage. You could say that they are the main unmet needs in the global economy.
In advanced economies, the demand for products and services that meet the needs of society is growing rapidly. Thus, for example, food companies, traditionally focused on taste and quantity, are refocusing on the fundamental need for better nutrition or certain needs, such as food for celiacs.
Continuous exploration of societal needs will lead companies to discover new opportunities for differentiation and repositioning in traditional markets, as well as recognizing the potential of new markets that they had previously ignored.
To meet needs in underserved markets, for example gluten-free foods, redesigned products or different methods of distribution are required. These requirements can lead to fundamental innovations that could also have an application in traditional markets such as, for example, microcredits, designed to meet the unmet financing needs in developing countries, but which today is growing rapidly in Europe and the United States. United, where it is filling an important void that had not been recognized.
An example is how the pharmacy business has changed. On its shelves it is difficult to see a medicine. They have expanded their business, among others, to dermopharmacy for, for example, skin care, homeopathy, weight loss treatments, products associated with nutrition at all ages, they have extended hours.
Redefine productivity in the value chain
There are many ways in which a company can monetize itself by addressing societal issues. With this new mentality, we will see that the congruence between social progress and productivity in the value chain is much greater than what was traditionally thought. This synergy grows when firms approach social problems from a shared value perspective and devise new ways of operating to address them.
There are unmistakable signs of a change. It used to be thought that efforts to minimize pollution inevitably drive up costs for businesses and were only due to legal requirements and fees. Today, there is a consensus that improvements in environmental management, which can be achieved with better technology, implies very important savings due to a better use of resources, having more efficient processes and, ultimately, products with a level of quality. higher.
Let's look at some of these savings:
Improved energy use. Energy use throughout the value chain is being re-examined due to high energy prices and a new awareness of opportunities for energy efficiency and global concern about the greenhouse effect. The result has been dramatic improvements in energy utilization through the use of economically viable best available technologies.
Better logistics management. The logistics systems are being redesigned to reduce the times and routes of shipments, optimizing their processing, improving vehicles, modifying the size of vehicles, using new routes taking advantage of the best infrastructures.
Improved use of resources. High environmental awareness and advances in technology are catalyzing new approaches in areas such as the use of water, raw materials and packaging (their recycling and reuse). The best use of resources, made possible by better technology, will permeate all parts of the value chain and will extend to suppliers and distribution channels.
Catering. Although traditional strategies call for companies to commoditize and exert their bargaining power with suppliers to reduce prices, even when buying from small companies operating at the subsistence level or in countries with scandalously low wages, some companies are just starting out. to understand that these suppliers cannot be productive or improve their quality standards.
A higher level of quality is increasingly being preferred over a lower price. The stronger the suppliers become, the lower their environmental impact, the greater their efficiency as prices go down.
A good example of this new mindset is Nespresso, one of Nestlé's fastest growing divisions. Nespresso combines a sophisticated espresso machine with individual aluminum capsules, containing ground coffee from all over the world. By offering quality and speed, Nespresso has expanded the premium coffee market. Their big problem was how to ensure a reliable supply of certain types of coffees, especially those grown by small farmers in impoverished rural areas of Africa and Latin America, trapped in an environment of low productivity, poor quality and environmental degradation that limited the volume of coffee. production.
To address these issues, Nestlé redesigned its coffee supply. He worked intensively with farmers, advising them on agricultural practices, guaranteeing loans from banks, and helping to secure raw materials such as plants, pesticides, and fertilizers. He established local facilities to measure coffee quality at the point of purchase, allowing him to pay a premium for the best beans directly to those who grew them, thus improving his incentives. It partnered with the Rainforest Alliance, a leading international NGO, to teach farmers more sustainable practices that ensure greater safety in production volumes. The higher production per hectare and the better quality of the grains raised the income of the farmers while reducing the environmental impact of the farms.Simultaneously Nestlé ensured a reliable supply of good coffee. Shared value was created.
Within the Nestlé example there was a much more important learning: the advantage of buying from capable local suppliers. These can reduce cycle time, increase flexibility, encourage faster learning, and enable innovation while increasing your profits, hire more people, and pay better wages; which will undoubtedly benefit other companies and the community..
Distribution. Companies are beginning to reexamine their distribution practices from a shared value perspective. As iTunes or Kindle demonstrate, new profitable distribution models can also dramatically reduce the use of paper and plastic. Similarly, microcredit has created a new profitable model for distributing financial services to small businesses.
Employee productivity. Practices such as keeping salary levels low, reducing profits and relocating abroad are beginning to give way to the realization of the positive effects that a minimum living wage has on productivity, security, well-being, training and development opportunities. for employees. If unions will also focus more on shared value, these approaches to employees will also spread faster.
Location. Business thinking has accepted the myth that location no longer matters because logistics are cheap, information flows quickly, and markets are global. Therefore, the cheaper the location, the better, eliminating any concern for the local communities where it operates. This simplistic way of thinking today is being challenged, in part due to increases in energy prices as well as the increased awareness of the cost of non-productivity caused by highly dispersed production systems and their supply problems.
Allow the development of local clusters.
No company is a self-sufficient entity. The success of all businesses is affected by the companies and the supporting infrastructure around them. Productivity and innovation are highly influenced by “clusters” or geographic concentrations of firms, related companies, product and service providers, and logistics infrastructure in a particular area, such as information technology in Silicon Valley, flower growing in Kenya and the diamond cutting in Surat, India.
Having stronger local capacities in areas such as training, transportation and related sectors also increases productivity. And conversely, productivity suffers since its lack creates internal costs for companies:
- Low education imposes costs on productivity and training Poor transportation infrastructure raises logistics costs Gender or race discrimination reduces the number of capable employees Poverty limits demand and leads to environmental degradation, unhealthy employees and high security costs.
Local suppliers are able to foster greater logistics efficiency and easier collaboration. Therefore, companies create shared value if they promote clusters since it allows them to improve their productivity. Thus, the company ensures a reliable and quality supply so it can boost its level of quality and productivity, while improving its income as well as the purchasing power of local citizens. The result is a positive cycle of economic and social development. Certainly a correct type of government regulation can favor this implementation.
As new jobs are created in support sectors, multiplier social effects; New companies are born, the demand for auxiliary services grows, the supply of qualified workers rises for many other companies.
As explained above, at Nespresso, Nestlé also worked to build clusters, making its new sourcing practices much more effective. It was proposed to develop agricultural, technical, financial and logistical firms and capacities in each coffee region, thus further supporting the efficiency and high quality of local production.
Without question, the most successful development programs are those that involve collaboration between the private sector, trade associations, government institutions, and NGOs.
How to create shared value in practice
The creation of shared value implies compliance with laws and ethical standards, as well as the mitigation of any inefficiencies caused by the company, but it is much more than that. The opportunity to create economic value by creating value for society will be one of the most powerful forces driving growth in the global economy. This idea represents a new way of understanding customers, productivity, and external influences on corporate success.
In relation to the origin of the present economic crisis, the real estate bubble. A shared value approach would have led financial services companies to create innovative products that would have prudently raised access to home ownership. An example is the "rent with purchase option" mortgage financing system. However, financial entities promoted unsustainable financial vehicles that turned out to be economically and socially devastating, while claiming to be socially responsible for having Corporate Social Responsibility programs.
The prism of shared value can be applied to all the important decisions of a company. Can our product design incorporate greater social benefits? Are we serving all the communities that benefit from our products? Does our approach to processes and logistics maximize efficiencies in the use of water and energy? How can we improve our efficiency and innovation? How can we improve our community as a place to do business? If a company can improve social conditions, it is most likely to improve business conditions and thus trigger positive feedback loops.
The next evolution of capitalism
Shared value holds the key to unlocking the next wave of innovation and growth for businesses. It will also connect the success of the company with that of the community.
Many factors such as the growing social awareness of employees and citizens and the increased scarcity of natural resources will drive unprecedented opportunities.
We therefore need a more sophisticated form of capitalism, but imbued with a social purpose. But that purpose should emerge not from charity but from a deeper understanding of competition and economic value creation. This next evolution in the capitalist model must recognize new and better ways of developing products, serving markets, and building productive enterprises.
We must know how to break the traditional division between social concerns and economic interests. We will agree that people in the public and private sectors have often followed very different educational and professional paths. As a result, few executives have a sufficient understanding of social and environmental issues to allow them to go beyond current CSR approaches, and few social sector leaders possess the managerial skills and entrepreneurial mindset to design. and implement shared value models.
Bibliography
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