Creating Shared Value: Moving beyond CSR

In an attempt to increase the overall presence in the global markets, companies aim at optimizing short term financial performances. They do so by ignoring the society as well as important customer needs. They tend to put societal issues at the periphery in the process and overlook factors that determine long term success. Business and society are thus pitted against each other. Social improvement like hiring a disabled person imposes a constraint on the organization, thereby resulting in the reduction of profits. As a result, current strategies exclude social and environmental considerations. The corporate responsibility programs are merely treated as a necessary expense, and companies tend to do it in order to gain a few brownie points.

The concept of compulsory CSR can be eliminated and instead, the companies can aim at creating Shared Value at their own will. This includes:

• Creating economic value
• Create value for society
• Address the needs and challenges

The concept of Shared value recognizes the importance of societal needs. Social harms create “internal costs” for the firms (wasted energy, costly accidents etc). The congruence between societal progress and productivity in the value chain is very high. Addressing these issues through innovation does not raise costs. It also enables better differentiation and repositioning in traditional markets, and helps in recognizing the potential of new markets that were initially overlooked.

Cluster Development:

Clusters are geographic concentrations of firms, related businesses, suppliers, service providers, and logistical infrastructure in a particular field. A company must realize that it can never be self-contained, and that its success depends on supporting companies and infrastructure around it. Productivity and innovation are strongly influenced by “clusters” which include businesses, academic programs, trade associations and standards organizations. They also draw on broader public assets (schools and universities, clean water, fair-competition laws, quality standards, market transparency). Deficiencies in the cluster framework create internal costs. Shared value is thus created by overcoming these deficiencies and building effective local clusters.

Advantages of Clusters:

• Leads to open and transparent markets
• Allows company to secure reliable supplies
• Improves incomes and purchasing power of local citizens
• Leads to positive cycle of social and economic development
• Amplifies connection between the company’s success and its communities’ success

Eg: Workforce development initiatives increase the supply of skilled employees for other firms as well

Steps in Cluster Development:

1. Identify gaps in areas like logistics, suppliers, distribution channels, training, market organization, and educational institutions
2. Focus on weaknesses that represent the greatest constraints to the company’s own productivity and growth
3. Analyze whether to influence directly or go for collaboration
4. Implement the decisions made

Nestle has created shared value in a commendable manner. It has worked intensively with its growers by providing advice on farming practices, helped them with guaranteed bank loans and helped secure inputs (plant, stock, pesticides, & fertilizers). It avoided outsourcing i.e. bought goods from local suppliers and also established smaller plants closer to its market. This resulted in improved productivity of its growers and better bargaining power of local suppliers. Maximum use of locally available materials and resources took place with far more effective new procurement practices. Building of local agricultural, technical, financial, & logistical firms & capabilities in each coffee region helped in raising not only the company’s margins, but also resulted in the development of the society.

HUL is another outstanding example. It created new direct-to-home distribution system, run by underprivileged female entrepreneurs and provided micro – credit & training .HUL now has 45 entrepreneurs covering 100,000 villages across 15 Indian states. It started project Shakti, thereby benefiting women skill and leading to increased household income.

YARA is the world’s largest mineral fertilizer company which invested about $60 million to improve ports and roads. It worked with the help of local governments and extended support from the Norwegian government. Improved roads led to increased efficiency in transportation for the company.

The major difference between CSR and CSV is that the former is the act of contributing to the society after getting profits, whereas the latter is the act of gaining benefits through acts that are meant for the betterment of the society. It can thus be concluded that CSV is a step ahead of CSR, and effective creation of Shared Value with the development of improved local clusters is any day better than CSR activities. The companies can thus be rated through a new metric system which focuses on the extent to which a company has gone ahead to contribute to the society, instead of enforcing them to implement compulsory CSR activities.

-By Siddharth Chhottray (TAPMI Manipal), among the top 5 entries chosen for being published on the blog in the February edition of the article writing competition