Creating Shared Value As a Differentiation Strategy

Creating Shared Value: Lessening the Tension between Society and the Economy by Utilizing Corporate Social Responsibility to its full Potential PA 311 Introduction to Civic Engagement INTRODUCTION Commerce is an essential part of humanity. Without commerce man would most likely still be in an animalistic state relying on the hunter-gatherer life style. With business and trade, come economic prosperity and a higher standard of living. However, business can also create situations that are unjust and not equitable for all humans.

On the same token, society can create environments in which a business cannot successfully operate. A tension between economy and society has existed since the beginning of modern human culture. Throughout history cultures have tried to lessen the tension with mixed results. Communism attempted to eradicate the problem by eradicating the profit motive but in the end, it was unsuccessful. Socialist theorists failed to understand that business is part of human nature and if wielded correctly can benefit not only the business, but the society as well.

In modern times the attempt to lessen the tension between the two has taken the form of Corporate Social Responsibility (CSR). While it has many benefits it also leaves the profit motive out of the equation by only focusing on the needs of society and not of business. In its current state, CSR is not a sustainable form of philanthropy and will ultimately fail. A newer version of CSR, Creating Shared Value takes into account, not only society’s needs but the businesses’ as well. By operating within this model we can create a self-sustainable equilibrium in which both business and society as a whole, prosper.

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Only by uniting the two, and focusing on the commonalties, not the differences, can we create a situation in which the tension between economics and society are tempered. This paper will show how the modern era attempted to lessen the tension between the two by the creation of CSR. It will show the history of the program and ultimately its failings. Later, it will focus on the new concept of Creating Shared Value and how it can benefit society and lessen the tension between economics and society. Origins of Corporate Social Responsibility

Benjamin W. Heineman, a senior vice president for law and public affairs at General Electric, defines CSR as. 1. Strong, sustained economic performance. 2. Rigorous compliance with financial and legal rules. 3. Ethical and other citizenship action, beyond formal requirements, which advance a corporation’s reputation and long-term health (Olowski, p. 6). These concepts were not the norm in business forty years ago. Most people believed that corporation’s sole responsibility was to conduct business and be profitable.

However, the role of business in society began to be seriously questioned during the cultural revolution of the 1960s. With the possible exception of the depression of the 30s corporations were held in high esteem in America. From the early beginnings of US business to the 1960s people assumed that business existed solely to serve the economic needs of the country. Businesses produce goods and services and employ citizens thus providing them economic security. Employed Americans can then buy more goods and services producing more commerce and business which leads to more employment (Wilson, 2000, p. 3).

This role is very important in a society because if it is done correctly, it will eventually raise the standard of living for most of its citizens. This idea that corporations were merely agents of economics was not seriously challenged until the 1960’s (Wilson, 2000, p. 6). During the turbulent 60s there were many societal changes that led to the birth of Corporate Social Responsibility and a heighted sense of conflict between society and business. Affluence doubled in the decade of the sixties allowing more young adults to attend college. Citizens of the US became more financially stable and better educated (Wilson, 2000, p. ). With this social growth came more expectations from corporations in regards to safety, quality, and environmental considerations. They also had increased consumer buying power giving them the freedom to choose which products and from which firms they would purchase. At the same time confidence in our institutions were begging to wane in part due to the war in Vietnam and the Civil Rights movement (Ackerman, 1979, p. 4). Corporations, which were run mostly by an older generation, were quick to dismiss the changing tides as “a few radical kids on campus” (Wilson, 2000, p. 8).

However, as pressure mounted on American corporations, many politicians took the mantle and conducted congressional hearings to investigate corporate scandals. Starting in the late 60’s corporations’ general mentality began to change as they felt the impact on their corporate image and their bottom line (Wilson, 2000, p. 10). Though there had always been tension between the public and business, not until the 60’s was there such a strong public backlash to corporate scandals. Starting with boycotts of the Civil Rights Movement and the agricultural sector, businesses began to change their attitudes towards the public.

This was exacerbated with the scandal of Nestle, who, for decades, sold infant formula as a substitute for breast milk in many developing nations with devastating effects on infant development (Richter, 2001, p. 50). Also during the Vietnam War, Dow Chemical, the major producer of napalm and Agent Orange saw their public image devastated. The two chemicals that they sold to the US government compounded the pain and suffering of the Vietnamese people and many in the US began to protest and boycott their products. Later in the 20th century Nike was found to have unfair working conditions in many of its factories in developing nations.

This scandal, like that of Nestle and many others, had a detrimental effect on the company’s reputation and ultimately their profits. US corporations knew they had to react to stay competitive in the changing world. American firms changed from being reactionary to social and political scandals to being pro-active. In an attempt to restore their image with the public they started to invest in what is now known as Corporate Social Responsibility. Problems with Corporate Social Responsibility Porter and Kramer in their work Strategy and Society (Harvard Business Review, 2006, p. ), remark that there are four main arguments for Corporate Social Responsibility: moral obligation, sustainability, license to operate, and reputation. However, most companies CSR approaches were created and implanted to bolster their reputations. Not that this is particularly unfounded because in this market economy many companies live or die by their reputations. Their CSR policies can produce some societal benefits. However, many focus on “short term defensive reactions… with minimal value to society and no strategic benefit for the business” (Porter, Kremer, 2006 p. ). Porter and Kremer (2006) also state that all four of these rationales share the same weakness; “they focus on the tension between business and society rather than on their interdependence. They mostly focus on issues that are unrelated to their business practice and set up philanthropic programs designed to bolster their corporate image” (p 4). For example Ford, which up until recently, were having monetary difficulties, donated a large portion of money to help develop an environmentally friendly high tech football stadium for the Detroit Lions.

The idea was well intentioned but keeping the money and investing in many of their Midwest plants could have kept them from shutting down, thus preserving jobs and stock holder equity (Olowski, p. 12). The major criticism of CSR is that it is a shield against corporation’s wrong doings. One might argue that they are trying to buy the public’s support by investing in projects that will gain them notoriety. Though CSR in this state may be well intentioned, giving money away frivolously does little to assist the business and in most cases does little for society.

This is unfortunate, because corporations possess vast resources and have the potential to create a lasting impact. Companies have a symbiotic relationship with the communities in which they live and do business. An unhealthy community is not a good environment for firms and likewise an unhealthy company does not benefit the community. A company that seeks profits at the expense of its people will be unsuccessful. However the reverse is also true; citizens who attempt to drive out successful businesses will only end up hurting their communities.

Only by recognizing the linkage between the two will the tension between society and business be tempered. As Wilson states in his book, The New Rules of Corporate Conduct (2000, p. 16); “But the scene (CSR) is ever in motion. There is no point of stability and equilibrium. Where we are now is not a settled end point but a springboard to the future. ” The new concept of Creating Shared Value attempts to restore the balance and equilibrium between society and business. Creating Shared Value Porter and Kramer wrote in their study, Strategy and Society (2006, P. ) that “no business can solve all of life’s ills. ” Companies, historically, have used CSR to focus on issues not related to their business model and have gotten mixed results both from society and their bottom line. This is not a sustainable business model because it does not create wealth potential. Many CRS initiatives have been disregarded by firms due to lack of share holder interest and monetary problems. Instead, Porter and Kramer argue that a more sustainable system should benefit both parties.

Firms, wanting to engage in CSR, should focus on a single issue that creates shared value between the business and society. By focusing on social issues directly related to the business they can create a greater impact that is measurable and sustainable. In essence, Creating Shared Value is about benefiting the society and the company. When the two come together to create shared value both benefit tremendously and the tension is lessened. A good example of the concept of Creating Shared Value comes from an unlikely source; Nestle.

Although they partook in some unforgivable business practices, they possess some redeeming qualities. In the 1960’s Nestle built a dairy in the northern Indian province of Moga. This was an extremely poverty stricken area where farmers lacked refrigeration and veterinary care for their cows. Nestle built refrigerated collection points in each town and sent its trucks to come and collect milk from each farmer. Nestle also provided veterinary care and information to the farmers not only for their benefit but to ensure that the milk they were receiving was of high quality.

The relationship between the farmers of Moga and Nestle continued to grow and benefited both tremendously. When Nestle opened its first dairy, they had only 180 farmers who sold milk. As of when this study was produced there are now over 75,000 (Porter, Kramer, 2006 p. 11). Now Moga has a significantly higher standard of living in comparison with other provinces of India. Nestle benefited by entering into a new market and gaining a competitive advantage without having to pay middlemen for their milk. This is a good example of how shared value can benefit both the society and the business.

CONCLUSION Throughout human history many have attempted to resolve the conflict between economics and society. Even in the early stages of the United States our founding fathers recognized that a strong economy would foster an even stronger society. As Henton, Melville and Walesh state in their book The Civically Engaged Reader (2004, P. 91); “Adams and Madison reconciled these extremes with their pragmatic view that civic government and free markets could channel self-interest toward public good. The modern commercial society developed from a market economy based on shared principals. During the modern era, many companies attempted to diminish the tension between their business and the surrounding society with the creation of Corporate Social Responsibility. They figured that if they invested in social programs their image would not be negatively affected. Ultimately, CSR was a failure because it did not recognize the link between society and business. Instead, it focused solely on preserving the companies’ reputation without realizing the potential business opportunities that the commonalities could create.

Creating Shared Value attempts to fix the failings of CSR by concentrating on the linkage between society and business and creating opportunities that benefit both parties. As Porter and Kramer state in Strategy and Society (2006, P 13); Efforts to find shared value in operating practices and in the social dimensions of competitive context have the potential not only to foster economic and social development but to change the way companies and society think about each other.

Only by realizing that society and economics engage in a symbiotic relationship will we be able to extinguish the tension between the two. Works Cited Olowski, Lew J. Corporate Social Responsibility: It’s History, Ethical Justification, And Abuses in the Business World. Retrieved from http://www. rockhurst. edu/news/events/images/projecti/olowski. pdf Porter, M. E. , Kramer, M. R. (2006) Strategy and Society. Harvard Business Review. Retrieved from http://www. salesforcefoundation. org/files/HBR-CompetiveAdvAndCSR. pdf Henton, D. , Melville J. , Walesh K. 2004). Civic Revolutionaries. San Francisco, CA: Jossey – Bass. Wilson, I. (2000). The New Rules of Corporate Conduct: Rewriting the Social Charter. Westport, CT: Quorum Books. Davis, L. E. , Hughes, J. R. , McDougall, D. M. (1969). American Economic History: The Development of a National Economy. Homewood, IL: Richard D. Irwin, Inc. Richter, J. (2001). Holding Corporations Accountable. New York, NY: Zed Books Ltd. Ackerman, R. W. , Bauer, R. A. (1979). Corporate Social Responsiveness: The Modern Dilemma. Reston, VA: Reston Publishing Company, Inc.

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