Why not all profit is equal

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STRATEGY

Harvard University Professor Michael Porter started the modern strategy revolution with his 1980 book Competitive Strategy, so when he says it's time for a fundamental reappraisal, as he does in Harvard Business Review, it's something leaders have to pay attention to.

With consultant Mark Kramer, he contends that companies are viewing their performance too narrowly and must adopt the notion of "shared value," which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. He stresses this is not about social responsibility, philanthropy, or sustainability, but a new way to achieve economic success - and it must be at the centre, not the margins, of what companies do.

"Not all profit is equal - an idea that has been lost in the narrow, short-term focus of financial markets and in much management thinking. Profits involving a social purpose represent a higher form of capitalism - one that will enable society to grow even more. The result is a positive cycle of company and community prosperity, which leads to profits that endure," they write.

Shared value is created in three distinct ways, they explain:

RECONCEIVING PRODUCTS AND MARKETS

Most businesses have lost sight of the most basic of questions: Is their product good for their customers, or for their customers' customers? Society's needs are huge - for everything from better housing and health, to help for the aged, to reducing environmental damage - and those arguably are the greatest unmet needs in the global economy.

A starting point for creating shared value is to identify all the societal needs, benefits and harms that are or could be embodied in the company's products. "An ongoing exploration of societal need will lead companies to discover new opportunities for differentiation and repositioning in traditional markets, and to recognize the potential of new markets they previously overlooked," they write.

Some of those opportunities, the authors suggest, lie in disadvantaged areas of advanced countries as well as in developing countries.

REDEFINING PRODUCTIVITY IN THE VALUE CHAIN

A company's production and distribution chain inevitably affects and is affected by many societal issues, such as natural resources and water use, health and safety, working conditions, and equitable treatment in the workplace. Companies have traditionally expected others to pick up the costs for problems they might cause, such as pollution, but now they are realizing the costs also have an impact on the company. The authors point to the fact Wal-Mart was able to reduce excess packaging of products and lower its greenhouse gas emissions by rerouting its trucks to cut 160 million kilometres driven, and at the same time save $200-million (U.S.) even as it shipped more products.

Places to look for these shared benefits include energy use and logistics, resource use, procurement practices, distribution, and location. Companies, the authors note, are finding location matters - and often that location is in communities close to home, where the product is being sold.

ENABLING LOCAL CLUSTER DEVELOPMENT

Prof. Porter has written extensively about "clusters," geographic concentrations of companies, related businesses, suppliers, educational institutions, and service providers. They help to spark regional economies and drive productivity. "Firms create shared value by building a cluster to improve company productivity while addressing gaps or failure in the framework conditions surrounding the cluster," the authors note.

Building clusters in key locations amplifies the connection between a company's success and the surrounding community's success. "A firm's growth has multiplier effects, as jobs are created in supporting industries, new companies are seeded, and demand for ancillary services rises," they write. Some of that can be in developing countries: The authors point to Nestlé, with its Nespresso coffee brand, building agricultural, technical and financial capabilities in areas where it sources the coffee.