By creating shared value, companies can deliver profits while also serving society
Can the Indian private sector, especially its largest corporations, meaningfully contribute to inclusive growth? Our view is a resounding YES: We believe it is both possible and necessary for companies to fill this role… BUT, only if we move away from the prevailing paradigm of charity and corporate social responsibility (CSR).
Redistributing 1 percent or 2 percent of net profits through philanthropy will never fully meet India’s needs. Only leveraging the true potential of capitalism can solve our society’s most critical problems—that is, through business initiatives that create shared value by delivering profits while also serving society.
This has two important implications: First, society must accept the idea that companies can make money from addressing the needs of the poor.
Second, business must strive for a higher form of capitalism, one that sees beyond short-term financial returns to create economic value in a way that also creates value for society.
In January 2011, I, along with FSG’s co-founder Michael Porter, captured this thinking in a Harvard Business Review article entitled ‘Creating Shared Value’. We argue that by viewing value creation narrowly as the optimisation of short-term financial performance, companies are missing the most important customer needs and the broader influences that determine their long-term success. Business acting as business, and not as charitable donors, is the most powerful force for addressing the pressing issues we face. This is the next major transformation in business thinking that will drive future innovation and productivity growth in the global economy.
India’s private sector is uniquely positioned to catalyse this transformation. Every day we come face-to-face with the myriad of society’s issues—poverty, lack of access to healthcare, poor quality education, and so on. Companies exist in a veritable laboratory that can be used to experiment, innovate and develop solutions for these problems.
Companies in India who are exploiting this unique positioning to create shared value include Britannia, Nestle and Novartis.
Britannia is re-conceiving its Milk-Bikis and Tiger biscuits, by fortifying them with iron to fight a key driver of malnutrition in children. In Moga (Punjab), Nestle has reconfigured its value chain for milk, a critical input to its products, by providing refrigerated collection points, new plant stock, technical assistance, financing and other supports that enable smallholder farmers to increase the quantity and quality of milk. Through regular payments and higher prices for better quality, Nestle has dramatically raised the standard of living for tens of thousands of farmers while creating a sustainable supply chain for its products.
Novartis is deploying hundreds of health educators in villages to increase awareness and education around common ailments such as diarrhoea and diabetes—and to create a market for its drugs to treat those maladies.
Unfortunately, Britannia, Nestle and Novartis are the exception rather than the rule. FSG’s decade-long work in Corporate Responsibility points to four major misconceptions that hold Indian companies back from adopting a shared value approach.
Myth 1: “My products and services already benefit low-income customers.”
Many companies may meet social needs as a by-product of their normal course of business. However, realising the full potential of shared value and the new business opportunities that lay hidden in social problems requires companies to develop an intentional strategy and execution plan.
For example, any company that sells drip irrigation systems inherently creates some degree of shared value by reducing water use in resource constrained areas. The business opportunity is limited however, as smallholder farmers that constitute 75 percent of India’s agricultural landscape lack the technical skills and the upfront capital to install drip irrigation, even though the increase in crop yields would easily repay their investment.
Shared value companies look beyond these constraints by reinventing their products, delivery mechanisms and business models.
What happened in microfinance was that the twin pillars on which the industry was built—income generation (which would enable borrowers to repay loans of 30 percent interest) and social capital (encouraging repayment through self-help groups)—were undermined as microfinance institutions (MFIs) chased growth. MFIs began to define their role as credit delivery institutions and focussed on standardising products and delivery processes to achieve scale more rapidly. They were no longer focussed on social value creation.
(This story appears in the 27 April, 2012 issue of Forbes India. To visit our Archives, click here.)