Creating Shared Value
Summary of ‘Creating shared value’ by M. Porter and M. Kramer The problem nowadays is that most businesses don’t have the right purpose ‘in mind’.
They have a narrow-minded view in making profit and thus optimizing short-time financial performance. This old capitalistic view leads to a vicious circle. More specifically, the corporation doesn’t keep its environment and the broader community in mind while making profit and so they are perceived as (partly) responsible for society’ failures. This is where political leaders undermine competitiveness by setting the appropriate policies.
The old, narrow view of capitalism leads to growing competition and shorter term performance pressures from shareholders. Shorting investor time horizons leads to outsourcing and offshoring which weakens the connection between the firm and its community. The solution lies in redefining the purpose of the corporation as creating shared value. This means enhancing the competitiveness of the corporation while simultaneously advancing the economic and social conditions in its communities. The market should be redefined by societal needs, rather than convential economic needs.
To create shared value, there are three main ways: reconceiving the products and market, redefining productivity in the value chain and enabling local cluster development. These ways are mutually reinforcing while creating shared value. By reconceiving products and markets, corporations can meet the demand for products and services that satisfy societal needs. In this way, there’s more space for innovation. Also, in developing countries and nontraditional communities in advanced economies equal or greater opporunities arise.
Opportunities increase when capitalism starts working in these poor countries. These opportunities change constantly because of developping economies and evolving technologies. Another source of creating shared value lies in transforming the value chain. For instance by reexaminating energy use and logistics, huge costs can be saved for the company and at the same time for society. Another example is the advantage of buying from capable local suppliers. This avoids costs by avoiding inefficiencies and lowering input costs.
This also means sharing technology and improve supplier quality and productivity by better procurement. Employee productivity can be improved by offering health care coverage, because poor health costs firms more than health benefits. Companies need to embrace locational thinking because of the rising costs of energy and carbon emissions. Enabling local clusters plays a crucial role to boost productivity. As mentioned, logistics through local suppliers avoid lots of internal costs.
In monopolized markets, people often get exploited, prices are not fair and thus productivity will suffer through a lack of incentives for the workers. This indicates that the formation of open and transparent markets are necessary to create shared value. We can conclude that business can earn the respect of society again by respecting the new, more sophisticated form of capitalism. This new view focuses on profits that create societal benefits rather than diminish them, which creates shared value.