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Creating Shared Value

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Presentation by Michael E Porter at Porter Prize 2017

Published in: Business

Creating Shared Value

  1. 1. This presentation draws on ideas from Professor Porter’s books and articles, in particular, Competitive Strategy (The Free Press, 1980); Competitive Advantage (The Free Press, 1985); “What is Strategy?” (Harvard Business Review, Nov/Dec 1996); On Competition (Harvard Business Review, 2008); and “Creating Shared Value” (Harvard Business Review, Jan 2011). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. For further materials, see the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu, and FSG website, www.fsg.org. The New Competitive Advantage: Creating Shared Value Professor Michael E. Porter Harvard Business School Mumbai, May 24th, 2017
  2. 2. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter2 • Societies everywhere are facing significant social, environmental and economic development challenges • Government and NGOs lack sufficient resources and capabilities themselves to fully meet these challenges • Business is the only institution that can actually create wealth and prosperity • Company engagement in society continues to grow, but the legitimacy of business has fallen The Role of Business in Society We need a new approach
  3. 3. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter3 The Role of Business in Society Evolving Approaches Philanthropy • Donations to worthy social causes • Volunteering
  4. 4. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter4 Corporate Social Responsibility (CSR) Philanthropy • Donations to worthy social causes • Volunteering • Mitigating risk and harm • Improving trust and reputation • Compliance with ethical and community standards • Good corporate citizenship • “Sustainability” initiatives The Role of Business in Society Evolving Approaches
  5. 5. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter5 Corporate Social Responsibility (CSR) Creating Shared Value (CSV) Philanthropy • Donations to worthy social causes • Volunteering • Addressing societal needs and challenges through the business itself, with a business model – Making a profit • Mitigating risk and harm • Improving trust and reputation • Compliance with ethical and community standards • Good corporate citizenship • “Sustainability” initiatives The Role of Business in Society Evolving Approaches
  6. 6. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter6 Fair Trade • Paying a “fair” (higher) price to farmers or small producers for the same products • Certification as a fair trade company CSR CSV Transforming Procurement • Collaborate with farmers to improve quality and yield • Supporting investments in better methods and inputs • Higher prices for better quality • Higher yield increases quantity produced • Environmental impact also improved • Expanding the role of markets CSR Versus Shared Value Fair Trade
  7. 7. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter7 Company Productivity and Success • Social needs represent the largest unserved market opportunities • Societal deficits and environmental impacts create economic costs for companies • Community weaknesses affect company productivity The Opportunity for Shared Value Environmental Improvement Energy Efficiency Water Use Economic Development Affordable Housing Worker Safety Health Workforce Skills Education Jobs for Lower Income Citizens
  8. 8. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter8 Business Government and NGOs Shifting the Frontier Between Markets and Market Failures Conventional Markets Market Failures
  9. 9. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter9 Levels of Shared Value 1 Reconceiving Needs, Products, and Customers 2 Redefining Productivity in the Value Chain 3 Improving the Local Business Environment
  10. 10. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter10 Levels of Shared Value 1 • Products and services that meet societal needs • Providing products to unserved or underserved customers and communities Reconceiving Needs, Products, and Customers
  11. 11. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter11 Shared Value in Products and Markets Jain Irrigation Systems • Micro-irrigation equipment for small farmers in India – Customized to the crop type, soil, and weather patterns • Farmer agronomic and technical support • Intensive training for farmers on more productive growing techniques • Serves more than 4 million farmers worldwide as of 2012 • The company is the 2nd largest worldwide and has 55% market share in India • Annual revenue of $960 million; CAGR of 39% • Crop yield increased by 230% – Water usage decreased by 70%, compared to flood irrigation techniques
  12. 12. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter12 Unlocking Shared Value in Products and Customers • Rethink the business around unsolved customer/societal problems or needs, not traditional product definition/segmentation • Identify customer groups that have been poorly served or overlooked by the industry • Think in terms of improving lives, not just meeting conventional needs • Start with no preconceived constraints about product attributes, channel configuration, or the economic model of the business - e.g., small loans are unprofitable
  13. 13. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter13 Levels of Shared Value 1 • Products and services that meet societal needs • Providing products to unserved or underserved customers and communities Reconceiving Needs, Products, and Customers • Accessing and utilizing resources, energy, suppliers, logistics, and employees differently and more productively 2 Redefining Productivity in the Value Chain
  14. 14. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter14 Shared Value in the Value Chain • Procurement that enhances supplier capabilities and efficiency • Resource efficiency across the value chain that improves the environment • Redesigning or recycling to minimize or eliminate waste • Minimizing logistical intensity • Improving employee health and safety • Better wages, benefits, training and career paths for lower income employees raises productivity and retention • Recruiting that reflects the diversity of customers and the served communities, enhances effectiveness • Others…
  15. 15. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter15 Shared Value in the Value Chain Fibria, Brazil • World’s leading manufacturer of chemical pulp integrates planted eucalyptus trees with native habitat to dramatically reduce the land required for wood fiber cultivation and improve sustainability • Encourages small-scale producers near its mills to plant eucalyptus in conjunction with other crops, providing technical training and inputs • Far greater land and water efficiency compared to traditional plantation methods. 35% of planted areas preserved as native forest • Small scale producers currently contribute 27% of raw material volume used in Fibria mills • Over 4,000 households have significantly increased employment and incomes
  16. 16. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter16 Integrating Plantation and Rainforest
  17. 17. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter17 Shared Value in the Value Chain Arvind Eye Care • Cross subsidy model of healthcare delivery – Customers choose between a paying hospital and free hospital; facilities and service vary accordingly – Doctors are rotated between paying and free hospital to maintain standard quality of healthcare delivery • Arvind introduced multiple innovations in the delivery of cataract surgeries in India – In house manufacturing of intraocular lenses – Training for hospital administrators, and employees • Establish Africa’s largest eye hospital (Nigeria) in 2015 • 32 million patients treated and 4 million cataract surgeries – The hospital performs 5 times the average number of surgeries that are performed in India; 16 times more than the U.S. – Infection rate is 33% lower than international standards • Single handedly responsible for decreasing cataract-related blindness in India
  18. 18. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter18 Levels of Shared Value 1 • Products and services that meet societal needs • Providing products to unserved or underserved customers and communities Reconceiving Needs, Products, and Customers • Accessing and utilizing resources, energy, suppliers, logistics, and employees differently and more productively 2 Redefining Productivity in the Value Chain • E.g., improving skills, local suppliers, and supporting institutions in the areas where the company operates • Enhancing cluster sophistication in the sector 3 Improving the Local Business Environment
  19. 19. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter19 Improving the Business Environment: Japanese Tea Cluster ITO EN • ITO EN is the world's leading producer and marketer of loose leaf and bottled green tea • Partners with Japanese farmers and other stakeholders to utilize abandoned agricultural land • Provides assistance in modern farm management practices to growers to meet ITO EN standards, and purchases farmers’ entire crop to encourage investment and lower selling costs • Motivates and trains young people for careers in tea growing when older farmers retire • Farmer incomes have risen due to increased quality and efficiency • Land abandoned by retiring farmers has been restored to production • Supply has expanded, quality is higher, and costs are lower
  20. 20. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter20
  21. 21. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter21 Shared Value in the Local Business Environment JSW Steel • Established an integrated steel plant on 3,000 acres of undeveloped land in Karnataka – Developed in technology to produce high quality steel from low-grade iron ore – Built local infrastructure, such as roads and bridges – Provided extensive training for local residents – Introduced health benefit program for employee and their families, including child immunizations and cataract surgeries • Has become the largest steel plant in India, by capacity, and highly profitable • 45% higher productivity compared to industry average • Reduced project delivery time by 50% • 65% of the workforce from the local region
  22. 22. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter22 Shared Value and Strategy • Shared value opens up new needs and customer segments, and new ways of producing and delivering • Shared value creates new value propositions, new opportunities for strategic positioning, and new competitive advantages • Shared value strategies are often more sustainable than conventional cost, feature, and quality advantages
  23. 23. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter23 Creating Shared Value: Where is the Opportunity? Water Rural Development Nutrition • Opportunities to create shared value are inevitably tied closely to a company’s particular set of businesses
  24. 24. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter24 Shared Value Journey Walmart • Organic, fresh, healthy foods • Locate neighborhood markets in food deserts • Low cost financial services for underbanked families • Low cost in-store health clinics for low income and uninsured families • Low cost generic drugs Reconceiving Needs, Products, and Customers 1 • Local sourcing • Comprehensive programs to reduce energy usage, water usage, packaging, and waste • Increase wages and benefits for low income associates • Training and career pathways for associates Redefining Productivity in Value Chain 2 • Lead collaboration in the retail sector on workforce development • Introduced Sustainable Value Networks to collaborate with suppliers to improve the resilience of supply chains Improving the Local Business Environment 3
  25. 25. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter25 Integrating Across the Levels Novartis in Rural India • Portfolio of the appropriate and affordable medicines drawn from the company’s patented, generics, and over-the-counter (OTC) businesses • Packaging medicines to reflect consumers’ limited spending power Reconceiving Needs, Products, and Customers 1 • Localized sales teams that know the culture, speak the dialect, and understand needs to build trust • A dense network of local distributors to reduce stock-outs Redefining Productivity in Value Chain 2 • Community health education programs to address lack of health- enhancing behavior • Frequent health camps bring physicians to rural areas • Microfinance partners improve healthcare delivery infrastructure and offer access to working capital Enabling Local Cluster Development 3
  26. 26. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter26 Change the World List 2016 50 Companies That Do Well By Doing Good 9. Coca-Cola 10.Intel 11.Munich Re 12.Fibria Celulose 13.Walmart 14.Bank of America 15.Crystal Group 16.Ito En 17.PayPal Holdings 18.Skandia 19.Siemens 20.National Australia Bank 21.Olam International 22.Schneider Electric 23.McDonald’s 24.Salesforce.com 27.Unilever 28.CVS Health 29.Accenture 30.Didi Chuxing 1. GlaxoSmithKline 2. IDE Technologies 3. General Electric 4. Gilead Sciences 5. Nestlé 6. Nike 7. MasterCard 8. United Technologies 9. Novozymes 10.First Solar 31.Johnson & Johnson 32.Banco de Crédito 33.Compass Group 34.mPedigree 35.LinkedIn 36.Smart Communications 37.Becton Dickinson 38.PepsiCo 39.Panasonic 40.Gap 41.Tribanco 42.DSM 43.Heineken 44.BTPN 45.Starbucks 46.Cipla 47.IBM 48.Godrej Group 49.Grupo Bimbo 50.Tesla Motors
  27. 27. 20170524—Creating Shared Value: India Copyright 2017 © Professor Michael E. Porter27 The Purpose of Business • The purpose in business is to create economic value in a way that also creates shared value for society • Businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many of society’s pressing issues – Innovation and scalability • Shared value opens up major strategic opportunities to create competitive advantage, while driving the next wave of innovation, productivity, and economic growth • Realigning company strategy around shared value gives greater purpose to the corporation and to capitalism itself

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