In “Creating Shared Value,” the Harvard Business Review cover story written by FSG co-founders Michael Porter and Mark Kramer, the authors cite numerous examples of multinational corporations (MNCs) that are increasing their competitiveness by addressing significant social issues. Companies like Nestlé, GE, Coca-Cola, and Cisco have increased their profits by hundreds of millions of dollars and had a profound impact on poverty, health, environmental, and educational challenges, by carefully considering the intersection between their business models and global social challenges.
The experiences of these companies are critical: through their efforts they provide an example to other companies of the opportunities that Creating Shared Value (CSV) represents. These companies are also developing a competitive advantage. There is a steep learning curve associated with pursuing an effective Shared Value strategy.
Company leaders must learn to identify and prioritise opportunities in a new way. Managers must adjust their mental models about risk management and collaboration to implement Shared Value. As companies execute Shared Value initiatives, they increase the knowledge assets at their disposal and enable themselves to uncover new Shared Value opportunities that other companies without those knowledge assets miss out on. Ultimately a virtuous cycle is created that will allow the MNCs with serious CSV strategies to leave their competitors behind.
This is bad news for the legions of companies that have yet to discover Shared Value, in particular, local companies in developing markets that are not familiar with the concept. The good news is that Shared Value is not merely the province of MNCs. On recent trips to Peru, Chile, and Brazil, I met with dozens of local companies. Almost without exception, regardless of whether they called it CSV or not, these companies were contemplating significant strategic moves that would simultaneously enhance their profitability and address a societal challenge.
With greater proximity to the local social challenges, Latin American companies should have an advantage over multinationals in many CSV areas. Porter and Kramer outline three ways for companies to simultaneously increase their competitiveness and have social impact: reconceiving products and markets, redefining productivity in the value chain, and enabling local cluster development. Below are examples of companies in Latin America that are pursuing Shared Value in each of these ways.
CEMEX, the $15 billion dollar Mexican building materials supplier, has opened up new markets for itself by creating the housing microfinance program, Patrimonio Hoy. With some 20 million Mexicans facing a housing shortage, Patrimonio Hoy helps to address this problem by providing low-income families access to microloans for construction materials, labor, and technical assistance to build or renovate their homes. CEMEX spent a year studying the low income market, working to develop approaches to financing, design, and construction that would be effective. In the next five years, as many as 750,000 low income families are expected to benefit from CEMEX’s efforts and a new market segment is using CEMEX products and services.
Native is a sugar company based in São Paulo, Brazil with over a century of experience in the sugar business. Over the last decade, Native has systematically re-engineered its value chain, thereby creating tremendous social value and establishing itself as the largest producer of organic sugar and ethanol in the world. Native’s story is not a simple shift from conventional to organic farming, however.
To maximise its differentiation and manage costs, Native has redefined its value chain in many areas.
The company refined its training programs, even converting some traditional slash and burn workers to lab assistants aiding in the research species for effective natural control of pests. By extending its R&D capabilities, Native has opened new business opportunities as reflected in its recent development of a new bio-degradable PHB plastic produced from sugar cane.
Alicorp is a $1.3bn consumer product company based in Lima, Peru that has pursued CSV by strengthening its cluster. In addition to supplying a broad range of products including cooking oil, pasta, laundry detergent, and pet food, Alicorp is one of Peru’s largest producers of flour. Recognising that the success of its flour business was directly tied to the success of Peru’s bakeries,
Alicorp mounted a program to train 7,000 bakeries in both urban and rural areas. The training focuses on basic management skills and helping bakeries recognise the opportunities in shifting their production to higher profit items, such as pastries, where margin is six times what it is for the more typical French bread.
Thousands of small scale bakeries are benefiting from these efforts. Meanwhile, Alicorp is reaping benefits, as well. The deeper relationships with the bakeries translate into higher levels of customer loyalty and larger purchases of Alicorp flour. The program has worked so well for Alicorp that they are considering extending the training to tens of thousands of “mom and pop” stores across Peru.
Companies, whether MNCs, the so-called “Multi-Latinas,” or local enterprises in developing countries should feel an urgency about CSV.
Companies that do not have a CSV strategy risk missing out on big business opportunities and may consign themselves to falling into a disadvantaged position that will be hard to escape. The examples of CEMEX, Native, and Alicorp demonstrate that a strategic exploration of different CSV opportunities can be profitable to the companies and to society at large.
Dane Smith is a managing director at FSG. He co-leads of FSG’s Creating Shared Value practice area