Shifting the manner in which the basic tenet of capitalism is managed today by expanding the economic theory to one of joint organisational and social "value-creation".
Corporates have misinterpreted their interdependencies with their environment and that the contemporary practice of “short-termism” (among others) has fractured capitalism’s social contract with society and thus its very legitimacy is now threatened.
Since the Global Financial Crisis the call for change has become deafeningly loud and vocalised by many – global protest groups such as “Occupy” (Gabbatt et al, 2011) business practitioners (Barton, 2011), academics (Gray, 2006), regulatory bodies (NZ Government 2011) to “joe-ordinary” in the street - all have an axe to grind about the negative effects contemporary capitalism has inflicted.
In January 2011, Professor Michael Porter and Mark Kramer published their solution to the contemporary problems surrounding capitalism. They advocated a conceptual framework based on the principle of “Shared Values” (CSV) and defined the concept as “…policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates...”
At its purest, the concept holds that if the environment capitalism exists within is socially weak and impoverish, then capitalism will also be weak and impoverish and therefore ultimately fail to achieve its most ultimate goal. CSV seeks to harness what capitalism is good at, that is creating value that maximises shareholder wealth and extending it to enrich the environment it inhabits.
The notion is not new; stakeholder theory (Branco, et al 2007) and corporate social responsibility (CSR) (Carroll 1991) are now established business practices. However, Porter and Kramer (2011) believe that CSV differentiates itself from other models because it targets the very essence of capitalism that is it integrates societal improvements into its own economic value-creation. CSV endorses ethical principles of utilitarianism (McShane et al 2011) and beneficence (Beauchamp 2008) and reiterates the 18th century work of Adam Smith (1759) that virtuous people are willing at all times to sacrifice their own interests for that of the good of others.
The power of CSV lies in its ability to change the DNA of business and redefine its purpose away from the narrow scope of profit for profits sake to a higher order of expanding the total economic and social value pool driven by an organisation’s strategic plan and the re-design of its value chain.
Innovation and Strategic Thinking
Strategy and economic theories align in that the success of a company (maximising owner’s wealth) is achieved by creating unique value sets that meet the needs of its customers. The organisation acquires competitive advantage by the way it configures its value chain - that is how it applies it strategies to create, produce, sell, deliver and support its products. Porter and Kramer (2011) hold that an organisation can create economic value by creating societal value and that the improvement of value in one area provides opportunities in another. By connecting a company’s success to that of societal improvements gives rise to new needs, efficiency gains, differentiation in the marketplace and, indeed the growth of new markets.
Creating New Products and Markets
CSV offers a multitude of advantages to organisations in that it creates value by offering up new products and markets in relation to satisfying societal needs. This in turn produces new revenue streams and/or cost reduction, enhances an organisation’s reputation and signals to investors that the business is serious about maximising owner wealth, which in turn leads to accessing more capital markets. In addition, successful companies become social entrepreneurial magnets whilst they gather and retain talented innovators. Opportunities for innovation abound as employees begin to think of “improving lives” rather than the narrow company-perception of “meeting customer needs”.
New evaluation models are already benchmarking an organisation’s product lines against social needs and product benefits and harms. Martin’s (2006) “Virtue Matrix” is a decision-making tool which guides organisation and societal behaviours by calculating a return on CSV activities. Puma Group, a leading sports apparel company issued its first Environment Profit and Loss report in 2011 as a method of evaluating the impact of their global operations. Evaluations lead to new on-going innovations as societal needs are satisfied, product harms addressed and further issues begin to surface.
Redefining the Value Chain
A value chain is used when analysing specific activities through which organisations create a competitive advantage, in this sense a firm’s productivity can be viewed as a series of value-creating behaviours.
Smart companies re-evaluating their value chain with a shared-value perspective look further than mere cost cutting exercises and explore new methods of operating in order to mitigate existing factors. The Warehouse, for example, has eliminated costs of providing customers with plastic carry bags by passing the charges directly onto those customer wanting them, donating the proceeds to local charities, whilst simultaneously offering an environmentally friendly alternative.
Re-wiring value chain activities such as procurements, product distribution and employee productivity all offer opportunities to create shared-value. Nestle revamped its procurement activities by providing its coffee bean suppliers with improved farming practices, finance and technology to provide quality high yielding coffee bean. Growers’ incomes increased, the environment benefited from improved horticultural practices and Nestle was provided with a reliable supply of good quality beans (Porter et al 2011).
Enabling Cluster Development
Porter and Kramer (2011) cite that organisations create shared value by building clusters to improve productivity while addressing gaps or failure in the communal infrastructure they exist within.
A cluster is a geographical concentration of organisations such as service providers, logistical operators, related businesses, academic institutions, trade associations and standard setters.
.Porter and Kramer (2011) hold that by collaborating with other communal organisations fair and open markets develop that returns positive economic and social results and dissuades exploitative and deceptive practices.
The Future with CSV
“If all companies individually pursued shared value connected to their particular businesses, society’s overall interests would be served. And companies would acquire legitimacy in the eyes of the communities in which they operated …” Porter and Kramer (2011).
CSV is imbued with social good and seeks corporations to pursue a higher order of value-creation, one aptly suited to tackling the world’s most pressing and important challenges. CSV has the potential to re-negotiate capitalism contract with society and in doing so provide a rich and sustainable legacy for generations to come.
Barton, D. (2011). Capitalism for the Long Term. Harvard Business Review March (pp.85-91).
Beauchamp, T. (2008). The Principle of Beneficence in Applied Ethics. The Stanford Encyclopedia of Philosophy (Fall 2008 Edition).
Branco, M.C. & Rodrigues, L.L (2007). Positioning Stakeholder Theory within the Debate on Corporate Social Responsibilities. Electronic Journal of Business Ethics and Organization Studies (EJBO) Vol. 12, No. 1 (pp 5-15).
Carroll, A.B. (1991). The Pyramid of Corporate Social Responsibility” Toward the Moral Management of Organisational Stakeholders. Business Horizons. Vol. 34, No. 4.
Gitman, L.J, Juchau, R & Flanagan, J. (2007). Principles of managerial finance, 5th Edition. Pearson Education, Australia. (p 14).
Gabbatt, A., Townsend, M. & O’Carroll, L. (2011). ‘Occupy’ anti-capitalism protests spread around the world. The Guardian/The Observer. http://www.guardian.co.uk/world/2011/oct/16/occupy-protests
Gray, R. (2006). Social environmental and sustainability reporting and organisational value creation? Whose value? Whose creation? Accounting, Auditing & Accountability Journal, Vol. 9 No.6, (pp 793-819).
McShane, S., Olekalns, M. & Travaglione, T (2011) Organisational Behaviour on the Pacific Rim 3rd Edition. McGraw Hill. (pg 67).
Martin, R.L. (2002). The Virtue Matrix: Calculating the Return on Corporate Responsibility. Harvard Business Review. Reprint R0203E (pp 5-11)
New Zealand Legislation (2011) Financial Markets Authority Act 2011. Parliamentary Counsel Office
Porter, M. & Kramer, M (2011) Shared Values, Harvard Business Review. January.
Puma Press Release (2011) Puma Completes First Environmental Profit & Loss http://about.puma.com/puma-completes-first-environmental-profit-and-loss.
Rappaport, A. (2006). 10 Ways to Create Shareholder Value. Harvard Business Review, September (pp 68-77).
Smith, A. (1759). The Theory of Moral Sentiments.
Unknown, Strategic Management The Value Chain. http://www.quickmba.com/strategy/value-chain
Watson, T., Wyckoff, B. & Levy, M (Unknown) Value Chain Development. Wealth Creation in Rural Communities. http://www/creatingruralwealth.org/wealth-creation-approach/value-chain.
Zalta, E.N (2008). (ed) The Principle of Beneficence in Applied Ethics. The Stanford Encyclopedia of Philosophy (Fall 2008 Edition). <http://plato.stanford.edu/archives/fall2008/entries/principle-beneficence/>
You need to register in order to submit a comment.