Creating Shared Value as Future Factor of Competition

Benedikt von Liel

Analysis and Empirical Evidence

Wirtschaftsethik in der globalisierten Welt

Wirtschaftsethik in der globalisierten Welt

Herausgegeben vonCh. Lütge, München, Deutschland

Herausgegeben vonChristoph LütgeTechnische Universität MünchenDeutschland

Die Ordnungsethik analysiert die normativen Grundlagen moderner Gesellschaft eneinschließlich ihrer ökonomischen Aspekte und macht sie für die praktische Gestaltung zugänglich. Dies umfasst sowohl systematische als auch historische Perspektiven derWirtschaft sethik sowie verwandter Gebiete der Philosophie, Ökonomik, Geistes- undSozialwissenschaft en.

Benedikt von Liel

Creating Shared

Analysis and Empirical Evidence

of CompetitionValue as Future Factor

Benedikt von Liel München, Germany

Wirtschaftsethik in der globalisierten Welt ISBN 978-3-658-12602-5 ISBN 978-3-658-12603-2 (eBook)DOI 10.1007/978-3-658-12603-2 Library of Congress Control Number: 2016939261 © Springer Fachmedien Wiesbaden 2016 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission orinformation storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. Printed on acid-free paper This Springer VS imprint is published by Springer Nature The registered company is Springer Fachmedien Wiesbaden GmbH

Dissertation an der Technischen Universität München, School of Management, Peter Löscher-Stiftungslehrstuhl für Wirtschaftsethik Vorsitzender: Univ.-Prof. Dr. Robert von Weizsäcker Prüfer der Dissertation: 1. Univ.-Prof. Dr. Christoph Lütge 2. Univ.-Prof. Dr. Dr. Ann-Kristin Achleitner Die Dissertation wurde am 14. April 2015 bei der Technischen Universität München einge-reicht und durch die Fakultät für Wirtschaftswissenschaften am 15. Juli 2015 angenommen.

Table of Contents

A. Theoretical introduction into Creating Shared Value ........................................................ 1

1 Introduction ..................................................................................................................... 3

1.1 Creating Shared Value (CSV) as a new terminology in business ethics ................... 3

1.2 Research question and objectives ........................................................................... 3

1.3 Course of investigation ............................................................................................ 4

2 Theory of business ethics ................................................................................................ 7

2.1 Morality and competition ........................................................................................ 7

2.2 Order ethics as a concept of incentivized business ethics ...................................... 8

2.3 Integrative business ethics (Ulrich) ........................................................................ 11

2.4 From business ethics theories to practical business ethics ................................... 12

3 Conceptual introduction of “Creating Shared Value” ................................................... 15

3.1 Historical development of CSR theory ................................................................... 15

3.2 Overview of definitions of the field of Corporate Social Responsibility ................ 19

3.3 Concept of “Creating Shared Value” (CSV) ............................................................ 21

B. Comparative analysis of CSV theory and related concepts ............................................. 31

4 Creating Shared Value and related theories and tools ................................................. 33

4.1 Shared Value concepts prior to Porter’s Creating Shared Value ........................... 33

4.2 Corporate Social Responsibility and CSV ............................................................... 34

4.3 Corporate Citizenship and CSV .............................................................................. 37

4.4 Bottom of the Pyramid and CSV ............................................................................ 40

4.5 Stakeholder Theory and CSV .................................................................................. 43

4.6 Corporate Sustainability and CSV .......................................................................... 46

4.7 Social Entrepreneurship and CSV ........................................................................... 50

5 Critical summary of the CSV concept ............................................................................ 55

5.1 Summary of definitions of corporate responsibility concepts .............................. 55

Table of Contents V

VI Table of Contents

5.2 Business and academic perception of Creating Shared Value .............................. 57

5.3 Originality of CSV ................................................................................................... 58

5.4 Criticism on the concept of CSV ............................................................................. 63

5.5 CSV elements for further analysis .......................................................................... 66

C. Empirical study of CSV unique elements ......................................................................... 71

6 CSV differentiator - Business with underserved markets in developed economies ..... 73

6.1 Identification of underserved markets through market segmentation ................ 73

6.2 Analysis of market opportunities in developed economies for low income

individuals ......................................................................................................................... 75

6.3 Analysis of market opportunities in developed economies for high income

individuals ......................................................................................................................... 84

6.4 Summary of CSV opportunities in underserved markets within developed

economies ......................................................................................................................... 86

7 CSV differentiator - Market opportunities through reshoring production ................... 89

7.1 Definition of ‘reshoring’ ......................................................................................... 89

7.2 Moral perspective of CSV opportunities through reshoring ................................. 89

7.3 Economic perspectives of production offshoring to developing countries .......... 90

7.4 Current trend towards reshoring in manufacturing .............................................. 93

7.5 CSV opportunities through relocating production ................................................ 95

D. Impact of geography and other success factors for CSV ................................................. 97

8 Geographic differences of CSR and its impact on CSV applicability ............................. 99

8.1 Traditional CSR understanding in Germany and the United States ...................... 99

8.2 CSV and German social market economy ............................................................ 106

8.3 CSV and American free market economy ............................................................ 108

8.4 Differences of CSV applicability in Germany and the United States ................... 108

9 Analysis of success factors of CSV initiatives .............................................................. 113

9.1 External factors influencing Creating Shared Value ............................................ 113

Table of Contents VII

9.2 Corporate success factors for Creating Shared Value ......................................... 142

9.3 Summary of CSV success factors ......................................................................... 153

E. Conclusion ...................................................................................................................... 159

10 Conclusions – CSV the future of competitive advantage? .......................................... 161

10.1 Conclusions and implications for businesses ....................................................... 161

10.2 Research contribution, limitations and elements for future research ................ 166

10.3 Creating Shared Value as the future factor for competitive advantage?............ 171

F. Appendix………………………………………………………………………………………………………………….. 173

List of tables and figures

A) Tables

Table 1 Trends in CSR research (adjusted from Lee (2008, p. 56)) ................................ 18

Table 2 Definitions of corporate responsibility concepts ............................................... 56

Table 3 Company examples reporting on CSV ................................................................ 57

Table 4 Overview of CSV common and unique elements .............................................. 62

Table 5 Unique elements of Creating Shared Value ....................................................... 68

Table 6 Categorized CSV opportunities in developed economies (new product

development to help the poor).................................................................................. 87

Table 7 Comparison of United States and Germany - CSR determinants .................... 106

Table 8 Summary of CSV applicability by industry sector and CSV dimension ............ 141

Table 9 Examples of measurable CSV results (Porter et al., 2012, p. 3) ....................... 152

Table 10 Overview of results of CSV success factor analysis ........................................ 156

B) Figures

Figure 1: The concept of Creating Shared Value (Porter & Kramer, 2011) .................... 24

Figure 2: Process of CSV implementation (Porter, Hills, Pfitzer, Patscheke, & Hawkins,

2012) .......................................................................................................................... 27

Figure 3 Distinction of traditional CSR and Porter’s CSV ................................................ 36

Figure 4 Income distribution Germany versus USA ........................................................ 75

Figure 5 Top reasons for reshoring of American companies .......................................... 91

Figure 6 Average manufacturing cost – country comparison ........................................ 92

Figure 7 Offshoring and reshoring of German manufacturing companies .................... 94

Figure 8 Implicit and explicit CSR .................................................................................. 104

Figure 9 CSV opportunities in different market economies ......................................... 115

Figure 10 Profitability measures of MFIs by region (MicroRate, 2014) ....................... 117

Figure 11 Creating Shared Value at Nestlé ................................................................... 125

Figure 12 Concept of Creating Shared Value according to Avista Utilities ................... 138

Figure 13 CSR implementation patterns of MNCs and SMEs ....................................... 144

IList of tables and figures X

List of abbreviations / definitions

BAT British American Tobacco Company

BoP Bottom of the Pyramid

CC Corporate Citizenship

CFP Corporate Financial Performance

CSR Corporate Social Responsibility

CSV Creating Shared Value

EHS Environment, Health and Safety

FTE Full-time equivalent (workforce)

FSG Foundation Strategy Group

Global Industry

Classification Standards

(GICS)

Global industry taxonomy, the structure consists of 10

sectors, 24 industry groups, 67 industries and 156 sub-

industries

ISO International Organization for Standardization

LNG Liquefied natural gas

MFI Microfinance institution

MNC Multinational corporation

NCD Non-communicable disease

NGO Non-government organization

SME Small and medium enterprises

Web of Science Core

Collection

Collection of the world's leading citation databases covering

over 55 million records from over 12,000 journals worldwide

List of abbreviations / definitions XI

A. Theoretical introduction to Creating Shared Value

The theoretical introduction of this study starts with an overview of the research

approach and an introduction of all related terminology. The introduction includes a framing

of the research question, objectives of the research, and the course of investigation, which

provides an overview of the content chapter by chapter and concludes the introduction.

Additionally, the theoretical introduction contains the placement of the concept

Creating Shared Value (‘CSV’) within the realm of business ethics. Particular emphasis is put

on the classification of CSV in the context of order ethics and integrative business ethics. The

chapter on business ethics ends with an evolution from the philosophical concept of moral

behavior and profit orientation in day-to-day business practices.

The section concludes with an introduction to the concept of Creating Shared Value as

it has been defined by Michael Porter and Mark Kramer in the Harvard Business Review

article “Creating Shared Value - How to reinvent capitalism - and unleash a wave of

innovation and growth” (Porter & Kramer, 2011). The conceptual introduction provides a

historical review of Corporate Social Responsibility theory and a detailed introduction of the

CSV concept. The CSV introduction contains the theoretical framework, the relation between

Creating Shared Value and order ethics, the boundaries of the concept of CSV for this

publication, as well as a description of CSV implementation. An overview of business and

academic reactions to the concept finishes the introductory section.

A Theoretical introduction to Creating Shared Value 1

1 Introduction

1.1 Creating Shared Value as a new terminology in business ethics

In recent years, the field of business ethics has gained attention in both science and

business. A lot of the practical focus has been on advanced methods of how companies can

engage for the societal and environmental good. The general theme is to encourage

companies to have positive impact on their surroundings while at the same time ensuring

market competitiveness for the companies. This development counters the classical

understanding of Corporate Social Responsibility in which social engagement is regarded as a

cost item to the company.

Porter and Kramer (2011) stand in line of such developments with their Harvard

Business Review publication “Creating Shared Value: How to reinvent capitalism - and

unleash a wave of innovation and growth”. In it, they develop the hypothesis that the

competitiveness of companies strongly correlates to the wellbeing of the society in which it

operates. According to Porter and Kramer, companies can create shared value in three

distinct ways (Porter & Kramer, 2011):

By reconceiving products and markets

By redefining productivity in the value chain

By enabling local cluster development

Porter and Kramer claim, that Creating Shared Value “should supersede” corporate

social responsibility because it is “integral to the company’s profitability and competitive

position” (Porter & Kramer, 2011, p. 16). If the hypothesis holds true that CSV constitutes a

profitable version of traditional CSR, it would ease discussion on social engagement among

company management and shareholders. If Creating Shared Value is truly a new level of

social responsibility, then CSR could be rendered redundant and we can expect a significant

change in business and a win-win outcome for both society and companies.

1.2 Research question and objectives

The concept and practical approach of Creating Shared Value has experienced positive

response in business. However, academic papers have not picked up on the topic to a

sufficient extent. Several researchers argue that CSV lacks theoretical foundation and is a

combination of existing CSR and sustainability tools.

© Springer Fachmedien Wiesbaden 2016 B. von Liel, Creating Shared Value as Future Factor of Competition, Wirtschaftsethik in der globalisierten Welt, DOI 10.1007/978-3-658-12603-2_1

1.1 Creating Shared Value as a new terminology in business ethics 3

4 1 Introduction

This study investigates the elements of the Creating Shared Value theory on their

originality and compares CSV to related theories such as Bottom of the Pyramid and

Stakeholder Management. The identification of newly developed elements in CSV in the

second part of the study allows for a detailed discussion on their validation using empirical

evidence and interviews with involved businesses.

The research goal is fourfold. The first goal is to clarify to what extent Creating Shared

Value is a new concept. The second goal is to analyze the new elements of CSV for their

prospective success for businesses. The third goal is to assess the impact of the underlying

market economy on CSV. This analysis is based on the developed countries Germany and the

United States. Lastly, success factors are developed across multiple dimensions to provide

practical guidance for companies to engage with Creating Shared Value.

All research goals lead to the answer of whether Creating Shared Value actually

constitutes a future factor for competitive advantage. The study aims to provide an answer

based on the insights collected across multiple dimensions of Creating Shared Value on

whether CSV is expected to become a pivotal element in the competitive context of most

businesses in the future.

1.3 Course of investigation

The discussion on Creating Shared Value emerges on top of theoretical foundations of

business ethics. Different approaches are discussed which aim to answer the question

whether and how morality can be reconciled with competition in general and more specific

in today’s market situation. Following the theoretical framework discussion on business

ethics, an overview to the concept of Creating Shared Value is provided as developed

previously by Porter and Kramer in 2011. For demonstrative purposes, this overview

includes business examples as well.

The concept of CSV is then tested against other related approaches in the field of

ethical business behavior. These comparable approaches include Corporate Social

Responsibility, Corporate Citizenship, Social Businesses, the theory of Bottom of the

Pyramid, Stakeholder Theory, and Sustainability Management. The comparative analyses of

these theories and approaches reveal to what level CSV qualifies as a newly developed

concept. Several elements of CSV can be found in other related concepts. Two elements of

Creating Shared Value are identified as unique factors which have not been present in

existing concepts prior to CSV. CSV emphasizes opportunities at the bottom of the pyramid

in developed markets, which have previously only been seen in developing and emerging

1.3 Course of investigation 5

markets. While the original literature of the Bottom of the Pyramid theory (C. K. Prahalad,

2010) focuses solely on business opportunities in emerging markets, Porter and Kramer

claim similar opportunities in developed markets as well. Similarly, Porter’s and Kramer’s

idea of creating shared value through ‘reshoring’ of production constitutes a unique element

of the concept Creating Shared Value. In particular, the concept of creating shared social and

economic value through relocating production back to the home markets of multinational

corporations arises from current trends of the cost structure and cannot be found in related

social responsibility concepts.

The empirical part of this study begins in section C with a detailed investigation of the

identified unique Creating Shared Value elements. The analysis is conducted as a qualitative

assessment of the unique elements based on case studies and utilizing web research and

individual interviews where applicable. The first CSV differentiator ‘business opportunities in

developed economies for low-income individuals’ follows the structure of the definition for

relative poverty developed by the European Commission. The result of the case study

investigation for the two countries United States and Germany provides insights of

applicability for CSV in developed economies across the different relevant dimensions for

people in poverty. In addition, the CSV differentiator ‘market opportunities through

reshoring production’ is analyzed utilizing similar tools as well as case studies.

A second empirical section assesses the impact of various factors on the opportunities

to create shared value at a wider level. First, the influence of geographical differences is

investigated with a particular focus on the United States of America and Germany. A

comparison of country-specific differences derives CSV opportunities for both countries. A

second analysis examines a range of success factors at a corporate level. Following a case

study approach, critical success factors for the creation of shared value are identified across

external and internal dimensions. The analyses result in recommendations for companies of

how to achieve the best results in creating shared value.

The closing section summarizes key findings along the research questions. It provides

insights in the concept of Creating Shared Value as well as its positioning next to other

related theories. The section also summarizes the business insights for a successful CSV

implementation. The contribution to research in the field of business ethics is presented as

well as the limitations of this study and elements for future research. A short note with

regard to the overarching research question concludes the study when the author answers

6 1 Introduction

the overarching research question whether CSV constitutes a future factor for competitive

advantage.

2 Theory of business ethics

The philosophical discussion of business ethics includes the question whether and how

morality and competition can coexist in today’s commercial environment. This question is

used as an introduction to the two concepts of order ethics and integrative business ethics.

These opposing theories are presented and briefly discussed before the theories are applied

to practical business ethics and classified with the concept of Creating Shared Value.

2.1 Morality and competition

“It is not from the benevolence of the butcher, the brewer, or the baker that we

expect our dinner, but from their regard to their own interest. We address ourselves, not to

their humanity, but to their self-love, and never talk to them of our own necessities, but of

their advantages” (A. Smith, 1776). Smith’s most quoted statement denies the existence of

altruism in competition. In a recent article, Lütge acknowledges that Smith’s doctrine is

highly relevant to business ethics in modern societies (Lütge, 2013a). Does Smith’s analysis in

fact still hold and, if so, imply that morality and competition are in itself incompatible

concepts?

Homann explains in his essay on morality and competition that as a theoretical

framework, each individual in a community can impose his or her low moral standards on

others because low moral standards imply a more profitable business. This reasoning of the

“erosion of moral standards” (Aßländer, 2011, p. 104) results in a continuous degradation of

moral standards in our communities. Our society as a whole has lower moral standards than

each individual would have (Homann & Lütge, 2002, p. 24). This theory is the core

motivation of moral philosophy against free market and competition. It is from where other

market criticisms stem such as greed, unfairness and exploitation. To counter this

phenomenon, Homann endorses Smith’s statement that there is an ethical choice to be

made of whether a society prefers to increase its overall wealth through common growth of

the economy in a free market and competitive environment, or whether a society prefers

help for individual market participants through intervention. The latter does imply a lower

level of market efficiency which is why both Homann and Smith favor the first option of an

efficient market environment (Homann & Lütge, 2002, p. 29).

Hence, Homann concludes that from a theoretical point of view, moral behavior is an

integral part of free market environment assuming that the right boundary conditions are

© Springer Fachmedien Wiesbaden 2016 B. von Liel, Creating Shared Value as Future Factor of Competition, Wirtschaftsethik in der globalisierten Welt, DOI 10.1007/978-3-658-12603-2_2

2.1 Morality and competition 7

8 2 Theory of business ethics

set. This statement holds in theory even without the postulation of moral behavior of

individual market participants.

However, he continues in a pragmatic section of his work, that there are multiple

occasions in which individual moral behavior is required. He offers a list of possible

situations ranging from loopholes in legal and institutional rules or the overall framework, to

incapable governance of public authorities, changes in moral understanding over time and

other occurrences (Homann & Lütge, 2002, p. 36 et seqq.).

According to Homann’s ‘Moral and Competition’, an institutional framework for the

economy and all its actions is required in order to ensure moral behavior of the market and

its participants. However, a recent global development confronts this appraisal with an

additional dimension. Globalization has significant implications on the framework since it

complicates the possibility to determine and endorse legal and institutional guidelines that

are valid and accepted by all market participants across the globe. Homann realizes this

problem. He offers a theoretical solution to this issue developed by a group of philosophers

who refer to Immanuel Kant when they claim two potential answers. Either each market

participant has to act ethically driven from an intrinsic personal and ethical motivation or a

so called ‘super state’ is equipped with the power to endorse ethical behavior by law globally

(Homann, Koslowski, & Lütge, 2007, p. 6). Both solutions have its difficulties when it comes

to implementation and the concept of order ethics attempts to develop a method of how

companies and their managers can act in line with wider social interests.

The subsequent two chapters introduce two prominent concepts of business ethics

and showcase the shortcomings for practical implementation of both concepts. The term

‘business ethics’ is used in this study as it reflects the most common terminology in

international academic discussions. The existing distinction between business ethics and

economic ethics exists mainly in German speaking discourses. Lütge (2012a) provides a

detailed definition and explanation of economic ethics.

2.2 Order ethics as a concept of incentivized business ethics

Following the complications of the theoretical framework and opposing the solution of

a ‘super state’ due to implementation difficulties, Homann proposes the concept of order

ethics as a tool to rationalize ethical behavior of actors and companies through self-interest

(Homann et al., 2007, p. 6).

2.2 Order ethics as a concept of incentivized business ethics 9

2.2.1 Concept of order ethics

Order ethics is based on the theoretical concept of contractarian business ethics and

can be viewed as the complement to the German order policy (‘Ordnungspolitik’). The

comparison to German order policy highlights the importance of the regulatory framework

for ethical behavior (Lütge, 2013b). A fundamental understanding of order ethics is that

market participants, both corporations and individuals, are guided by self-interest.

Proponents of order ethics postulate that institutional and legal boundary conditions need

to exist to trigger ethical behavior for the market participants. This includes the interest of

companies to develop a social order, when Homann declares that “corporations cannot be

expected to make ‘sacrifices’, but they can invest – in real or human capital, but also in the

social order as a prerequisite of long-run benefit” (Homann et al., 2007, p. 7). The concept

evolves partly from A. Smith (1776) and his theory of the ‘invisible hand’ of the market.

Order ethics employs the invisible hand to encourage moral behavior of market participants.

Homann suggests a directional change from a ‘manichaen’ view of business versus ethics to

an integrated approach of business ethics. In this integrated world, a company’s motivation

stems from self-interest to ensure long-term sustainable profits. A renunciation from the

zero-sum paradigm would enable companies to identify new opportunities when integrating

the poor and to date left outside of the modern economies into their business strategy. The

introduced concept has significant similarities with the approach of ‘Creating Shared Value’

which is discussed in depth over the course of this study. Elements of strong relationship

between order ethics and CSV are analyzed and presented in chapter ‘3.3.2 Relation

between Creating Shared Value and order ethics’.

Schmitz states in similar words that the market has significant social functions such as

deliberate use of scarce resources and efficiency of employment of factors of production

(Schmitz, Pichler, & Schmitz, 2004, p. 68). He agrees with previous philosophers such as

Smith to claim that the social function of the market can best be unfolded if there are

necessary boundary conditions in place that direct the self-serving actions to the better for

the society.

Lütge (2012c) develops an updated definition of order ethics. In his work, he

investigates other philosophers such as Gauthier and his approach to ethics born out of

individual self-interest. Gauthier’s moral theory is solely based on self-interest of individual

market participants. Moral problems occur according to Gauthier due to market failure or

prisoner dilemmas in the economy. To overcome moral problems, each individual first has to

10 2 Theory of business ethics

bind him- or herself to the overarching principle of justice. This principle implied on everyday

life and business activity will influence the self-interest in a way that the market participants

act morally which Gauthier calls ‘minimax relative concession’ (Lütge, 2012c, p. 104). Lütge’s

key difference and criticism towards Gauthier’s theory is his utilization of political sanctions

to influence the behavior of individuals.

Subsequent to the analysis of Gauthier’s and others’ moral theory, Lütge develops

order ethics with the following three key elements (Lütge, 2012c, p. 89):

‘Order’ refers to the political understanding of the term and as such to all rules,

norms, laws and boundary conditions of interaction in a society. Order ethics is about

boundary conditions of actions.

Order ethics aims for implementing created norms to trigger ethical behavior in the

real world. The implementation problem is a central thought of order ethics.

Order ethics is based on the social contract approach but differs in the

implementation of the social contract. Order ethics claims adherence to social norms

due to self-interest and not due to external enforcement.

2.2.2 Limitations of order ethics

Even proponents of the concept of order ethics such as Lütge acknowledge certain

limitations to the theory. Order ethics does not cover the full range of reality because it

disregards the idea of any behavior that is not driven by pure self-interest. Any form of

altruism does not match the considerations of order ethics. Examples of such forms of

altruism exist in the context of friendship, love or happiness (Lütge, 2012c, p. 107).

Detractors of the theory challenge the position of morality. According to order ethics,

morality needs to nest in the order framework of the market. Ulrich (2008, p. 366) identifies

the core problem of order ethics as the dualism of steering behavior and the free market. It

is critical for the theory of order ethics to find the adequate balance of shaping the market

while enabling competitive market conditions.

A significant challenge is posed by globalization. Imposing moral behavior through

framework conditions at a national level is possible through government intervention. It is

not clear how such order policy can be achieved at an international level. The current global

situation shows varying standards of market conditions and forms of governments.

Therefore, a required supranational establishment of norms and regulations for market

economies cannot be seen in the near future.