Insight: Ideas for Change - Michael Porter - Creating Shared Value

Summary

In this conversation, Jerry Baker of The Wall Street Journal interviews Professor Michael Porter of Harvard Business School about corporate social responsibility (CSR) and Porter's idea of creating shared value (CSV). Porter argues that CSV goes beyond CSR by integrating social issues into a company’s core business strategy to create economic value. He emphasizes that capitalism can address societal problems like hunger, environment, and health while remaining profitable. Porter outlines three key areas where companies can implement CSV: product innovation, value chain optimization, and strengthening local business ecosystems.

Takeaways

• 📈 Michael Porter introduces the concept of 'Creating Shared Value' (CSV), which involves using capitalism to address societal issues like hunger, health, and the environment.
• 💡 CSV is different from Corporate Social Responsibility (CSR) because it is not about redistributing profits but about creating economic value while solving social problems.
• 🛠 CSV encourages businesses to rethink how they operate by integrating social issues into their core strategy, opening up new opportunities for profit.
• 💰 Capitalism is viewed as a powerful tool that can create wealth and address societal issues when businesses align their goals with solving social problems.
• 🌱 One area where companies can practice CSV is by designing products that address unmet social needs, creating both social and economic value.
• 🔗 A second area is rethinking the value chain by saving resources, reducing waste, and creating better conditions for suppliers, leading to more efficiency and profitability.
• 🌐 The third area involves fostering 'clusters'—ecosystems of businesses and institutions that support a company’s operations, benefiting both the company and its community.
• 🤝 Porter contrasts CSV with fair trade practices, explaining that fair trade is more about redistribution, while CSV improves the entire business process for all parties involved.
• 🏦 Financial institutions can also apply CSV by creating products that genuinely benefit underserved customers, avoiding harmful practices like subprime loans.
• 🚀 Porter emphasizes that CSV is scalable, sustainable, and self-funding, making it a more effective long-term solution compared to traditional CSR or philanthropy.

Q & A

What is the main idea behind the concept of creating shared value (CSV)?

Creating shared value (CSV) is about applying the capitalist model to address social issues like hunger, health, and the environment. It focuses on creating economic value while simultaneously benefiting society, rather than simply redistributing wealth through corporate social responsibility (CSR).

How does CSV differ from traditional corporate social responsibility (CSR)?

CSR typically involves companies being responsible corporate citizens by redistributing profits, such as donating to social causes or mitigating harms caused by their operations. CSV, on the other hand, seeks to integrate social value creation into the core business model, aligning profit-making with addressing societal issues.

Why is creating shared value considered 'pure unadulterated capitalism' according to Professor Michael Porter?

Porter emphasizes that CSV is based on the principles of capitalism, where businesses create wealth by solving societal problems in a profitable way. The focus remains on making money, but through innovative business practices that also address social needs, rather than through charitable donations.

What are the three main areas where companies can apply CSV, according to Michael Porter?

The three main areas are: 1) Product innovation—developing products that address unmet social needs; 2) Value chain efficiency—improving operations to benefit both the company and society, such as reducing energy consumption; and 3) Building clusters—supporting the ecosystem around the company, such as suppliers and local institutions, to enhance overall competitiveness.

How does the CSV approach differ from CSR when it comes to helping small farmers?

CSR might focus on fair trade, which ensures that small farmers receive a fair price for their products. However, CSV goes further by improving the farmers' productivity and quality through better business practices, raising their incomes not through redistribution, but by creating a more efficient and profitable supply chain.

How does CSV impact the way companies operate their value chains?

CSV encourages companies to rethink their value chains in ways that benefit both their bottom line and society. For example, companies can reduce energy costs, minimize packaging waste, and improve the lives of their suppliers and employees, all while increasing profitability.

Why does Porter believe that capitalism has a bad reputation in society?

Porter suggests that capitalism is viewed negatively because businesses have often failed to understand their potential to positively impact society. This disconnect has led to a perception that businesses work against societal interests, which CSV aims to change by integrating social value into core business strategies.

What are the risks associated with companies focusing on social needs, according to Porter?

There is a risk that if companies focus too much on fulfilling social needs without a clear path to profitability, they may fail as businesses. Porter stresses that CSV must be driven by profit; if a social initiative cannot be profitable, it should fall under CSR, where companies allocate limited resources for such causes.

Can financial institutions apply CSV, and how might they do so?

Financial institutions can apply CSV by creating products that meet unmet needs in society while being profitable. Porter uses the example of subprime loans, which failed because they harmed customers. Instead, CSV in finance could involve creating responsible financial products that serve underserved communities while ensuring long-term profitability.

What role can government and non-governmental organizations (NGOs) play in supporting CSV?

Governments and NGOs can enable CSV by creating platforms, making investments, or offering support that helps businesses pursue shared value initiatives. By helping businesses succeed in addressing social issues, these organizations can amplify the positive impact of the private sector on society.