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July 18, 2011

Forget Corporate Social Responsibility, Focus on Creating Shared Value

Analyst Insight by Lee Linthicum, Head of Global Food Research

Woman_shopping As the global recession wears on, companies are being forced to re-evaluate their customary strategies through which they achieve profitability. With consumers spending less on premium-priced groceries, fmcg companies are finding it harder than ever to justify their expenditure on Corporate Social Responsibility (CSR) programmes. These well-intentioned schemes can prove a drain on the budget and contribute precious little to a company's balance sheet.

Instead of passively waiting for the economic situation to even out, several companies have already taken up the challenge of overhauling their patchwork – and typically off- the-cuff - CSR activities into far more cohesive and targeted long-term strategies aimed at Creating Shared Value (CSV).

How is CSV different from CSR?

The primary aim of CSV is to create a self-sustaining, positive cycle of economic profitability, both for the company and the communities in which it operates. The practice where companies move from location to location - lured by the promise of cheap labour, lax regulations and/or low taxes - leaving environmental devastation and shattered communities in their wake, is diametrically opposed to the CSV philosophy.

CSV generates economic value by contributing to the prosperity of the wider society as well as the company, rather than doling out philanthropy in order to add a glossy sheen to the company's reputation. One of the major criticisms often hurled at Corporate Social Responsibility (CSR) schemes centres on how profits are used. Profit generation is not just an integral part of CSV, but its primary driver, while in the loftier realms of CSR, making a profit does not overtly feature as a motivating factor.

Three routes to creating shared value: Reconceiving products and markets

An article published in the Harvard Business Review's January-February 2011 edition, written by Michael Porter and Mark Kramer, identifies three mutually re-enforcing ways in which shared value is created - reconceiving products and markets, redefining productivity in the value chain and building local business clusters.

When approaching the task of reconceiving products and markets, companies first need to ask themselves a series of questions about their products and customer base, such as whether their products still fit their customers' needs, and what could be done to make their goods appeal to consumer groups which are currently not buying them.

For instance, can the people (and their families) who make a company's products actually afford to buy them? Are they potential customers, and if not, why not? What could be done to make products appropriate and affordable for them? Fortunately, this is much easier to accomplish for packaged food and beverage companies compared to a maker of highly priced durable goods, such as a luxury car manufacturer or Apple Inc.

Packaged food and beverage companies have long been dealing with the issue of whether their products are actually “good” for their customers, and this has, in part, fuelled the global health and wellness trend. Escalating obesity statistics, for instance, are prompting companies to move from purely focusing on taste and shifting products in huge quantities – an approach which promotes overconsumption – to focusing on nutrition and health by reformulating entire product portfolios.

There are different strategies that can be employed when dealing with highly developed versus still developing markets. For example, combating micronutrient deficiencies may be the most appropriate approach in developing countries, while this is less of an issue in highly industrialised countries where calorific reduction is higher up the agenda. Of course, attention must also be paid to different consumer groups within the same country. For example, the range (and price points) of products targeting India or Brazil's middle-class may be profoundly different from those intended for its poverty-stricken population.

Reconceiving products and markets creates shared value in a multitude of ways, for example by expanding a company's consumer base, by improving customers' nutritional intake (and thereby health), which has a positive impact on productivity, and by serving as a forceful driver of innovation – a central point of every company's overall success strategy.

Redefining productivity in the value chain

Over the long term, societal and environmental problems and resource depletion, some of which are still commonly regarded as “externalities” by many businesses, can create economic costs in a company's value chain, including lost business opportunities. The ugly side effects of industrial activity geared at short-term profiteering, such as environmental pollution and the depletion of local water resources, pose more than just a threat to a company's reputation to be “fixed” by “giving something back” via a CSR gesture.

Indeed, the CSV approach goes much deeper than the mere avoidance of generating external costs to be borne by local communities. Rather, it actively analyses the value chain and identifies the precise points where productivity can be enhanced. The most promising areas along a company's value chain worth examining for shared value creation include energy use and logistics, resource use, procurement, distribution, employee productivity and location.

One way of redefining value chains, for instance, is by moving production sites closer to a company's customers. This may entail a move away from operating few and very large production sites as companies move back from a global to a local perspective. However, this does not mean that a business is diminishing its global presence. On the contrary, its global presence and market access can actually be extended by this change in approach, accompanied by cost savings for logistics and energy use and creating shared value for local communities and shareholders alike. As will be seen, Nestlé has proved a key exemplar of the CSV approach and its purported benefits.

No company is an island. Its commercial success depends, among other factors, on its suppliers and the health of the infrastructure surrounding it. Shared value is created once a company takes a long-term view and invests in nurturing a vibrant local cluster of supporting and complementary businesses and services.

Identifying weaknesses in its immediate local business environment and closing those gaps is a top priority for companies set on creating shared value. CSR programmes, in contrast, tend to be somewhat random and unfocused, lacking the necessary power to create strategic economy-boosting multiplier effects. The key is not to make a community dependent on charitable actions which are not geared towards stimulating business activity per se, but to aid the creation of competitive local clusters conducive to market transparency and professional competence.


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