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INDIAN INSTITUTE OF MANAGEMENT ROHTAK
STRATEGIC MANAGEMENT
CREATING SHARED VALUE
Submitted By: Submitted To:
Section B, Group 11 Dr. S DASGUPTA
Jatin Arora – PGP04065
Joohi Srivastava – PGP04066
Kanta Moolchandani – PGP04068
Raghav Chadha – PGP04081
Introduction
“Shared value is not about “sharing” the value already created by firms—a
redistribution approach. A shared value perspective, instead, focuses on
improving growing techniques and strengthening the local cluster of supporting
suppliers and other institutions in order to increase farmers’ efficiency, yields,
product quality, and sustainability.
- Michael Porter
Shared value, contrary to its literal meaning of ‘sharing
(redistributing) the profits’, is about ‘expanding the pie’ for all the
stakeholders .It has been defined as ‘a set of policies and operating
practices that enhance the competitiveness of a company, while
simultaneously advancing the socio-economic conditions in the
communities in which it operates’[1] . Traditionally, the interaction of
businesses with the society has been of a transactional nature .It is
considered as a zero sum game. Businesses are considered as creating
value to the society by the products they create, and the employment
provided to society (the circular economy model). And over reliance
on short term and narrow performance measures has led not only to
sustainability issues, but ethical issues as well [2] . In such a business
model with increasing commoditization of products and services,
companies look towards creating value for the society as an expense in
P&L account. Some companies may prefer to ‘outsource’ the work to
NGOs and use PR techniques such as Corporate Social Responsibility
(CSR, which, as shown ahead, is very different from shared value
approach). Governments also ‘punish’ companies for not doing
enough, by imposing taxes and regulations (a process referred to as
‘internalizing’ the ‘externalities’ [1]) ,which further reduces
profitability .
The philosophy of shared value is based on the fact that it is possible
for companies to turn the threat of social value into an opportunity for
gaining competitive advantage. Under this approach, creating socio-
economic value is not perceived as a ‘trade-off’ to profitability, but a
means to create a distinctive value proposition .It emphasizes that
addressing social constraints ,when properly channelized for
profitability can deliver benefits greater than the costs . It focuses on
increasing the size of the pie, rather than just attempting to grab a
larger slice of it.
3 generic strategies have been suggested for creating shared value [1]:
1. Reconceiving products and markets: This approach involves
creating new or improved products, and enabling access to
these. An example would be the Microfinance industry
.Originally started as a not-for-profit initiative by M. Yunus, it
has spawned an NBFC industry in India (e.g. SKS Microfinance).
2. Redefining productivity in the value chain: It emphasizes
operational efficiency, or increased return from existing
resources (such as HR) to yield cost savings and increased
productivity. A prominent example is HUL’s project Shakti.
3. Enabling Local Cluster Development: This approach emphasizes
building a pool of capability to improve the operating
environment .For example, ITC was able to reduce its transaction
costs of dealing with farmers (for procurement) by its e-Choupal
initiative, which became the world’s largest rural digital
infrastructure by 2012 .It was an IT enabled marketplace, which
helped in reducing information asymmetry and enabled ITC to
procure from the farmers directly. It was estimated that it saved
approximately $6 per metric ton of produce for farmers and ITC.
CSR vs Shared Value
The terms Corporate Social Responsibility and Shared Value are often
confused. While CSR refers to the company’s policy of philanthropy
and citizenship, CSV is the joint value creation between the company
and community for mutual benefit and is essential for competing. CSV
stresses on the benefits of the company’s existence and sustenance to
society while also underlying the strategic advantages the company
can gain from it. However the pursuit of shared value opportunities
into a regular activity requires defining a clear social purpose,
publicizing it internally and externally, and embedding it in core
processes such as strategic planning and budgeting. This establishes a
culture that unleashes the best in employees and helps mobilize
external partners that have similar goals.
Thus, while the company gains publicity and coverage from
conducting various CSR activities, shared value can help the company
gain sustainable competitive advantage over its rivals.
THREE C’S FRAMEWORK FOR OPTIMISING
SHARED VALUE [3]
According to a study, enterprises are most likely to generate high shared value when they have the capability to do so, when there is consistency between the creation of shareholder value and social value, and when the social value can be cultivated beyond the enterprise that created the original initiative.
CAPABILITIES & SHARED VALUE INITIATIVES Leveraging existing Capabilities in the supply chain will lead to the creation of more shared value through an initiative. Such capabilities must be distinct capabilities build over a period of time. These capabilities enable competence that remains impervious to competitive threats and continues to provide added value to the firm' s customers and shareholders.
CONSISTENCY & SHARED VALUE INITIATIVES
Consistency can be defined as the perceived congruence of shareholder and social value of a Shared Value Initiative. While the capability to create shared value may exist, shareholders may lack the motivation to use this capability for social value. To optimize shareholder value, tradeoffs are required to acquire sustainability. Managers need to demonstrate a link between social & financial value while leveraging their scarce capabilities.
CULTIVATION & SHARED VALUE INITIATIVES
Cultivation can be referred to as the expansion of SVIs' influence beyond the boundaries of the firm. Through SVIs that leverage firm capabilities and demonstrate consistency, global corporations can affect rapid social changes within their organization’s sphere. However, to optimize shared value, the portion of that value aimed at the community of need beyond the shareholders must be able to be cultivated by other entities. If social value is cultivated, the long-term viability of the firm will likely increase through the creation of a more vibrant customer base. As long as the principle of consistency is not
violated, any negative financial impact on the firm of cultivating social value will be muted. The ability to collaborate and innovate are often the true drivers of cultivation.
APPROACHES TO CREATING SHARED VALUE
INSIDE-OUT APPROACH
According to Inside – Out approach, every step in the company’s value
chain is analyzed for its impact on society and modifications are made
so that each step acts as a source of competitive advantage to the
company. Both the primary and secondary activities can be a source of
such an advantage. E.g. in the Technology Development activity, the
company can involve University students thereby creating a mutually
beneficial relationship. Similar shared value activities can be carried
out at other steps of the value chain.
OUTSIDE-IN APPROACH
In the Outside - In approach to shared value creation, the company looks at its external environment to look for shared value opportunities and then utilizes such opportunities to create a strategic impact. HUL’s Project Shakti is one such example where the company which realized the immense potential of rural India and leveraged it to create an efficient distribution network which is still a source of competitive advantage for the company.
EXAMPLES OF SHARED VALUE
In 2007, Novartis India launched Arogya Parivar (Hindi for “Healthy Family”), a program designed to increase access to medicine in rural
India. The company uses its generics manufacturer, Sandoz, to
produce drugs at low cost and provides smaller package sizes to make
products more affordable. In a parallel effort, Arogya Parivar “health
Competitive Context
Related & Supporting Industries
Input Conditions
Local Demand
conditions
• Local demands
• Characteristic
of Market
• HUL
Exploited this
dimension for
project Shakti
Presence of Clusters
Access to local suppliers
Efficient
infrastructure
Efficient access to
capital
Availability of tech
Availability of
sustainable
resources
Availability of HR
Local demands
Characteristic of
Market
HUL Exploited
this dimension for
project Shakti
Fair Competition Regulatory climate
Transparency
Meritocracy
IP Protection
educators” work closely with village leaders and local non-
governmental organizations to educate residents of rural communities
about the benefits of healthy lifestyles, raising awareness and
simultaneously creating demand for effective medicine. To ensure
continuity of supply to local pharmacies, Novartis has established new
distribution networks that are capable of supplying even the most
remote locations. In addition to reconceiving its products and
markets, Novartis is also strengthening its competitive context by
working with international and local financial institutions to make
infrastructure loans available to rural healthcare practitioners. Such
loans allow local health practitioners to set up facilities, increasing the
number of patients who can seek quality healthcare services and thus
the market for medicine.
Before Nestle launched Maggi Masala-ae-Magic, a micronutrient-reinforced spice product priced for low-income consumers in India at three rupees, researchers at the company studied the nutritional situation and the most prevalent micronutrient deficiencies in the country. They discovered that 70% of children under the age of three and 57% of women suffered from anemia. They then visited 1,500 poor households to understand cooking customs and diets, and realized that spices—the most commonly used item—offered an optimal vehicle for hiding the bad taste of crucial micronutrients: iron, iodine, and vitamin A. Following an intense period of development and the upgrading of manufacturing lines, Nestlé launched the product. In just three years, the company sold 138 million servings of Masalaae- Magic, using both existing and new nonprofit distribution channels to reach the most remote and affected areas of India.
In 2009, General Electric (GE) launched Healthymagination, a bold
commitment to invest $6 billion by 2015 to develop 100 new, more
affordable, and simpler products that address severe health issues. In
India, one of the severe health issues the company aimed to address
was infant mortality. GE’s R&D engineers spent months reinventing their incubator and managed to bring the price down to an impressive $2,000 – 10 percent of the original. However, this was still too expensive. It was then that
GE chanced upon Embrace, a social enterprise born out of a Stanford Design class that had radically rethought the solution to the problem. Bearing no resemblance to a traditional incubator, Embrace’s solution was fashioned as a sleeping bag with a pouch for a heating pad. The pad which could be warmed by an electric or water warmer in 20 minutes could keep the baby warm for 4-6 hours. Most importantly, this came at just $200 – or 1 percent the price of GE’s original incubator. Portable, affordable and practical, it was the perfect solution to the problem.
STRATEGIC IMPACT OF SHARED VALUE As discussed above, Shared Value can be a source of competitive
advantage for any company pursuing it. It can help the company
identify potent customer needs and then realign its focus towards
fulfilling those needs. Companies like ITC have been able to
significantly reduce their transaction costs by their e - chaupal project.
HUL’s project Shakti has given it an unmatchable distribution network
in rural India. All these result in improved profitability for the
company. Shown below is HUL’s share price since the year 2000,
when project Shakti was launched. After the initial years, success of
project Shakti has contributed significantly to HUL’s profitability.
FUTURE OF SHARED VALUE
Shared Value is going to be the most important thing for sustainable growth of organizations. While shared value won’t solve all of the
HUL share price since 2000 when Project Shakti was launched
issues overnight. Its use would be important to create value for company’s shareholders. Also the approach towards Shared Value would vary from company to company, while some would depend on innovative ideas and solutions, others would use existing resources to create such an impact.
CRITICISMS
While many corporates have enthusiastically taken to the idea of Shared Value but many critics doubt over its ability to be the next “big idea”. There is also a striking similarity between shared value and Jed Emerson' s concept of blended value, in which firms seek simultaneously to pursue profit and social and environmental targets. There is also an overlap with Stuart Hart' s 2005 book, “Capitalism at the Crossroads”.
While shared value as the critics point out is a buzzword, a lot of work still has to go into it to make it a winning business strategy.
References
1. Porter, Michael E., and Mark R. Kramer. " Creating shared value."
Harvard business review 89.1/2 (2011): 62-77.
2. Handy, Charles. " What is a business for?" Harvard business
review 80.12 (2002): 48-55.
3. Maltz, Elliot; Schein, Steve,” Cultivating Shared Value Initiatives:
A Three Cs Approach”, Journal of Corporate Citizenship, Volume
2012, Number 47, September 2012 , pp. 55-74(20)