April 1, 2015 | Written by: Kirk-Dale
Tradeoffs are an inherent part of strategic decision-making. Traditional organizational strategy’s focus is to deliver value to a single organization and its shareholders. Companies make decisions to leverage some resources (people, finance, natural resources or time) over others. Typically, value is measured from the viewpoint of that single organization rather than the ecosystem in which the organization exists. Regulation is sometimes viewed as nothing more than a constraint to be circumvented. This approach destroys shared value.
The complex nature of the modern business ecosystem requires tradeoffs across corporate borders. Value must be seen through a lens that encompasses internal and external facets balancing between economic, environmental and social gains. The objective of shared value is to increase value for all not simply to redistribute value from one group to another.
Corporate Social Responsibility (CSR) is not a solution for this problem. CSR activities have made social responsibility a concept where societal issues are at the periphery of decision-making and not the core. What is lacking is a conceptual framework to guide decision-making where the company’s success is linked with value creation for the entire social ecosystem.
The approach followed by most entities to shared value is based on balancing the firm’s and owner’s needs with their customers needs. Most find it challenging to maintain a balance over the long-term. Inevitably long-term value is sacrificed for the short-term in the pursuit of gains. Trust is eroded as a result of this narrow approach and businesses are blamed for many social, environmental, and economic problems.
Traditionally, value creation has been reached through shareholder value maximization where corporations should serve the interests of its stakeholders within the constraints of the law. Such a competitive equilibrium can never be Pareto optimal yet alone socially optimal. A shared value approach encourages corporations to maximize the weighted sum of their shareholder value and of their contributions to society, consumer and employee welfares, which will improve the stakeholder-ecosystem equilibrium to the benefit of all stakeholders. Thereby, defining a new way of thinking about the value. Seeing value as “…integrating societal issues and challenges into economic value creation” as by defined by Michael Porter.
Its important to distinguish between shared value and redistribution. Fair trade aims to increase the proportion of value that goes to poor farmers by paying them a higher share of the earnings for the same crops. Redistribution does not increase the size of the pie. To expand the amount of value created, the focus must widen to improving the techniques and processes to increase farmers’ efficiency, yields, product quality, and perhaps most importantly sustainability. Early studies of cocoa farmers in the Côte d’Ivoire, for instance, suggest that while fair trade can increase farmers’ incomes by 10% to 20%, shared value investments can raise their incomes by more than 300%.
Our economy needs to observe the interdependency between business and the communities we are operating in. Several empirical studies suggest relationships between happiness, economic performance and productivity. If these wide relationships exist, business solutions must include an equally broad view of what value creation means and how to achieve it.
Kirk-Dale’s expertise focuses on operationalizing strategy, leading business transformation programs and building innovative business models. He has broad experience spanning senior roles focused on strategy, corporate turnarounds and reengineering.
KD leads Strategy & Analytics for IBM in Saudi Arabia. He is an alum of Harvard Business School, HEC Paris, The London School of Economics and The University of Oxford.
Latefah is an Associate Consultant in the Strategy & Analytics practice of IBM Middle East & Africa. She has a very good technical background with a passion for Business. She is interested in Strategy, Smarter Cities, and Watson. She holds a BA in Computer Science.