Despite its obvious benefits for both business and society, creating shared value is still not a mainstream business practice
Creating shared value is about business addressing societys most pressing issues by acting as business, and not as charitable donors. This, we believe will drive future innovation and productivity growth in the global economy. Why then, is creating shared value still not a mainstream business practice? There are many reasons but we have found three misconceptions or “myths” to be among the most common.
Myth 1: my products and services already benefit society or the environment
Many companies may meet social or environmental needs as a by-product of their normal course of business. For example, generic drug manufacturers and drip irrigation suppliers create social value simply by being in the business they are. However, without an intentional strategy that seeks to maximise business value by solving the social problem, companies rarely realise the full potential of such opportunities. Jain Irrigation is one of the largest suppliers of drip irrigation in India and serves as a good example. Instead of being satisfied with the social value created as a by-product of simply selling drip irrigation solutions, Jain has an intentional strategy to reach customers who are most water-constrained and thus, most in need of its solution, ie smallholder farmers. Jain has been able to maximise the business benefit (it commands an impressive 50% share of the micro-irrigation market) only by intentionally targeting this difficult-to-reach customer base by coupling its product with innovative financing and technical assistance.
Myth 2: it would be wrong for our business to make a profit from meeting the needs of the poor
Societys mixed history with microfinance certainly supports the concern that when business profits from providing services to the poor, things can go very wrong. The painful truth is that not all shared value ideas actually end up creating shared value. As microfinance institutions (MFIs) chased growth they began to define their role as credit delivery institutions that focused on standardising products and delivery processes and lost focus on the twin pillars of social value creation â€” income generation (which would enable borrowers to repay loans of 30% interest) and building social capital (encouraging repayment through self-help groups). Successful shared value companies understand that lasting competitive advantage is only maximised when the activity meaningfully and continually addresses the social problem. Companies such as Jain Irrigation are zealous about measuring and holding themselves accountable for both the financial and social impact of their shared value activity.
Myth 3: creating shared value means there is no longer any role for CSR and corporate philanthropy
Shared value does not relieve companies from the basic corporate responsibilities of having good governance, minimising environmental footprint, treating employees well, ensuring product safety, and meeting community obligations especially in times of disaster. Best-in-class companies take a portfolio approach whereby resources are allocated across three categories, each of which fulfils a different objective:
1. Exercising good corporate citizenship by meeting community obligations
2. Fulfilling basic business responsibility by mitigating harm from business operations
3. Proactively creating large-scale social impact through shared value activities
Companies can also leverage CSR or philanthropic resources over and beyond that allocated for meeting community obligations for incubating shared value opportunities. These investments can thereby have a longer timescale that isnt subject to the strict return on investments, or the profit and loss constraints of the business unit.
Ultimately, creating shared value represents a higher form of capitalism â€“ a form that is based on the inextricable link between business and society. It stems from the belief that the progress of one is dependent on the progress of the other.
Lalitha Vaidyanathan is a managing director at FSG