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Creating shared value

Future of Business (University of Sydney)

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Creating shared value

Moving beyond trade-offs

- Government policies often attempt to internalise the social costs of firms
- Social weaknesses are addressed at the expense of businesses
- Companies are perceived to be prospering at the expense of the community.

- Societal needs, not just conventional economic needs, define markets.

- Social harms can create internal costs for firms
- Shared value is not redistributing values created by firms
o E.g. Fair trade scheme: paying farmers more for the same amount of crops
- Shared value is expanding the total pool of economic and social value
o E.g. Improving agricultural methods to increase yields, quality and
sustainability

The Roots of Shared Value

- The competitiveness of a company and the health of the communities around it are
intertwined
o Business needs community for
 Demand
 Public assets
 Supportive environment
o A community needs businesses to
 Provide jobs
 Wealth creation opportunities
- Public policies that hinder productivity and competitiveness of firms are self-
defeating

What is “Shared Value”?

- Policies and operating practises that enhance the competitiveness of a company
while simultaneously advancing the economic and social conditions in the
communities in which it operates
- Value is benefits relative to its costs
o Businesses rarely approach societal issues from a value perspective
o Social sectors rarely think in terms of value
 Governments and social organisations view success only in terms of
benefits
o Collaborations between businesses and social sectors grow as they think in
terms of value
- In manager-led businesses that focus on short term performance
o Managers resort to
 Restructuring
 Personnel reductions
 Relocations to lower-cost areas
o Leads to

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 Commoditisation
 Slow organic growth
 No clear competitive advantage
o Therefore, little benefits received by community, even as profits rise
o Community perceives that profits rise at their expense
- Globalisation (e.g. outsourcing and off-shoring), the rise of social institutions and the
shortening of investor time horizons saw firms lose connection with community
- These changes led to increase in economic efficiency, but missed opportunities for
value creation.

How Shared Value is Created

- Can create economic value by creating shared value
- Three key ways a company can create shared value
o By reconceiving products and markets
 Create products that are good for the customer/ the customer’s
customer
 Businesses are more effective than governments at marketing G&S
that create social benefits
 E.g. Healthier food, environmentally friendly products
 Opening up new markets in poorer (underserved) countries/regions
 Create appropriate products to lower-income and disadvantaged
consumers (e.g. cheap cell phones)
o By redefining productivity in the value chain
 Value chain affects societal issues: natural resources use, health and
safety, working conditions, equal rights, etc.
 Many externalities also inflict internal costs
 E.g. excess packaging cost more for environment and firms
 E.g. Improvements in environmental performances can be achieved
with better technology at low cost, and also enhance resource
utilisation, process efficiency and quality
 Advances in technology is key to both increases in productivity and
the reduction in societal cost
 Procurement
 Traditionally, companies tend to bargain with suppliers to
drive down price.
 Marginalised suppliers cannot remain productive, or improve
 By providing resources (e.g. finance, technologies), better
supplier
 Sourcing from local suppliers reduce cycle time, increases
flexibility, etc. Improves local community.
 Distribution
 Technology such as eBooks reduce paper and plastic usage
 Employee productivity
 Traditionally, companies hold down wages and reduce benefits
and off-shores jobs to reduce costs

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 Living wage, safety, wellness and training can increase

productivity
 E.g. health care for workers reduce days lost due to sickness
 Location
 Reduce transport costs and flexibility
 Reduce carbon emissions and energy usage

o By enabling local cluster development

 Success of a company is affected by supporting
companies/infrastructure
 Productivity and innovation are influenced by clusters (geographic
concentration of firms, suppliers, service providers, infrastructure)
 E.g. Silicon Valley
 Clusters avoid
 Monopolies forming
 Exploited workers and suppliers
 Lack of productivity
 A firm’s growth has a multiplier effect
 Jobs created in the industry
 New companies seeded
 Demand for ancillary services rises
 Increase supply of skilled employees for many firms
 Supplier clusters
 Agricultural clusters in developing countries promote
efficiency  better suppliers
 Helping small farmers increase their yields only helps if there
are ready buyers/ enterprises that can process crops

Implications for Governments

- Will be most effective if they think in value terms
o i.e. focus on results rather than funds and effort expended
- Boost in productivity is equally valuable whether in service of commercial or societal
objectives
- The right kind of government regulation can encourage shared values:
1. Sets clear and measurable social goals (e.g. energy use, health, safety)
 Where appropriate, set prices for resources (e.g. water) that reflect
true cost
2. Set performance standards but do NOT prescribe methods to achieve
them
3. Define phase-in periods for meeting standards
 Give company time to develop and introduce new products and
processes
4. Put in place universal measurement and performance reporting systems
 Government provides the infrastructure for collecting reliable
benchmarking data
5. Efficient and timely reporting of results

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- Regulations that discourage shared value

o Forces compliance with particular practises
o Mandates a particular approach to meet a standard
 Blocking innovation and inflicting cost on firms
o When government employs this type of regulation, they trigger resistance
from business, slowing progress and blocking shared values that would
improve competitiveness
- Regulations must exist to limit exploitative, unfair, or deceptive practices in which
companies benefit at the expense of society

Creating Shared Value in Practice

- Not all profit is equal – profit involving a social purpose represent a higher form of
capitalism.
o Creates a positive cycle of company and community prosperity
o Leads to profits that endure
- Company can best create shared value in areas most important to tis business
o Here a company can benefit most economically, can sustain its commitments
over time
o Here the company brings most resources to bear
o Its scale and market presence equip it to have a meaningful impact
- Many of the shared value pioneers have limited resources
o SEs and companies in developing countries
o Outsiders see the opportunities more clearly
o Distinction between for-profits and non-profits is blurred
- Social value redefines the industry
o Opens up many new needs
 New products and services
 New customers
 New ways to configure value chain
o Competitive advantage arisen from social values will be more sustainable
- Creating shared value supersedes corporate social responsibilities (CSV>CSR)
o CSR focuses on the company’s reputation
o CSR has limited connection to business, hard to justify in long-run
o CSV is integral to a company’s profitability and competiveness
- 3 avenues for creating shared value are mutually reinforcing
o Enhancing cluster  more local procurement and less dispersed supply chain
o New G&S that meet social needs will require a new value chain
o New value chain  creates demand for equipment and technology that saves
energy, conserves resources, supports employees
- CSV will involve new collaborations
o Companies benefit from resources, skills and insights that cut across
profit/non-profit public/private boundaries.
o Data driven collaborations – clearly linked to defined outcomes, connected to
the goals of stakeholders

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