Shared value - SUM: Sustainability Management Wiki

Authors: Finja Eiting, Yasmin Gruner, Jennifer Häusler, Marie Hennecke, Gesa Schmidt
Last updated: December 27, 2022

1 Definition and relevance

Loss of trust and society’s increasing view that companies were held primarily responsible for social, environmental, and economic problems gave rise to a new “strategic” CSR principle. ¹

“Successful corporations need a healthy society. Education, health care, and […] efficient utilization of natural resources make business more productive. […] At the same time, a healthy society needs successful companies. No social program can rival the business sector when it comes to creating the jobs, wealth, and innovation that improve standards of living and social conditions over time” ¹. Based on the awareness and the existing problems of this fundamental dependency of companies and society regarding the generation of value creation, Michael Porter and Mark Kramer developed the Shared Value Principle.

1.1 Definition

“The concept of shared value [SV] can be defined as policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates”. The progress is thereby approached with the help of value principles. Here, value is defined as benefits in relation to costs, not benefits alone. There are three possibilities for companies to create SV: by reconceiving products and markets, by redefining productivity in the value chain, and by enabling local cluster development (all described in more detail further below). SV, according to Porter and Kramer, sets new limits to capitalism. Through joint improvements of companies and society, opportunities are developed, differentiation is created, and new markets are opened. ¹

1.2 Relevance

The need for companies to consider sustainability is widely recognized in practice. In this context, companies are developing corporate social responsibility strategies designed to ensure that social and environmental problems are addressed. These are primarily aimed at improving the corporate image ² (Jean, 2015). However, it can be observed that activities in this context are often outsourced from the normal operational business and considered separately from the general corporate strategy. This neglects the fact that business and society exert a mutual influence on each other. Business and society are mutually interdependent ² (Jean, 2015). Shared value addresses this widely neglected connection and forms an alternative process of economic value creation ³ (Schmitt & Renken, 2012).

Companies should recognize that social problems cannot only be barriers to economic activity ⁴ (Pfitzer et al., 2013). Instead, according to Porter and Kramer ¹ (2011), the creation of economic value through the achievement of social value represents one of the most important drivers of productivity, innovation, and growth. It should be noted that shared value does not mean a redistribution of value creation, but the creation of greater value for both dimensions ⁵ (Maltz et al., 2012). As such, the approach invites the search for win-win situations ⁶ (von Liel & Lütge, 2015). A key advantage thus lies in its proximity to capitalism and can therefore be implemented in current economic systems ¹ (Porter & Kramer, 2011).

2 Background

2.1 Criticism of CSR

As companies are blamed for many problems, regular corporate social responsibility (CSR) has “become an inescapable priority” ⁷ which is not productive for two reasons: 1. companies are pitted against society, even though both are interdependent; 2. companies are pressured to do CSR in a general way rather than in a way that is best suited to each company’s strategy. CSR-related shareholder resolutions and legislation for annual CSR reports bring “potentially large financial risks for any firm whose conduct is deemed unacceptable”. ⁷

“Examining the primary schools of thought about CSR is an essential starting point in understanding why a new approach is needed to integrate social considerations more effectively into core business operations and strategy”. ⁷

Proponents of CSR have used four prevailing justifications: moral obligation, sustainability, license to operate, and reputation. These arguments do not offer sufficient practical guidance for corporate leaders. Moral obligations are absolute mandates, while most corporate social choices involve balancing competing values, interests, and costs. Sustainability does not offer a basis for long-term objectives in a view of occurring short-term costs and needs a lot of “enlightened self-interest”. The license-to-operate approach includes the company getting permission from stakeholders to do business, but stakeholders cannot wholly understand the capabilities, competitive positioning, or trade-offs a company must make. Reputation is used by companies to justify CSR initiatives on the grounds that they will improve a company’s image, strengthen its brand, enliven morale, and even raise the value of its stock. Therefore, CSR approaches are mainly used for satisfying external audiences. The weakness of the CSR approaches is their disconnection from business. The four schools of thought focus on the tension between business and society and not on their interdependence. Great opportunities for companies to benefit society are left behind. ⁷ Porter and Kramer counter that CSR can be much more than just “a cost, a constraint or a charitable act”. Strategic CSR [like SV] can make great social progress as companies devote resources and expertise to activities that advance society. ⁷

2.2 Developments Shared Value

The first roots of the SV principle go back more than 20 years. As early as 1999, Porter and Kramer wrote about economic value creation logic and strategic philanthropy in their Harvard Business Review article “Philanthropy’s New Agenda: Creating Value”. At that time, the attention was still concentrated on foundations. Too little strategy was criticized, and the cost-benefit factor was emphasized. “A foundation creates value when it achieves an equivalent social benefit with fewer dollars or creates greater social benefit for comparable cost”. ⁸ Three years later, the competitive advantage of companies came into focus. In the next article, “The Competitive Advantage of Corporate Philanthropy”, the two authors advised companies to increasingly integrate philanthropic engagement into the environment of their local activities. “Philanthropy can often be the most cost-effective way for a company to improve its competitive context, enabling companies to leverage the efforts and infrastructure of nonprofits and other institutions”. ³

The business decisions as well as social policies must benefit both sides if they follow the principle of SV. On this realization, in their 2006 article “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”, Porter and Kramer formulate this broad principle into steps: 1. Identifying the points of intersection, 2. Choosing which social issues to address, 3. Creating a corporate social agenda, 4. Integrating inside-out and outside-in practices, and 5. Creating a social dimension to the value proposition. ⁷

To integrate business and society and to bring it into practice, the company must integrate the social perspective into core frameworks and strategy. This requires the identification of intersection points: The company has an impact on society – the inside-out linkages. At the same time, external social conditions influence firms (outside-in linkages). ⁷ A company should select issues that intersect with its business to create a meaningful benefit for society that is valuable to the business at the same time. Important issues for the strategic framework that affect a company in three categories are: Generic social issues that do not influence the company’s long-term competitiveness (Responsive CSR), Value chain social impacts, which mitigate harm and transform value chain activities to benefit society while reinforcing strategy. Last but not least, Social dimensions of competitive context, which are external environmental factors that crucially affect the underlying drivers of competitiveness in a company’s operations (strategic philanthropy that leverages capabilities to improve salient areas of competitive context = Strategic CSR). Responsive CSR includes good corporate citizen action and mitigation of the harm which arises from a firm’s value chain activities. The more proactive process is strategic CSR, which involves inside-out as well as outside-in dimensions. Strategic CSR leads to SV and at the same time reinforces the success of the company and the success of the community. ⁷

Regarding the organization of CSR, it requires adjustments in organization, reporting relationships, and incentives. Important is the shift from the “fragmented, defensive posture to an integrated, affirmative approach”, a switch from a reputation emphasis to an emphasis on substance. ¹ According to Porter and Kramer, strategy is always about making choices. What needs to be measured is social impact. To create SV, research and development is a long-term investment in the firm’s competitiveness. ¹ The Moral Purpose of Business is that a corporation can contribute to a prosperous economy. This is the decisive point a company can do for society and the community. Moreover, not only to foster economic and social development but give a new way of thinking about each other, it restores the legitimacy business had lost. ⁷

The term SV is also used more frequently in a report prepared by the international strategy consultancy “Foundation Strategy Group” (FSG) (founded in 2000, by Porter and Kramer) and by Nestlé, which is a pioneering company implementing the SV principle. FSG is a global nonprofit organization providing strategy consulting to foundations, corporations, nonprofits/non-governmental organizations (NGOs), and governments. They are working on social issues like global health and development as well as education. In addition, the FSG is publishing practice-oriented reports on the implementation of SV. ⁹

In 2011, SV, Porter and Kramer’s strategic solution approach, was defined in more detail. In the often-cited article “Creating Shared Value: How to Reinvent Capitalism – and unleash a Wave of Innovation and Growth”, published like the other three articles in the Harvard Business Review, SV was further developed. Trade-offs between economic efficiency and social progress have been institutionalized in political decisions for decades. Businesses need to move forward and reconnect business success with social progress to bring business and society back together. ¹ Implementing SV requires leaders to develop new skills such as a deeper social needs assessment, a better understanding of fundamentals in production, or collaboration across profit and non-profit boundaries. Policy also needs to regulate in a way that promotes rather than hinders SV. To re-legitimize the economy, the purpose of business must be redefined, as creating SV – not just profit per se – will drive the next wave of innovation and productivity growth in the economy. ¹ It is not about redistribution measures (like Fairtrade), but – to take agriculture as an example – SV is about improving cultivation techniques, strengthening the local network of suppliers to increase efficiency, yields, and product quality, as well as the sustainability of farmers in the long term. This can additionally lead to an increase in income of more than 300 %. ¹ The fact that SV goes far beyond a monetary donation is made clear because SV requires functional innovations. Functional innovations include those already mentioned in product design and the organization of value creation processes, but also the expansion of employee competencies and the ability to “cooperate with atypical partners, as well as the use of political or economic influence”. ¹⁰

In 2012, FSG gave birth to the Shared Value Initiative, a global community working to introduce and implement its strategies in business, civil society, and government organizations. ⁹

2.3 Criticism of Shared Value

Following the SV publication of 2011, a lively academic discussion arose around the SV concept. In general, there is an agreement with the core of the SV concept that companies should contribute to solving problems and creating value for society. ¹¹ There is also general agreement that the SV concept has become widely known, not least due to the fame of Michael Porter. Especially authors of strategic management, marketing, and social entrepreneurship evaluate SV positively. It is also recognized that a practice-oriented operationalization has expanded the target group for CSR issues. ¹² SV is composed of two words with positive connotations and Porter and Kramer’s positive mood leads to a high connectivity of the SV concept. ¹¹

Criticism (negative) of the SV concept is expressed mainly by internationally established CSR community/business ethicists. ¹¹ The main aspects mentioned are a lack of originality, a one-dimensional value perspective, and limitations of the “business case”. ¹³

The “reinvention of capitalism” is very rhetorical, as hardly anything new is brought into the international CSR discussion. Crane et al. (2014) accuse Porter and Kramer of vagueness and a lack of novelty. Furthermore, the importance of compliance would be underestimated and a too-shallow social responsibility of companies in society would be conceived. Porter and Kramer present SV “as a novel contribution, yet its core premises bear a striking similarity to existing concepts of CSR, stakeholder management, and social innovation. […] they caricature the CSR literature to suit their own ends […] without due acknowledgment”. ¹² Porter and Kramer responded to this article by underpinning the success of the SV concept. This replication was in turn replicated by Crane et al. ¹² Beschorner is particularly clear in his criticism. To see the understanding of value only as a cost-benefit relation and to explicitly exclude personal, moral values is an economic reduction of the concept of value. He understands the SV principle as a rejection of the established CSR concept. SV is a “one-trick pony” because it is oriented purely toward economic concerns. ¹⁴ The picture painted by Porter and Kramer does not reflect the current state of science and does not properly represent CSR best practices. ¹¹ A literature review of SV by Dembeck et al. concludes that the SV basic concept is rather an empirically not validated keyword concept. ¹⁵ The approaches of SV do not address the complex processes of consideration and exchange between the stakeholders concerned. However, these are associated with such strategic decisions if societal challenges are not ignored. ¹¹ A sustainable transformation cannot be achieved through SV, as destructive corporate activities cannot be prevented with pure business case logic. ¹⁶ Seele (2022) notes that it is implicitly expressed that non-business-case problems must be solved by others, thus the SV concept has reached the point that led to the emergence of CSR in the first place and thus to corporate social and environmental responsibility that cannot be framed in economic terms. ¹³

3 Practical implementation

3.1 Topic-specific processes

FSG and the Shared Value Initiative have created a Purpose Playbook with practical tips on how to develop a company purpose and put the shared value approach into practice. After defining the company’s purpose, three areas need to be considered, and the guide gives three practices for each to implement the concept. The three areas are strategy, people, and operations (cf. Figure 1). Each area and its practices are presented and explained using examples, followed by checklists that sum up the most important points ¹⁷. The following will elaborate on each practice in detail, using questions managers can pose themselves, hands-on approaches, and best-practice examples.

*Figure 1: Areas and Practices for Creating Shared Value based on ¹⁷.*

Develop a strategy for creating Shared Value
It is important to have a clear vision of the area and the way a company wants to create shared value. This ensures that the company is successful in solving societal/environmental problems in a manner profitable to the business.

Opportunities Identification: Which societal/environmental problem do we want to address? Which risks and opportunities are there regarding our current business model? Where is the need for innovation the largest? Where can we have the largest impact? Involve internal as well as external stakeholders to get different perspectives and a realistic picture of the problem ¹⁷. For example, in India, many people do not have access to electricity and the expansion of the traditional grid is only progressing slowly. The Rockefeller Foundation’s Smart Power for Rural Development Initiative supports Indian energy-service companies in providing power to rural businesses and households via renewable energy mini-grids that are independent of the traditional grid. In developing the solutions, the needs of rural customers were explicitly considered ¹⁸.
Sources of Distinction: Which opportunities are best suited for our company as a source of differentiation and competitive advantage – to not only create social/environmental value, but also business value? Consider existing company assets, or where they need to be expanded to reach the desired goal. Also take into account the company’s culture – which policies, programs, and activities support the chosen shared value approach, and which countervail it? Foster the positive aspects and develop plans to counteract the negative ones ¹⁷. The fast fashion industry is one of the most polluting industries. Inditex, a global fashion group including brands such as Zara and Massimo Dutti, wants to reduce the negative impact its industry has and has committed to eliminating single-use plastics for their consumers and more sustainable materials for their products, among others ¹⁹.
Strategies, Goals & Resources: Choose a strategy on how to address the selected problem ¹⁷. Porter & Kramer (2011) propose three approaches: “reconceiving products and markets”, “redefining productivity in the value chain”, and “enabling local development” ¹, which will be explained in chapter 3.2. Develop a 3- to 5-year plan with key goals and milestones, strategic priorities, and indicators to track progress. Define which financial, human, and physical resources are needed and will be employed to implement the plan, where the funding will come from, and which return-on-investment (ROI) is expected ¹⁷.

Implement the Shared Value approach in operations
To create shared value, new approaches to innovation and operation need to be taken, and progress needs to be compared with goals.

Innovating for Scale: Take a long-term perspective and look at the problem through the eyes of the affected people. Prototype, pilot, and continuously improve the innovation ¹⁷. Nestlé has several innovative programs to develop, test, and pilot new products in six months in different categories and for different markets: The InGenius program lets employees propose and test new ideas, in collaboration with external partners such as start-ups and students ²⁰. The R+D Accelerator network helps start-ups and students bring their ideas to life with support from internal experts. Teams can make use of co-working stations, labs, prototyping kitchens, and small- to medium-scale production facilities. There are R+D Accelerators for dairy, nutrition, coffee, confectionery, and food products, and Regional Accelerators in China, India, the U.S., Southeast Asia, and Sub-Saharan Africa ²¹. Ideas can be submitted to specific challenges posed by Nestlé as well as independently ²⁰, ²¹.
New Models of Cooperation: Who are the stakeholders relevant to your shared value goal? Build a network with them, e.g., affected societal groups, local, regional, and/or national government, NGOs, and other companies in the supply chain and industry. Define who is involved in collaboration and what their roles are ¹⁷. You as initiating company will have to provide most of the funding, at least for the administrative part, but there should not be a hierarchical structure. Instead, all participants should be regarded as equal actors who can bring something to the table through their unique knowledge and experience ²². An open dialogue should be fostered, and stakeholders supported in expanding their knowledge and skills, where necessary ¹⁷. To convince stakeholders to participate, calculate the part of shared value creation that is interesting for them, e.g., reduced government expenditures through improved health ²². De Beers, a global diamond jewelry company, collaborates with many partners to tackle various issues: It was part of the negotiations for the Kimberley Process via its membership in the World Diamond Council ²³, and is a partner of the Diamond Development Initiative (DDI) ²⁴, two alliances to prevent the trade of conflict diamonds. The Kimberley Process is an alliance composed of states, regional economic integration organizations, the diamond industry, and civil society groups ²⁵. The DDI further works to strengthen artisanal and small-scale miners and their communities ²⁴. Another example of De Beers engaging stakeholders is its Shining Lights Awards, supporting young design talents from its producer countries, i.e., Botswana, Namibia, South Africa, and Canada. Successful participants are granted scholarships and internships ²⁶. Participants benefit by furthering their skills and receiving extraordinary career opportunities, while De Beers fosters talents for their potential employee base.
Measurement & Reporting: Decide on which level to measure progress (initiative, portfolio, division, enterprise?). Define whether the business value will be measured via increased revenue and/or reduced costs and develop metrics that track societal value creation. Ideally, report on progress both through integrated financial reporting and sustainability reporting ¹⁷. Nestlé publishes an annual “Creating Shared Value and Sustainability Report”, in which it reports on its progress regarding its focus areas and commitments in accordance with the Global Reporting Initiative (GRI). Its commitments are mostly at the enterprise level, with some commitments related specifically to certain products or supply chains. The report emphasizes social and environmental values, which are assured by Ernst & Young, while associated business values are not commented on ²⁷.

Get the right people on board
People are central to any organizational process and their engagement will decide whether your shared value endeavor will be successful.

Organizational Design: Appoint a shared value strategy owner to guide the journey and create a cross-functional team to implement the shared value approach. Initially, the creation of a “separate business unit to incubate and pilot” ¹⁷ might be useful; in the long term, it should be “[integrated] into the main business” ¹⁷. Develop a “governance process” ⁷ or body to oversee shared value creation ¹⁷. Nestlé has several bodies that are responsible for sustainability and shared value creation: The ESG and Sustainability Council provides “governance, strategic leadership and execution guidance” ²⁷, while the ESG Strategy and Deployment Unit develops the concrete strategies and is in contact with the markets for implementation. The Sustainability Committee oversees the process. The CSV Council is an “external advisory council established in 2009 and formed of a group of experts from a broad range of fields, from corporate responsibility, strategy and sustainability to nutrition, water and rural development” ²⁷, but has “no formal governance role” ²⁷.
Talent Acquisition & Development: To attract people that support the shared value idea, include the narrative in the recruitment process and job descriptions. Look for talent with “cross-sector experience” ¹⁷ and hire people with diverse characteristics and backgrounds to get many different perspectives. Develop shared value knowledge and skills through a “shared value onboarding plan” ¹⁷ and “on-the-job learning opportunities” ¹⁷ for all employees as well as the company board and senior executives. Incentivize employees to follow the shared value approach by including “clear, demonstrable, and measurable [shared value goals]” ¹⁷ into the “performance management process and compensation […] in an objective and quantifiable manner” ¹⁷. Lilly, a company that develops especially diabetes medicines, emphasizes its purpose of “[making] life better for people around the world” ²⁸ across its company and career websites ²⁹, ³⁰. It explicitly considers diversity in its recruiting process, for example by making interview panels diverse and specifically targeting underrepresented groups. For existing employees, online training is offered to further their learning and development ³¹. Merck, another pharmaceutical company, has developed a toolkit to teach employees about shared value-creation opportunities. ³². Discovery, an insurance company based in South Africa, amongst other actions, sets targets for a diverse workforce and has included shared value in its leadership and executive learning programs ³³.
Engagement & Communications: Get and communicate a commitment to shared value creation from the top levels of the organization. Create an “engagement and communications plan for various audiences” ¹⁷ to reach buy-in. Promote a culture of “creativity, co-creation, learning from mistakes, vulnerability, and challenging the status quo” ¹⁷. Discovery follows a shared value approach across its operations ³⁴. It emphasizes this model throughout both its integrated annual report as well as its sustainability report and makes direct connections to business outcomes, for example through a “virtuous cycle of shared value for the insured, insurer and society” ³⁵, ³³.

3.2 Creation of Shared Value

As mentioned in the previous topics, creating shared value as a business case is about connecting economic and societal value in form of a transformative change. ³⁶^,¹ Porter and Kramer identified three recognizable ways of creating shared value in 2011: reconceiving products and markets, redefining productivity in the value chain, and enabling local cluster development. ¹

Reconceive products and markets
Shared value is created by meeting societal needs for social and/or environmentally friendly products, for example, healthier food or financial security and simultaneously creating economic success through market share and revenue growth. ³⁷, ¹ Companies are often more effective and efficient in driving innovation of these products forward and creating new markets for these demands through marketing. ¹ Tesla for example drove innovation in the mobility sector forward by their pursuit to replace fossil fuels as a primary energy source for mobility. They used the shared value approach for an environmentally friendly solution in the private transportation sector and created a new business ecosystem. ³⁶ Through constant exploration of societal needs, a company can identify new opportunities to create products and markets to serve unmet needs. ¹ Underserved markets and unmet needs are often found in developing countries and disadvantaged communities according to Porter and Kramer. Those markets can be perceived as a central opportunity to create shared value ¹. Nestlé for example emphasized their efforts to improve nutrient deficiencies in lower-income communities in their 2010 annual report. Especially the MAGGI products were fortified with nutrients and Nestlé managed to increase their annual turnover by 29% due to a marketing campaign focusing on products with a high nutrient input. ³⁸, ¹⁰ Over time, additional benefits besides the product’s direct benefits can arise for the addressed society. For example, a company-driven improvement of local infrastructure can be forced due to distribution necessities in the company’s value chain ¹^,³⁹. This first approach of reconceiving products and markets is mostly straightforward: As a manager, you identify a societal issue or need and invest in research & development to create a new product and/or redefine a market that serves this unmet need or eliminates the societal issue. However, a firm’s manager needs to include an ethical framework in his shared value strategy to prevent the creation of new societal issues along the product’s value chain. Otherwise, there is a risk of impairing a firm’s legitimacy. The goal is to implement a shared value framework that is linked to ethical and legal norms and creates a resistant legitimacy for the firm. ³⁹

Redefine productivity in the value chain
Redefining productivity in the value chain means internal environmental and/or social improvements of costs, input access, quality, and productivity, for example through better resource utilization, investment in employees, and supplier capability. ³⁷ The value chain of a firm is affected by and affects society and societal issues. This interdependence can lead to costs in the firm’s value chain because of societal problems. ¹ In 2012 Walmart for example was trying to transform their packaging into an environmentally friendly recycling-based packaging solution to reduce costs and carbon emissions. However, they faced a lack of recycled plastic, because 45% of cities in the U.S. were still using landfills. Walmart initiated a partnership with NGOs, the government, and companies to build a recycling infrastructure in the U.S. to strengthen their supply chain and reduce their packaging costs. ⁴⁰ The perception of implementing environmental and societal measures in a firm’s value chain is currently changing. Whereas a few years ago, those measures were perceived as additional costs and were only implemented due to regulations and taxes, nowadays managers think of these measures as an opportunity to improve efficiency, resource utilization, and quality and even to reduce costs in the value chain. ¹ The main areas where redefining productivity in the value chain is creating shared value are energy use and logistics, resource use, procurement, distribution, and employee productivity. Especially energy use and logistics have been in the company’s focus even before sustainability became a global topic because they are major cost drivers. This leads to a large scale of innovations and already implemented and tested improvements regarding energy usage and logistics. ¹ Regarding resource usage, external pressure on the firm through a higher environmental awareness led to new approaches towards the utilization of resources (i.e., water, raw materials, packaging). For example, in their 2010 Sustainability Report, Danone stated that they decreased around 11% of their water consumption by optimizing their processes and implementing a water recycling system leading to a reduction of cost and wastewater. ⁴¹ When we look at possible shared value implementations for a firm’s procurement process, increasing access to inputs and allocating technologies and investments to a supplier can increase the quality and productivity of a supplier and build long-lasting supplier relationships. Especially investments in suppliers from developing countries can contribute to a shared value because the support of local suppliers can lead to a stronger economy and community in those countries. ¹ When it comes to distribution, several shared value approaches emerged in the recent past. A firm can rethink the physical form of distribution, for example through online access to newspapers, or rethink the distribution system. ¹ For example, Hindustan Unilever established a direct-to-home system, by employing, training, and financing underprivileged female entrepreneurs, who are covering over 100,000 Indian villages. Through this, they increased household incomes and reduced the spread of diseases by enabling easier access to medical and hygiene products. ¹ The last option to create shared value within a firm’s value chain is through employee productivity. By increasing health benefits and wages for their employees, companies can reduce costs caused by absenteeism, decreased productivity, and increased healthcare claims. The reduction of costs caused by increased productivity exceeds the investments in health benefits and higher wages. ¹ When examining the value chain to identify shared value opportunities, a manager must keep a close eye on the potential creation of societal issues through the firm’s actions to maintain legitimacy. ³⁹

Enable local cluster development
The economic success of a firm directly and indirectly depends on its surrounding clusters of related companies, suppliers, service providers, academic and non-governmental institutions, and the logistical infrastructure. Those clusters are drivers for productivity, innovation, and competition. ¹ A well-developed local cluster often times features educational institutions, good living conditions (i.e., clean water, good air quality), and healthy competition (i.e., fair competition laws, quality standards, market transparency). A failure in the cluster can create internal costs for a firm. For example, a high poverty rate in the cluster can lead to a decrease in demand. ¹ A firm can directly influence its local cluster by changing its framework conditions in a negative sense (for example by local air pollution) as well as in a positive (for example by creating shared value). It is the responsibility of a firm’s managers to implement cluster development in their strategic planning. Cluster development is best done by pursuing open, fair, and transparent markets to increase overall productivity and by initiating a positive cycle of economic and social development. ¹ A firm can increase its own productivity by directly addressing framework failures and enabling local cluster development. ¹ For example, the company Anglo American initiated the first large-scale research program regarding the diagnosis and treatment of HIV/AIDS in South Africa to protect their employees and reduce absenteeism. ⁴⁰ Another option for enabling local cluster development is by initiating a collective-impact effort. A collective impact effort is a coordination of all cluster participants (i.e., academic institutions, non-governmental organizations, government, etc.) to positively influence a common issue. ⁴⁰ The fertilizer company Yara, for example, formed a partnership in 2009 to develop an agricultural corridor, the Southern Agricultural Growth Corridor of Tanzania (SAGCOT) to secure their supply chain. The partnership between NGOs, government and companies invested in the local infrastructure, the financial system and in local facilities and services supporting the process. The project was implemented and established within three years and secured the incomes of hundreds of thousands local farmers and at the same time increased Yara’s sales in the region by 50%. ⁴⁰

3.3 Materiality analysis

The first step of developing a shared value strategy is to identify key social issues or needs that link a firm’s values with societal values. The identification process is linked to the firm’s core competencies. Based on the identified social issues the firm chooses one or more strategy described earlier. Within this process it is crucial to include stakeholders into the identification process. ³⁷^,⁴² Materiality analysis can be used by a manager to identify and prioritize these issues according to what issue is material to the company. ⁴³ They can also use the analysis for subsequent strategic planning. This analysis is characterized by a long-term focus on issues that have a direct effect on the firm’s economic performance. ⁴⁴ Materiality analysis differs from firm to firm and depending on the included stakeholders, but most times consists of four core elements: The identification of environmental, social and economic issues; the evaluation and ranking of the identified issues according to the companies’ and stakeholders’ involvement; the identification of the companies impact on the stakeholders and the material issues and the prioritization of the identified issues. ⁴³^,⁴⁵ Accountability offers a framework/handbook to companies that helps with the process of identifying, prioritizing, and acting regarding to possible sustainability issues that are material to the company. ⁴⁶ After finishing this process, the companies should be aware of the stakeholder’s issues and unmet needs and should be able to implement a shared value strategy: reconceiving products and markets, redefining productivity in the value chain and enabling local cluster. ⁴³ The materiality matrix can help to prioritize the identified issues and to choose a suitable strategy. After the prioritization, the manager can determine which strategy is suitable for which issue/need. Saenz (2019) established a selection process within the materiality matrix for this decision based on the prioritization. A manager can now create shared value within his or hers company by selecting one of the assigned strategies from the quadrant the issue is placed in and in the next step formulate a practical implementation ⁴³:

Highest materiality: Reconceiving products and markets; redefining productivity in the value chain; enabling local cluster development
Medium to high materiality: Enabling local cluster development
Low materiality: Redefining productivity in the value chain; enabling local cluster development
Medium to high materiality: Redefining productivity in the value chain

*Figure 2: Materiality Matrix based on ⁴³.*

3.4 The Hourglass Model

To develop a business model for the creation of shared values, the Hourglass Model developed by the Network for Business Sustainability of South Africa gives guidance. ⁴⁷ The Hourglass Model combines three key aspects for a shared value business model to give the manager a perspective on missed, destroyed, and created value ³⁶: capitals, value creation and stakeholders (cf. 36). Including all three aspects into a business model is meant to give a manager a perspective for total value creation possibilities. ⁴⁸ The capitals aspect consists of six central types of capital that are relevant for the core business of the company: natural, human, social & relationship, intellectual, financial, and manufactured capital, based on the standard of the International Integrated Reporting Council (IIRC). ³⁶^,⁴⁷ The value creation process is in the heart of the Hourglass Model and is based on traditional business model thinking. The process consists of customer value proposition (i.e., what customer value is offered by a company’s products and/or services); business infrastructure (i.e., representing internal and external resources, for example technology and employees); customer interface (i.e., defining the customer-company relationship and the interaction channels) and financial model (i.e., summarizing a company’s financial resources). ³⁶^,⁴⁷ The next key aspect represented in the hourglass model are the stakeholders. The stakeholders play a crucial role in the process because, the earlier mentioned capitals are often created or contributed to by the firm’s stakeholders. ³⁶ A large part of creating shared value is the expansion of the value creation perspective beyond the company and its customers to all affected stakeholders. As mentioned above, stakeholders contribute different forms of capitals and affect the firm’s success directly and indirectly. The Hourglass Model reflects the created value of the firm for each stakeholder, as well as the value a firm may have missed or destroyed. ⁴⁷ This should give a manager a road map for increasing shared value. The Model focuses on the three described aspects to validate the fact that a firm’s capital stems from different stakeholders interacting with the firm, thus, illustrating the interdependency between society and the company. ³⁶

4 Drivers and barriers

The successful implementation of a CSV approach is influenced by numerous drivers and barriers. They can be divided into factors which influence the impact on sustainability and factors that hinder or foster the implementation from the company perspective. These are presented separately and elaborated using examples of companies which exploited drivers and overcame barriers.

4.1 Drivers of and barriers to a positive impact on sustainability

A shared value approach is not necessarily positive for sustainability. It should be considered which societal issue to address and what negative impacts the SV strategy could have (Table 1).

DRIVERS	BARRIERS
Social issue is addressed with the use of multiple resources	Only certain cases can be addressed
Is compatible with capitalistic motives	Is not able to transform the system
Easy to fit to core competencies	No clear definition
	Establishment of “Company towns”

Table 1: Drivers and Barriers of a CSV approach on sustainability.

Due to the premise that social and economic value should be generated simultaneously, only certain cases of social problems can be addressed ¹²^,⁴⁹. Between the business and society, trade-offs are present and value creation for both sites limits the pool of social issues that can be addressed ¹². “ [CSV] puts societal issues at the strategic level, but only as far as this brings returns” ⁵⁰. Other cases despite win-win cases cannot be addressed by CSV alone. To mitigate the negative social impact in those business-society relationships, there is a need for additional guiding norms to secure ethical standards along the whole value chain ³⁹^,⁵¹. Despite the restricted pool of sustainable problems that can be effectively addressed, the social issue can be better approached than through philanthropic activities. The incorporation of the social cause into the business strategy combines monetary resources and core competencies when addressing a societal issue, while philanthropic activity is addressing societal issues with monetary resources ¹. With an CSV approach, funds are not as restricted for the societal cause, since the benefit for society lies at the heart of the business operation. In contrast, philanthropic activities rely on a given amount of funds (excess from the core business) that are dedicated to the societal issue. ⁵¹^,⁵²

In the definition of CSV, the capitalistic motive of profit maximization is combined with pursuing benefits for society ¹. Therefore, the approach can be followed in cooperation with other actors that operate in the capitalistic system and does not rely on time- and resource-intensive transformation processes. The business is still placed at the center of the stakeholder network ⁴⁹. This is also one of the critical points concerning CSV since it does not contribute to system transformation and global problem solving oftentimes ⁵³ but rather concentrates on local opportunities to create a business case ¹², ⁴⁹. Crane et al. (2014) argue that the company would have to become a stakeholder in the problem as opposed to the case in CSV, where the business is at the center ¹². With its Working Connections partnership, Microsoft proved that even with the business in focus, sustainable impact can be created. When the company encountered a lack of trained IT workers, they saw the opportunity to create shared value in cooperation with community colleges. These colleges had no standardized IT curricula, their technology was outdated and faculty members were not equipped with up-to-date knowledge due to missing development programs. In cooperation with the American Association of Community Colleges (AACC), Microsoft supplied not only monetary aid and products but also sent employee volunteers. They helped with curriculum development and creation of faculty development institutes. As a result, colleges provided better education and Microsoft solved its problem of the need for IT workers. ⁷

The societal impact is also influenced by the degree of social benefit the firm aims for. CSV is not clearly defined in the realm of what counts as shared value ⁵⁰. This bears the risk that, while some problems are addressed, negative impacts in other sectors can arise ¹². The freedom to define which problem to address makes the implementation for companies easier as they can choose a problem that fits their competencies and also possible cooperation partners, which are addressed under Firm-Internal factors. The Swedish-based mining company Boliden is an early example that directly addressed negative aspects of the company’s core business via an SV approach. In the 1920s, the US copper industry was heavily regulated due to the environmental issues it caused. As Boliden planned to establish a copper smelter in Sweden, where such problems were not yet evident, they actively mitigated possible problems from pollution associated with copper production. After they identified the problem of pollution for society, they invested in the development of a new technology that would enable the extraction of sulfur and arsenic from the smoke caused by copper production. This enabled a larger-scale production and the simultaneous production of sulfur and arsenic as by-products for the business and less environmental damage as a social benefit. ⁵⁴

The benefit to society should be sustainable in the sense that the addressed social group is not permanently reliant on the company. If there is no mitigation of this, so-called “Company Towns” can emerge which are reliant on one company or specific cluster. In the case of the firm going bankrupt or relocating, the social group priorly addressed could be left worse off than without the SV approach. ⁴⁹ Before CJ Vietnam even started its red chili pepper procurement project explained under Firm-External Factors, it established self-sufficiency of the villagers in the addressed village in Ninh Zhuan province. To address both the infrastructure of the village and the necessities for crop cultivation. It started in community facilities with installing water pipes, in elementary schools it installed water fountains and new toilets performed renovations there and in the village kindergarten. In the private space, CJ installed kitchens and provided kitchenware additional to providing all 181 households with clean water. By creating a public space for drying harvested crops, tented roofs, and a space to produce organic compost, CJ enhanced a cooperative working environment. Another point CJ addressed was the training of farmers. All these efforts enabled sustainably enhanced living conditions in the village and mitigated a constant reliance on the company. ⁵⁵

4.2 Drivers of and barriers to implementation

The implementation of CSV is influenced by three groups of interlinked factors. Additional to the environment (Firm-External) and the company (Firm-Internal), the individual characteristics of entrepreneurs influence the SV approaches of the enterprise⁵⁶^,⁵³. An overview of the factors against or in favor of CSV implementation is depicted in [Fig. 5].

*Figure 4: Drivers and Barriers of the CSV implementation by a company.*

4.2.1 External drivers and barriers

In order to reach the social group that the product or service is directed at, the social value has to be communicated ⁵⁷. In some cases, the social problem is not connected to an existing market in which case the market must be introduced first ⁵⁸ (Hartman & Werhane, 2013). The key to this is Project-Awareness ⁵⁷. P&G managed market establishment by working with NGOs and local retailers. As they recognized the problem of clean drinking water supply in India, P&G developed the PUR, a powder-based packet which was able to purify ten liters of water for US 0.10 $. Even though they addressed an important social problem with this product, uptake was only rising when they worked together with local NGO and government programs as well as local vendors. In contrast to P&G managers, they had the trust of the public and could effectively communicate the benefits of PUR. ⁵⁸.

Additionally, socioeconomic conditions have an influence on the implementation of the Shared Value strategy. Social conditions include, for example, the local culture and ethical standards. Also, the economic system could be a success factor. A free-market system that incentivizes companies to engage in social behavior can promote the shared value approach. While the German social market economy comes closest to this, parts of the economic system in the USA are approaching this state in the form of new regulations. ⁶ Porter and Kramer (2011) already described the role of governmental actors, which can address several success factors to support the implementation process. According to the authors, this includes ”performance standards”, defining ”phase-in periods for meeting standards” and ”putting in place universal performance reporting systems” ¹. On the other hand, there are examples where government interference can be an obstacle. Since the shared value approach aims at economic value as well as social value, it must remain possible for the private sector to find competitive solutions compared to those of the state. ⁶ The globally operating fertilizer supplier Yara that was presented under “Enable local cluster development” is not only an example of a collective impact effort but also provides a good example of CSV in case of inhospitable market conditions. When Yara aimed the supply of smallholder farmers in Africa from the entry port in Tanzania, corruption in the government led to long timespans in which the fertilizer was held back at the government-controlled port. As mentioned earlier, the company then initiated a partnership to establish the Southern Agricultural Growth Corridor of Tanzania (SAGCOT). This partnership addressed the problem at the port and enabled investments in the port infrastructure. ⁴⁰

A high development need of the target area of the Shared Value Initiative especially is a driver for the economic success of the approach. These areas represent previously unserved markets. In addition, the local population can be easily integrated into the initiative, e.g., as “customers, workers, suppliers, or economic partners” ⁶. When addressing such areas, an evident problem is the lack of infrastructure and industrial competencies which requires cooperation with government and actors in the social sector ⁵⁵. CJ Vietnam applied a successful CSV strategy in rural Vietnam, working tightly with the local population, government, and experts. To address the wealth gap between cities and rural areas in Vietnam, CJ Vietnam started an SV strategy in one village in the Ninh Thuan Province. In alignment with the government’s New Rural Development (NRD) strategy, they used their expertise in agriculture and knowledge from multiple sites to establish a Korean red chili pepper cultivation in the village. The chili peppers are a key ingredient used by CJ Vietnam, therefore diversifying its global sourcing base and the project generated social value through increasing the income of the local farmers and enhancing the self-sustainability, thus increasing the living standard. ⁵⁵

4.2.2 Internal drivers and barriers

Linked to the previous argument is the need for strong stakeholder engagement and ultimately the formation of local clusters. When the local community is involved in the production process, direct social value is created as the economic development of the community is promoted ³. Samsung provides an illustrative example of this. Samsung relocated part of its production to South Africa in 2011. However, local technicians there lacked the necessary knowledge and skills, due to a lack of educational structures. Samsung used these problems in the value chain as an opportunity to create both social and economic value and thus pursued a shared value approach. Samsung trained the technicians themselves. They thus fixed the problem in the value chain and achieved specific know-how related to Samsung products. The local community benefited from better employment, both quantitatively and qualitatively. ⁵⁹

In addition to cooperation with the local community, system-wide cooperation with other organizations, such as “governments, international organizations, communities, schools, research institutes, and even with other corporations” is an important driver for successful shared value projects ⁵⁵. In this way, several barriers can be addressed. One difficulty could be that the company does not have the financial resources. Shared value projects are characterized by high initial investments and may also have long payback periods ⁵⁹. Second, specific know-how and an in-depth understanding of local conditions are required. Since companies are often not familiar with research in the social sector, they are not equipped to research social issues at this level ⁴². This makes an international network, as well as cross-cultural competencies, another important factor for the successful implementation of a shared value approach ⁵⁵. “Novartis’s Arogya Parivar unit recognized that a lack of financing in rural areas prevented doctors and pharmacists from purchasing diagnostic equipment and stocking essential medicines. Since Novartis didn’t consider financing to be a core competence, its team decided to partner with a local microfinance enterprise” ⁴². If the company does not have the necessary know-how, external independent entrepreneurs can be funded ⁴². Overall, financial resources need to be combined with know-how ⁵⁵.

“Creating shared value is knowledge-intensive” ³. It is therefore recommended that companies build on existing capabilities and core competencies ⁵. Companies that are more innovation-driven therefore have an advantage in implementing the shared value approach ⁴². In addition to continuous innovation, a subsequent constant improvement of the developed solution is necessary to ensure social value ³. Thus, another possible solution for a lack of know-how is to invest in R&D. For this, the company must have the necessary capital over a longer period. If the company does not invest in building a deep understanding, it could increase the risk of trying to implement ineffective solutions. Only through this deep understanding can needs, potentials for improvement, and potential value for the company be identified. Nestle can be mentioned here as a positive example. They have tackled the problem of malnutrition in India. To do this, they studied the situation in detail in advance and were thus able to find and successfully implement an effective solution. ⁴

The company’s internal values play a key role in investment decisions in the area of the shared value approach. The extent of the values has a major influence on the motivation of an otherwise economically oriented company. They also determine which needs of the community are to be addressed. In the further course of the Shared Value initiative, firmly anchored values, through for example a code of conduct, also ensure that managers stick to the given mission in the long term. ³

The anchoring of certain value could also influence another key success factor – the degree to which Creating Shared Value is integrated into the company-wide strategy ⁶. It can be shown that Shared Value must be viewed holistically for it to lead to economic success. This requires a corresponding realignment of the value creation process ³. The shared value approach is thus reflected in all activities of the company, “including planning, production, and marketing” ⁵⁵. Such integration is currently reflected in car manufacturers redefining their corporate purpose to being mobility providers ⁴².

Another possible barrier is that shared value has so far been difficult to measure compared to economic value. Porter and Kramer (2011) have already addressed the problem of measurability. By measuring progress, the added value of the shared value approach becomes visible. In this way, further investments can be justified. However, since the effects of shared value initiatives often materialize rather late, the introduction of metrics that can measure incremental progress is recommended. ¹ An example of successful progress measurement is provided by the Coletivo initiative of Coca-Cola. They have had participant numbers and performance of their projects continuously tracked by an NGO partner. This allowed them to identify the most successful practices early on. ⁴² Apart from the lack of a standardized measurement methodology, current approaches (e.g., impact assessments) are often complex and therefore costly. Moreover, they often fail to link economic and social value. So far, this remains the task of the respective company. For example, IBM combines operational and social value in a process they developed themselves. ¹

In principle, there are no restrictions on the necessary size of a company to pursue a shared value approach ⁶. Nevertheless, company size is discussed as a possible influencing factor. Larger companies have more financial power and thus more R&D capacity. This enables them to invest in shared value projects with longer payback periods and higher requirements for deep problem understanding. ⁵ In addition, large multinational companies can capitalize on their global reach ⁶. On the other hand, smaller companies often have a closer relationship with the local population ⁶. This is due to the fact that they focus on value creation for society at the core of their business strategy ⁵². They are also more often independent of external funding since they mitigate indebtedness ³.

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1
Porter, M. E. & Kramer, M. R. Creating Shared Value. Harv. Bus. Rev. 89, 62–77 (2011).
2
Jean, W. A. The Review of Shared Value in Contemporary CSR Run by Two Successful Companies to Sustain the Business in Recent Years. Int. J. Manag. Account. Econ. 2, 1122–1129 (2015).
3
Schmitt, J. & Renken, U. How to Earn Money by Doing Good!: Shared Value in the Apparel Industry. J. Corp. Citizsh. 79–103 (2012) doi:10.9774/GLEAF.4700.2012.sp.00007.
4
Pfitzer, M., Bockstette, V. & Stamp, M. Innovating for shared value. Harv. Bus. Rev. 91, (2013).
5
Maltz, E., Schein, S., Maltz, E. & Schein, S. A Three Cs Approach. 47, 55–74 (2012).
6
von Liel, B. & Lütge, C. Creating Shared Value und seine Erfolgsfaktoren – ein Vergleich mit CSR. Zeitschrift für Wirtschafts- und Unternehmensethik 16, 182–191 (2015).
7
Porter, M. E. & Kramer, M. R. Strategy & Society. The Link Between Competitive Advantage and Corporate Social Responsibility. Harv. Bus. Rev. 1–17 (2006).
8
Porter, M. E. & Kramer, M. R. Philanthropy’s new agenda: creating value. Harv. Bus. Rev. 77, (1999).
9
FSG. Reimaging social change. (2022). Available at: https://www.fsg.org/blog/fsg-story/ (Accessed: 13th September 2022).
10
Porter, M. E. & Kramer, M. R. Shared Value – Die Brücke von Corporate Social Responsibility zu Corporate Strategy. in Corporate Social Responsibility 145–160 (Springer Berlin Heidelberg, 2015). doi:10.1007/978-3-662-43483-3_10.
11
Schormair, M. J. L. & Gilbert, D. U. Das Shared-Value-Konzept von Porter und Kramer – The Big Idea!? in CSR und Strategisches Management (ed. Wunder, T.) 95–110 (Springer Berlin Heidelberg, 2017). doi:10.1007/978-3-662-49457-8_5.
12
Crane, A., Palazzo, G., Spence, L. J. & Matten, D. Contesting the value of ‘creating shared value’. Calif. Manage. Rev. 56, 130–153 (2014).
13
Seele, P. Shared Values. in Handbuch Wirtschaftsethik (ed. Aßländer, M. S.) 781–784 (J.B. Metzler, 2022). doi:10.1007/978-3-476-05806-5.
14
Beschorner, Thomas, Creating Shared Value: The One-Trick Pony Approach. In: Journal of Business Ethics, pp. 106–112, 2013.
15
Dembek, K., Singh, P. & Bhakoo, V. Literature Review of Shared Value: A Theoretical Concept or a Management Buzzword? J. Bus. Ethics 137, 231–267 (2016).
16
de los Reyes, G. & Scholz, M. The limits of the business case for sustainability: Don’t count on ‘Creating Shared Value’ to extinguish corporate destruction. J. Clean. Prod. 221, 785–794 (2019).
17
FSG & Shared Value Initiative. Purpose Playbook. Putting Purpose into Practice with Shared Value. (2020).
18
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26
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28
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30
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31
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32
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33
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34
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35
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36
Massa, L. & Lüdeke-Freund, F. Executive Guide: Business Models for Shared Value – Network for Business Sustainability. (2016).
37
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