INDIAN INSTITUTE OF MANAGEMENT

STRATEGIC MANAGEMENT
CREATING SHARED VALUE

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Introduction
Shared value is not about sharing the value already created by firmsa 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 socioeconomic 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 HULs 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 worlds 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 companys 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 companys 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 CS 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 organizations 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 companys 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. HULs 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.
Fair Competition Regulatory climate Transparency Meritocracy IP Protection

Competitive Context
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

Input Conditions

Local Demand conditions

Related & Supporting Industries
Presence of Clusters Access to local suppliers

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

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 micronutrientreinforced 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 spicesthe most commonly used itemoffered 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, Nestl 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. GEs 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, Embraces solut ion 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 GEs 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. HULs project Shakti has given it an unmatchable distribution network in rural India. All these result in improved profitability for the company. Shown below is HULs share price since the year 2000, when project Shakti was launched. After the initial years, success of project Shakti has contributed significantly to HULs profitability.

HUL share price since 2000 when Project Shakti was launched

FUTURE OF SHARED VALUE

Shared Value is going to be the most important thing for sustainable growth of organizations. While shared value wont solve all of the

issues overnight. Its use would be important to create value for companys 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)