Why do corporations engage stakeholders? It’s a fascinating question in today’s economy. If the stakeholders are customers, suppliers or shareholders, the business justifications are obvious. But when companies choose to engage with civil society organizations and governments, the purpose is not always as clear.
The most common answer is to preserve the company’s reputation and license to operate: by anticipating or resolving points of tension and disagreement between the company and those who are affected by its operations. This is a necessary form of stakeholder engagement, and it is generally much more successful than fighting or ignoring societal concerns.
But I think there is a far more powerful form of stakeholder engagement that comes from the concept of shared value that Professor Michael Porter and I developed. Creating shared value is not philanthropy, corporate responsibility, or the usual form of stakeholder engagement. It is about policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which the company operates.
A social purpose
Shared value is about finding the profit in solving social and environmental problems, whether those problems are rooted in the company’s operations or occur independently, outside its value chain. It is about identifying the one or two key societal problems that matter most to the success of the company and finding ways to address those problems that enable the company to increase its profits. When fully realized, shared value is about building a social purpose into the competitive strategy of the company.
I’d like to ‘share’ thee ways in which shared value can be created:
New products and markets: Nestlé, for example, has developed the Maggi Marsala-e-Magic bouillon cube to address nutritional deficiencies. The company knew that, in India, 70% of children under the age of three and 57% of women were anemic, and so they developed a low-cost bouillon cube fortified with the iron, iodine and vitamin A micronutrients that were needed. Since launching the product, Nestlé has sold about, 138 million bouillon cubes improving nutrition for over 200 million people, and creating a vast new and profitable market for the company.
Reconceiving productivity in the value chain: When Walmart decided to reduce its energy use, it found ways to save $3 billion over five years – additional profit straight to their bottom line that came from reducing carbon emissions.
But shared value is not only about environmental improvements. Coca-Cola in Brazil found that it could teach retailing skills to unemployed youth in the favelas or slums who could then find work selling different products – including Coke products – that significantly increased Coke’s distribution, strengthened brand affinity, and has improved the lives of more than 60,000 underprivileged young people. These are examples of shared value rooted in a company’s operations.
Strengthening the cluster: When Cisco Systems realized that a shortage of network administrators was holding back its growth, the company established the Cisco Networking Academy ), which has trained nearly 5 million network administrators in 165 countries and now graduates 1 million more every year. This has brought immense economic opportunity to many people who would never have had the chance, but it has also fundamentally improved market conditions for the company by creating a trained workforce for its customers. Cisco found a way to solve a social problem that affected its industry cluster, which was caused by limitations in educational systems around the world and not by the company’s ordinary activities.
I have only named a few of the examples of companies that create shared value by fundamentally changing societal conditions in the regions where they operate. They do so in ways that improve millions of lives and, at the same time, overcome material constraints to the growth of their businesses.
To solve problems, you have to understand them
Successfully creating shared value depends on stakeholder engagement, but not on the usual form of engagement aimed at resolving objections to the company’s operations. For a company to be successful in creating shared value, it must acquire a deep understanding of the problem it is trying to solve and the customers it is hoping to serve. Nestlé, for example, went into the homes of 1,500 low-income Indian families to observe how the women prepared meals. It was that close engagement with the community that led to the realization that the spices in a bouillon cube would hide the bitter taste of the micronutrients. Further community-based research was needed to determine the right combination of spices and a realistic price point to make the product successful.
Similarly, Cisco had to work closely with educational institutions around the world to design the Networking Academy in a way that enabled students to obtain course credit. And Coca-Cola had to engage youth in the favelas as instructors and outreach workers in order to attract enrollment. It is clear to me that each of these examples, and many more, involves a close working partnership between a company and stakeholders – not to silence critics or protect a license to operate, but to develop effective and profitable solutions to social problems.
I think it is important to stress that shared value does not replace philanthropy, corporate responsibility, or the usual forms of stakeholder engagement, but it opens the door to a new way of engaging with stakeholders that leverages the power of capitalism to solve societal problems at scale.
Teaming up with partners
Often, these solutions are not created by companies alone. Civil society and government help devise and implement solutions. Nestlé uses charities to distribute its bouillon cubes in regions too poor to cover normal distribution costs. Coca- Cola works with local community groups to conduct its classes. Cisco cooperates with schools to house the laboratories for its students.
Although engagement with civil society and government is essential, we can no longer depend on those sectors to solve the world’s urgent social and environmental problems on their own. Bringing business to the table as a partner with charities and government in solving social problems is the biggest step forward that we can possibly take to improve social conditions. And in doing so, companies can overcome many of the societal limitations that have held back their growth. But companies will only succeed in creating shared value if they genuinely engage stakeholders in a new way: as partners in the development of a solution.