Profit with social benefits
There has been a marked shift in the way people view businesses after the 2008 global financial crisis. Businesses are beginning to be thought of as entities representing greed, manipulation and evil, especially after people across the world were affected by the financial meltdown. While this is true for a few entities, most businesses work to create value for not only their shareholders but also for their customers and employees. A lot of innovations that we take for granted now were first implemented by businesses to solve some unique customer problems.
The movement now in capitalism is in addressing societal challenges through market-based solutions. Companies are creating measurable business value by identifying and addressing social problems that intersect with their business. This is what is termed ‘Creating Shared Value’ (CSV).
A lot of examples exist across industries and geographies. For example, Novartis Arogya Parivar in India is bringing health education and access to medicines to more than 10 million villagers, opening a new and profitable market for the company and improving health outcomes for consumers. Innovations like ICICI Bank Ltd’s rainfall-based crop insurance, now insuring 12 million small-holding farmers, are bringing financial inclusion as well as benefiting ICICI.
These examples illustrate the importance of business innovation and scale of impact through shared value. Fundamentally, it is about understanding the transformational role that businesses can play in social progress and economic development.
The concept of shared value goes beyond corporate social responsibility (CSR) or corporate philanthropy. Creating shared value addresses the needs and challenges of society while making profits. Businesses thus do well for the society while at the same time making profits. These become powerful institutions in solving societal problems, especially in developing nations. It is in contrast to what is being done at present in some developing societies.
Consider the case of India: as per the Companies Act of 2013, corporations must spend 2% of their average annual profits of the past three years to address social issues and challenges facing the society. Often, resources within the society are constrained in developing economies, and resources with the government are often limited. While the mandatory approach does solve some societal problems, this approach severely undermines the role that corporations can play in solving primary challenges such as education, healthcare, poverty alleviation, rural development and environmental sustainability. Shared value looks at leveraging the rest 98% of the resources that corporations can use for societal good.
Businesses can look to create shared value by altering activities within their business models in, broadly speaking, three distinct ways.
First, they can create new products and distribution systems to cater to the needs of the people. It enables businesses to access newer markets and drive innovations through the development of new products.
Second, they can redefine their value chain, i.e., the set of activities that a business undertakes to deliver products and services to customers. It leads to better efficiencies and mitigation of perilous impacts of the activities of a firm.
Third, businesses can create shared value by enabling local cluster development. It means businesses can invest in developing skills by training their suppliers in clusters. It strengthens a firm level of competitiveness and also the competitiveness of the location in which that particular business operates.
Newer business models will only emerge when India embraces greater competition that will force companies to innovate. Mother Dairy is an example of how businesses can truly create value for all stakeholders—namely customers, suppliers and even the business itself. Mother Dairy has created a powerful business model that has an impact on millions of people buying milk. It has also provided a platform for farmers to sell their products at the best market price. Unlike other organizations, their objective is not to maximize profits but to provide the best price to farmers for the products that they supply, while catering to the needs of their customers.
Another example that can be mentioned is Hindustan Unilever’s Sustainable Living Programme. It has undertaken initiatives like Project Shakti, wherein rural women, as well as the company, have benefited. In this initiative, rural women are empowered by basic training in running a business. They then go on to explain the benefits and do the sales and distribution of the products of the corporation. This way, Hindustan Unilever earns revenue as well as provides a means of livelihood to many women entrepreneurs. The consumers too get products that depend on their individual needs.
The next transformation of businesses will lie in creating economic value that creates value for society by addressing its needs and challenges. Realigning business models with societal needs is going to be the next big evolutionary change for the Indian corporations.
The need of the hour is the involvement of people in corporations who understand the meaning and imbibe the meaning of shared value within their organizations.
The government and key policymakers should encourage companies to understand the concept and adopt it for social good. Businesses must incorporate the shared value paradigm in their business models so that it truly has a transformational impact all the key stakeholders.
Amit Kapoor is the chair of the Shared Value Initiative in India. Mark Kramer is the managing director of FSG, a not-for-profit consulting firm co-founded by him and Michael Porter.