Rethinking business: time for “shared value”

One of the world’s leading business thinkers says companies need to retool their approach to profit by working with society to create “shared value,” and not regarding it as a costly “externality.”

Michael Porter, the famed author of Competitive Strategy, says the business sector has become estranged from the rest of the community, even among those who are pro-business, because of its narrow approach to making profit.

He said in an interview with the BBC that “there’s a widespread view … that business today is actually profiting at the expense of social needs and communities.”

“There’s been this shorter-term view of how to create profitability, and also been this narrowing of what the responsibility of the company is.”

Companies today are trying to “persuade people to buy more, to buy things that they may not need, that may not even be good for them,” he said.

Where businesses once used to consider they had some responsibility for the welfare of the communities where they operated, they are now “trapped in a bubble” and don’t understand that these societal factors “have a profound effect on their proficiency and productivity,” Porter says.

He points to firms such as GE, Google, Intel, Johnson & Johnson and Unilever that are creating “shared value by reconceiving the intersection between society and corporate performance.”

“The purpose of the corporation must be redefined as creating shared value, not just profit per se,” Porter said in a Harvard Business Review essay he co-authored. This means recognizing that “societal needs, not just conventional economic needs, define markets.”

“It also recognizes that social harms or weaknesses frequently create internal costs for firms—such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education,” he writes.

“Food companies that traditionally concentrated on taste and quantity to drive more and more consumption are refocusing on the fundamental need for better nutrition.

“Intel and IBM are both devising ways to help utilities harness digital intelligence in order to economize on power usage. [US bank] Wells Fargo has developed a line of products and tools that help customers budget, manage credit, and pay down debt.

“Sales of GE’s Ecomagination products reached $18 billion in 2009—the size of a Fortune 150 company. GE now predicts that revenues of Ecomagination products will grow at twice the rate of total company revenues over the next five years.”

Many “so-called externalities” actually create internal costs on the firm, such as excess packaging of products and greenhouse gases, which are costly to the company as well as the environment.

“Wal-Mart, for example, was able to address both issues by reducing its packaging and rerouting its trucks to cut 100 million miles from its delivery routes in 2009, saving $200 million even as it shipped more products. Innovation in disposing of plastic used in stores has saved millions in lower disposal costs to landfills.”

Porter says businesses must take the lead in bringing business and society back together.

“The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a ‘social responsibility’ mind-set in which societal issues are at the periphery, not the core.”

Source: Green Channel

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