Nov.16

The Next Big Thing in Business Strategy: What It Is & How To Do It

The Next Big Thing in Business Strategy: What It Is & How To Do It

The idea that corporations have an obligation to society is not a new concept. Most Fortune 500 companies have been promoting and enhancing corporate social responsibility (CSR) programs for years. However, the approach to corporate philanthropy is undergoing an evolution, with enhanced focus, to a more comprehensive idea of shared value. Shared value is a progression of capitalism, connecting society and business in a new, viable way.

Unlike CSR, shared value involves the company also benefiting from altruistic projects in a tangible way. This means a shared value program will help to increase shareholder value, despite any implementation or management expenses and opportunity costs. A shared value program would, therefore, need to have more scalability and long-term focus than a typical CSR program. In addition, CSR programs are not restricted in the causes they support, whereas the definition of shared value requires programs to be related to a firm’s core competencies, products, supplies, production or local communities.

That said, the societal motivations behind shared value programs are diverse and, therefore, the metrics that are required to measure success also vary widely. The most common broad topics seem to be sustainability and improving conditions for the underprivileged. However, the same firm can tackle radically different shared value projects at the same time. Because of these significant variations, the appropriate performance indicators will need to be specific to the individual project.

Examples of how of societal benefits could be measured include a reduction in healthcare costs or malnutrition rates in a specific area or the elimination of carbon dioxide emissions for several old factories. It is important to ensure that what is used is an actual reflection of a specific benefit. For example, a high school mentoring program would want to set goals based on raising graduation rates, instead of enrolling a certain amount of students, because it is a better indication of the effectiveness of the program and the benefit society is receiving.

The positive societal impacts, once determined, should then be communicated to the public. A 2012 Nielsen study showed that over half of North American consumers preferred to buy from, work for and invest in philanthropic companies. From just communicating the societal benefits, the corporation itself can gain intangible value, such as brand awareness and goodwill.

However, a critical and challenging component of shared value is to establish and measure specific success indicators. These tangible corporate benefits can often be harder than the societal benefits to identify and define clear measures. Understanding the three strategies of shared value that a company can pursue will help. The levels include reconceiving markets and products, strengthening cluster development and redefining the value chain.

In general, if a shared value program helps redefine the firm’s products or markets, applicable assessments could include market share, profitability and/or revenue. For example, HP was able to utilize its existing cloud and mobile technologies to create a system for preventing counterfeit medications. HP is able to directly measure profits from this product, as well as monitor the estimated number of counterfeit drug deaths in targeted areas. By reconceiving the firm’s existing products, HP was able to create socially measurable value that also directly added value to the firm.

On the other hand, programs could instead seek to strengthen local clusters, since businesses exist and depend on the communities they operate in. Metrics for these types of programs could include improved distribution or workforce access. Nestle offers an example of this type of shared value strategy. By providing infrastructure and resources for specific areas in India where their milk is sourced, the firm was able to improve volume, quality and dependability of a critical raw material. Specifically, Nestle was able to measure the percentage of milk increased and the number of rural farmers aided.

The final shared value level is aimed at increasing productivity for employees or suppliers. If this is the intent, success metrics might include improved product quality or the reduction of operating costs. Alcoa, the third-largest aluminum company in the world, provides an example of a supply-focused shared value program. The firm recognized a specific social need it was positioned to help and benefit from. In 2008, the aluminum can recycling rate in the U.S. fell to a record low of 53%, far behind many other countries. These pre-program and global rates serve as benchmarks for establishing a philanthropic goal. Because recycled aluminum takes 95% less energy to produce compared to raw materials, this objective can be related directly back to the firm.

Alcoa was able to create a business case with an objective of raising recycling rates in North America to 75% by 2015. The company benefits from the estimated $500 million scrap value, while society benefits from the reduction of 3.35 million metric tons of greenhouse gas and the elimination of 300,000 tons of waste from landfills. The tactics to achieve this goal have been varied, including $3.5 million-worth of donations to recycling organizations, a direct to consumer iPhone app and a partnership to improve collection infrastructure.

The next step for Alcoa was to track and communicate the progress. Two years after the plan was announced, the rate rose to 57%. Just this month, the Wall Street Journal reported a 20-year high aluminum can recycling rate, up to 67%, in the U.S. The numbers are headed in the right direction. The final, crucial step of a shared value campaign is analyzing the results to optimize the program and crack new value.

To sum up, shared value programs are measurable and mutually beneficial. Not only will the tracking of both societal and corporate benefits justify the program, but it will also provide insights for improving and scaling the efforts.

Other companies, including the previous examples, are proving the payout potential of shared value programs, while also providing a foundation for applying the concept. The key is to recognize a jointly advantageous project and determine the techniques for measuring its impact. Firms needs to embrace shared value and focus strategic planning on the intersection of creating business value and creating societal value.

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