Shared Value

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Description of Porter's Shared Value. Explanation.




Definition Shared Value. Description

Shared Value is the principle that companies should create economic value by creating societal value.

Credit Crisis: Domino Effect

Background of Shared Value: the Credit Crisis

In the first decennium of the 21st century an unfolding Network Economy and related economic Globalization cause a period of immense worldwide economic growth. Capitalism enables the world to develop quickly. There is a widespread belief that 'the sky is the limit'.

Greedy consumers, investors, shareholders, businesses, banks and even governments are trying to benefit as much as possible from the favorable conditions. They borrow money to buy products (incl. houses) and make leveraged investments in very lucrative, but also very risky ways.

Supervisory organizations, Corporate Governance regimes and Media fail to cope with the optimism, globalization, dynamics, greed and complexities of modern finance.

In 2007-2008 a sub-prime crisis occurs, followed by a mortgage (housing) crisis, credit crisis, bank and inter-bank crisis, and several country crises. Governments and supra-national organizations are taking draconic measures trying to avoid a total collapse of the global financial and economic system.

Consequences of the Credit Crisis. Effects

According to Michael E. Porter and Mark R. Kramer in "The Big Idea: Creating Shared Value" (HBR 2011 Jan /Feb), at the end of the decennium, the reputation of capitalism as an economic system comes under siege. Businesses, in particular financial institutions, are increasingly being viewed as having strived for excessive profits at the expense of society. Even if many businesses embraced Corporate Responsibility, they are still blamed and distrusted. This lack of trust leads politicians to deploy policies that undermine Competitiveness and economic growth.

Porter and Kramer argue companies must take the lead in bringing business and society back together by adopting the principle of 'Shared Value', instead of the usual Shareholder Value.

The Prevailing Shareholder Value Principle

At the core of a narrow view of capitalism lies the notion of 'shareholder value'. In short, the Shareholder Value Perspective emphasizes profitability over responsibility and sees organizations primarily as instruments of their owners. Shareholder value proponents believe that the success of an organization can be measured by things as share price, dividends and economic profit. They regard Stakeholder Management rather as a means than as an end/purpose in itself. They believe that social responsibility is not a matter for organizations, and think that society is best served by organizations pursuing self-interest and economic efficiency.

Creating Shared Value

Porter's proposal: The Shared Value Principle

The Shared Value Principle means companies should strive for economic value by creating societal value (see picture). Creating societal value advances the economic and social conditions in the society in which the company operates.


Note that Porter mentions that when corporations are striving for societal value this is not philanthropy but acting in their own self-interest.

An interesting way to understand what Porter and Kramer suggest, is to compare the Shared Value Principle with Strategic (Instrumental) Stakeholder Management and Intrinsic Stakeholder Commitment. Porter's principle appears to have characteristics of both:

  • In the process of creating shared value, creating societal value is 'strategic' or 'instrumental' in the sense that the ultimate goal of any firm continues to be to realize economic value. This will ensure the invisible hand of Adam Smith and the core strength of capitalism as a source of building progress and wealth for all remain intact. Survival of the fittest would still prevail, but the creation of economic value will be done in a way that also creates value for society by addressing its needs and challenges.
  • In the process of creating shared value, creating societal value is 'intrinsic' in the sense that it is not just some initiative to boost the Corporate Reputation, nor merely an act of Corporate ResponsibilitySustainability or philanthropy, but a new philosophy, policy, Corporate Mission and purpose to enhance the competitiveness of a company and to achieve economic success for the firm, while simultaneously advancing economic productivity, growth, innovation and social conditions in the communities in which it operates.

Creating Shared Value

How to create shared value? In general, there are three mutually reinforcing ways in which shared value can be created:

  1. By reconceiving products and markets (see Porter's Five Forces model) beyond their influence on the profitability of companies. Include the impact they have on customers (including those at Prahalad's Bottom of the Pyramid), on productivity, innovation and the business environment.
  2. By redefining productivity in the Value Chain, reconsidering Outsourcing, the level of Vertical Integration, energy use, Logistics, use of resources, Procurement Strategies, distribution channels, etc.
  3. By building supportive industry clusters at the company's locations (see Porter's Diamond Model).

We should not look for a trade-off between economic and societal value: societal benefits need not temper nor be a constraint on achieving economic benefits. Firms must look for intelligent, strategic, reconciled combinations (See: Dialectical Inquiry).

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