Saturday 8 June 2019

More from Michael Porter: Shared Value (part 2)

Part 1 of this post described Michael Porter's points on business strategy at WOBI London this week, as well as my additions on organisational strategy.  However the session was really on shared value, but I think Porter needed to go through all of his earlier thinking in order to make his input on shared value make sense (since creating shared value is really just strategy, in an environment where the broader community is more important).

So competitive strategy is still really useful, but these days it isn't enough. There are growing societal problems which everyone is aware of, and a growing NGO movement etc.  But businesses aren't doing enough and its image and people's trust in it are declining. Young people are being turned off capitalism because it's not what they want their society to be like. Even the desire of company leaders to do something has changed dramatically.

Aside from the ongoing technological revolutions this is the biggest shift and strategic opportunity companies need to respond to. We need to contribute to society rather than greedily take away from it.  Business is the only instrument that can meet needs like this at scale, whilst also making money. Doing this means that we need to link society and core business strategy. We can then regain the acceptance of capitalism, and make our businesses more strategically successful too.  

Creating shared value takes our involvement in society to a new level. It addresses societal needs through business and the business model - doing this and making a profit, seeing it as part of doing business. So not just doing business and making a profit but innovating the way a company is dealing with a social issue at a profit. It moves business from Milton Friedman's concept of business just being to maximise profits, and where philanthropy is not our job, as well as from a focus on CSR which is often just window dressing and gives away money rather than earns it, and even having a social purpose which tend to be very vague, and doesn't connect with the business or how to succeed. Can shared value be something customers value, or a differentiator for the business?

Walmart is a good example. It used to be seen as company than exploited its workers. Now it pays better than average, and has introduced career paths so that lower grade workers do not get stuck. But of course, this is really just what Walmart should have always been doing anyway. So actually, all CSV is, is doing business strategy with an eye on the broader community. Or perhaps recommending a shift from low cost to differentiated competition.

And, of course, companies are only going to invest in shared value when they make a profit too. If one opportunity comes with high shared value but a low or long-term profit and another with low shared valued but high and short-term profit it's obvious which they're going to pick. It's still an inelegant way to help the world do what it needs to do. We really need to be putting that extra value at a higher, or at least at the same level as the profit.

And Porter suggested that investors are crying out for companies to do more of this, and talked about Larry Fink's letter to CEOs. But that wasn't received uncritically. Or look at the problem Paul Polman had at Unilever trying to get their investors to back that company's social approach.

It's why on balance, that for the workforce at least, I still prefer my approach based on the organisation value chain which I addressed in my last post. I like the way shared value sees people as an intrinsic good not just an instrument to achieve profit. But companies are only going to invest in shared value when it provides profit anyway, so this is a very minor distinction. And I think the organisation value chain helps companies understand the investments they need to make more clearly.

Part 3 of the post will focus on my press interview with Michael. Up next.

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