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Business Discussions on Creating Shared Value Long Overdue

February 12, 2011

In the last year, Michael Porter and Mark Kramer have been writing and speaking on the opportunities available to businesses if they would “broaden” their views to include the society they are a part of, and have the longer term in view.   Many business practices in recent times have focused narrowly on transaction opportunities without seeming to consider the societies of which they are a part.   Globalization has often led to greater commoditization of products.   The business objective of creating demand has often led to unneeded and sometimes deleterious though attractive products.   Focus on narrowly-defined “lower costs” has led to often complex and counter-productive expansion of supply chains, greater vulnerability to natural and man-made dislocations, and significant levels of disengagement among employees.

It’s about time business leaders speak out.  And some are. 

Porter and Kramer’s position is that recent definitions of “Value Creation” has been defined too narrowly as “optimizing short term financial performance… while missing most important customer needs and ignoring the broader influences that determine their longer term success”  (HBR, Jan-Feb 2011, page 64).   “How else,” asks  Porter, “could companies overlook the well-being of their customers, the depletion of natural resources vital to their businesses, the viability of key suppliers, or the economic distress of the communities in which they produce and sell?” (Ibid). 

How else, indeed.  And how could such strategies be considered “state of the art” by leading Schools of Business Administration for decades?  Where were the Business Schools?  Indra Nooyi of Pepsico asked Porter that question at the 2011 Davos Conference during a panel discussion.  Porter’s response was “guilty as charged,” and added that the definition used in constructing value chains had been too narrow in that many real costs had not been appropriately considered in the “cost-benefit” analysis.

Most fascinating was Nooyi’s discussion of her vision for Pepsico, in which the product line would be reframed, with fewer just “fun” foods (those without nutritional benefit, but oh! so tasty), better foods and good foods.  She acknowledged being challenged by folks internally and her Board as to whether she would be acting as a responsible steward for Pepsico if she pursued such a strategy, so deep is the current American business culture in its acceptance of Milton Friedman’s mantra on the purpose of business is profits, and that is how it contributes to society.   As I have noted before in an earlier post, even Friedman had assumed an effective State, one that would appropriately assess businesses for the “external costs” they were creating for the society in which they acted.   That isn’t happening, either in the U.S. (and the prospect is for even less effective State involvement as business interests lobby for less regulation and lower corporate taxes) or in many places abroad.   (Another whole discussion can be offered in terms of creating more effective regulation. that achieves its purpose while stimulating innovation.).  Nooyi took the issue very seriously, and had legal resources research in law the purposes and origin of business-and society, the social contract.  Going back to the joint stock company laws of limited liability granted by the State, it was clearly articulated that businesses owed their society a “duty of care.”

In Porter’s words, that’s “creating economic value in a way that ALSO creates value for society by addressing needs and challenges.”  It is also taking external costs into the cost-benefit equation and mandating taking a longer term view for running a viable, valuable business.

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