To remain competitive in today's world, corporations have to do more than generate profits. They have to create economic value in a way that also addresses social or environmental needs. This concept of Shared Value, developed by Professors Michael E. Porter and Mark R. Kramer, is the focal point of the Harvard Business School (HBS) Executive Education program, Purpose and Profit: Creating Shared Value. Kramer, who serves as the program’s faculty cochair, explains how the program helps executives rethink their business model to benefit business and society—and what the broader implications may be.
I think there are four reasons. First, the world is moving this way. There is no question that engaging the private sector as an ally in solving social problems—and holding the private sector accountable for its impact—is a growing and substantial trend that is not going away.
Second, the structure of entire industries is changing in response to social and environmental pressures. Consider the impact of electric cars on the auto industry, of renewable energy on power companies, of obesity on food and beverage companies, of privacy on tech companies, of the shift in demand to emerging markets for medical device and pharma companies. Most companies today operate on decades-old business models that were designed for developed markets and ignored the impact of social and environmental problems. Those business models need to be reinvented. Companies need to leverage their social impact to create new sources of competitive advantage.
Third, employees want their companies to have a positive social impact and a sense of purpose. A lot of companies talk about purpose, but they’re often just words. If you really want to embed purpose into your company, you have to create Shared Value that aligns your competitive positioning and strategy with positive social outcomes.
Fourth, this is what investors increasingly expect. Larry Fink, the CEO of BlackRock, sent out a letter saying that he expects the business community to deliver value to society. We know from research that companies that have social purpose—and whose employees really understand and believe in that purpose—deliver superior shareholder returns. Too many companies still think of their social impact as a matter of public relations; they don’t convey to investors how addressing social challenges actually improves their bottom-line performance. And so, from an investor and shareholder-relations perspective, it's tremendously important.
The utility industry, for instance, used to be made up of big power plants with regional monopolies. The business was steady and predictable. Today, the whole industry is in disarray as a result of pressures to reduce carbon emissions and the price parity of solar and wind energy. Companies that are trying to hang on to traditional business models are struggling. However, companies that have shifted their focus to renewables or energy management software are finding new sources of revenue.
Or consider the food and beverage industry. For a long time, sugary beverages and fatty foods were core to the product line of many major food and beverage companies, such as Coke and Pepsi. Now, companies such as Nestlé and Danone are shifting to developing healthier foods and nutritional supplements that have positive health outcomes. These companies are finding new opportunities to generate profits—profits that other companies are missing because they are hanging on to traditional models.
So, taking a Shared Value perspective helps companies adapt to shifts in their industry that are brought about by social and environmental pressures. Updating business models to account for social and environmental deficits and opportunities can open up entirely new avenues for profitability and growth.
When most companies think about social impact, they think about it in terms of reputation, corporate social responsibility, and license to operate. Most companies also delegate social impact responsibilities to corporate social responsibility teams that are largely removed from operations and strategy. About 80 percent of the largest global companies deliver annual sustainability reports that focus on the environmental, social, and governance indicators developed by the Global Reporting Initiative. However, those reports tend to result in a long checklist of operational issues that are not tightly linked to strategy.
When companies treat social impact this way, they miss an opportunity to increase their profitability and strengthen their competitive advantage by building a social-value proposition into their core competitive position. That can really enable companies to deliver better bottom-line results and achieve new sources of differentiation.
In this program, we study companies that are outperforming others in their industry because they have built a social-benefit component into their competitive positioning. We also look at the implications for investors—how investors can outperform the market and how companies can communicate the economic and strategic benefits of social impact to their investors. This approach is entirely different from focusing on Global Reporting Initiative checklists or sustainability reports and rankings.
We use cases from a wide range of industries, including insurance, retail, food and beverage, agriculture, consumer goods, energy, and venture capital. Most cases focus on large multinationals, but we also look at some smaller and early-stage companies. And, although the cases focus on specific companies, they illustrate lessons that are broadly applicable to companies of any size and any industry.
For example, we study a health insurance company that is more profitable because it makes its customers healthier; a food and beverage company that is creating an entirely new industry at the intersection of food and pharmaceuticals; a retailer that is saving billions from reducing its environmental footprint; a consumer goods company that has cracked the bottom-of-the-pyramid market; and an agricultural product company that has grown its market by lifting millions of smallholder farmers out of poverty. Our cases focus on different regions of the world, including both developed and emerging markets.
I love teaching this course because the students always come away with a different view about the power of business to change the world and the importance of social impact in devising corporate strategy. The cases are truly inspiring. They overcome the idea that business and society are in conflict and show how companies can simultaneously create value for shareholders and the communities in which they operate.
It's appropriate for a wide range of people. It's ideal for CEOs, vice presidents of strategy, and heads of operational divisions. It's also relevant to board members, who are increasingly held responsible for the social and environmental impact of their companies. We welcome people from the investment community and those from shareholder relations who have to communicate how social impact can enhance shareholder returns.
However, the program isn't designed for the traditional officer who works in corporate social responsibility, diversity, or philanthropy. That said, these professionals can find the program relevant if they are connected to their company's operations and strategy. It can help them adapt projects in their portfolio to better contribute to the competitive advantage of their company.
We're also open to a few business-school academics. Professor Michael Porter and I want to change the way that business-school students around the world think about the connection between strategy and social impact. When we are working with companies, we find that the biggest barrier is getting over the mindset that you can't be serious about business if you're talking about social impact. We want people coming out of business school to understand that the social dimension of a company is part of its competitive positioning and that there is a rigorous business case for addressing the world’s problems.
We're particularly interested in the "tri-sector athletes" who have worked in the government, nonprofit, and corporate spaces. Increasingly, we're seeing the need for those three sectors to work together, and people who bring that mixed background really understand how to make that happen.
I'd say that the government, nonprofit, and business sectors are each recognizing the need to work more effectively in partnership. There has been a real attitude shift in the social and governmental sectors in terms of engaging the private sector as part of the solution. Traditionally, the social sector thought that the private sector simply caused the problems and wasn't part of the solution. But, increasingly, we recognize that there can be partnerships between nonprofits and profitable ventures, and there are opportunities for nonprofits to tap into the expertise and resources of companies. Global companies are able to deliver social impact at tremendous scale once they recognize how it advances their business objectives.
Certainly, with the United Nations' Sustainable Development Goals (SDGs), there is an intentional effort to engage the private sector in reaching social objectives on a global scale. Governments aren't just trying to regulate the private sector; they're trying to work with the private sector to stimulate innovation and opportunity.
They won't be alone in the program, but they also won't be among the majority of participants. To benefit from the program, participants need to have both an open mind and a familiarity with business terminology. The cases are focused on companies, but often contain insights about what makes cross-sector coalitions of companies work effectively with government and civil society. We will explore new ways that nonprofits and governments can engage and partner with companies as allies.
We think that every company has the potential to improve their performance by creating Shared Value. The framework equally applies to companies that are in controversial industries and those that are perceived to be good for the planet.
For example, Phillip Morris is trying to shift people to a new type of e-cigarette that warms tobacco instead of burning it, and therefore eliminates all of its cancer-causing agents. It's controversial as to whether shifting people to that is better than having them just stop smoking, but it absolutely has the potential to save hundreds of thousands of lives a year. So, even a tobacco company has the potential to be doing something positive.
Not every company can create Shared Value through their products, but every company can create value through other avenues—such as through their operations or through developing the communities in which they operate.
This program gives you a different way of thinking about your competitive positioning. It gives you a different way to communicate the value of your social impact to investors. It gives you a different way to align your company's strategy around changing trends in society. Most people don't understand what Shared Value is. They think it's the new term for corporate social responsibility. Understanding how Shared Value can shape your competitive positioning gives you a tremendous competitive edge because you will understand something that many of your competitors do not. And, of course, the opportunity to study competitive strategy with Professor Michael Porter is a privilege that many participants find to be a highlight of their careers.
The cases are terrific because they offer examples of companies that are outperforming others and winning in their industry because of their positive social impact. They really get away from the idea that companies are doing this as a matter of obligation or reputation. It's inspiring in terms of what's possible. When companies pursue Shared Value, the scale of impact they can have is extraordinary. It's much more than the impact they might have with corporate social responsibility or philanthropy. I find it exciting to think about engaging companies in positive and meaningful social change.
