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Creating Shared Value:Redefining the Role of Business in Society

prepared for:

Mark KramerFounder & Managing Director, FSG Senior Fellow, Harvard University

Nestlé Shared Value Forum

Lagos, Nigeria

September 18, 2012



FSG.ORG

Creating Shared Value Is Gaining Significant Momentum

2 © 2012 FSG

“The Big Idea: Creating Shared Value,”

by FSG founders Michael Porter and

Mark Kramer, HBR, Jan-Feb 2011 Economist: “Top trend in 2012”

Forbes: One of three “megatrends for 2012”



FSG.ORG

The Role of Business in Prosperity

• Only business can create prosperity

BUT

• Companies are increasingly perceived to be prospering at the expense of thebroader community

© 2010 FSG3

• us ness ncreas ng y s seen as a ma or cause o soc a , env ronmen a ,and economic problems

• Government and civil society often attempt to address societal issues at theexpense of business

• Despite growing corporate social responsibility (CSR) activities, the legitimacyof business has fallen



FSG.ORG

• The long-term competitiveness of companies depends on socialconditions

− An educated and skilled workforce

− Safe working conditions

− Sustainable use of natural resources

− A flourishing local economy

Societal and Corporate Success are Inextricably Linked

© 2010 FSG4

• us ness as an essen a ro e o p ay n so v ng soc a pro ems

− Only companies can create prosperity that funds government and civil society

− Companies can create sustainable and scalable solutions to many social problemsin ways that governments and NGOs cannot

− Competitions fuels innovation and efficiency

− For-profit models are the most scalable and sustainable− Businesses can overcome constraints that limit their growth

The “externalities” we have ignored have substantial internal effects



FSG.ORG

Redefining the Value Chain:

So-Called “Externalities” Have Internal Effects

QualityEducation

& Skills

RegulatoryEnviron-ment

Poverty inCompany’sCommunty

© 2010 FSG5

CompanyProductivity

PoorInfrastruc-ture

Health andNutrition

Water Use

EnergyUse

Environ-mentalImpact



FSG.ORG

Shared Value is:Policies and practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the

communities in which it operates .

• Shared Value is NOT:

‒ Sharing the value already created(philanthropy)

‒ Personal values

• Shared Value IS:

‒ Creating economic value by creatingsocietal value

‒ Usin ca italism to address social

© 2010 FSG6

‒Balancing stakeholder interests

problems

• All profit is not equal. Profit involving shared value enables society to advance and

companies to grow faster

• Incorporating societal issues into strategy and operations is the next major transformation

in management thinking

• Shared value thinking represents the next evolution of capitalism itself



FSG.ORG

Shared Value Is Found at the Nexus of Business Opportunities,Corporate Assets and Social Needs

Social NeedShared Value

Opportunity

© 2010 FSG7

Business

Opportunities

Corporate Assets

and Expertise



FSG.ORG

"… beyond sustainability, to create value for"… beyond sustainability, to create value forCreating

Shared Value

Peter Brabeck, Nestlé Chairman and CEO:

For a company to be successful over time and create

value for shareholders, it must also create value for society.

Peter Brabeck, Nestlé Chairman and CEO:

For a company to be successful over time and create

value for shareholders, it must also create value for society.

Creating Shared Value

© 2010 FSG8

-

core business"

-

core business"

Comply with the highest standardsComply with the highest standards

"…meet the needs of the present withoutcompromising future generations …""…meet the needs of the present without

compromising future generations …"

Nutrition, Water,Rural Development

Sustainability

Protect the future

Compliance

Laws, Business principles, codes of conduct

8



FSG.ORG

A Shift from ‘What’s Good for Business is Good for Society’ to ‘What’s Good for Society is Good for Business’

Philanthropy/CSR

1.Create social benefit byredistributing some of the valuecreated by business

Creating Shared Value

1.Create social and business benefitby “increasing the size of thepie”

© 2010 FSG9CSV

2. Doing good is integral to a riskmanagement strategy

2. Doing good is integral to asuccessful innovation strategy

3. Businesses help solve socialproblems because it is their

responsibility to ‘give back’

3. Businesses help solve socialproblems because it part of their

purpose and competitiveadvantage

4. All profit is equal 4. Profit that is good for society ismore sustainable



FSG.ORG

Companies Can Create Shared Value at Three Levels

Reconceiving Products and Markets

© 2010 FSG10

Enabling Local Cluster Development

Redefining Productivity in the Value Chain



FSG.ORG

• Design products and services to address societal needs – E.g., environmental impact, safety, health, education, nutrition, living with disability,

housing, financial security

• Open new markets by serving unmet needs in underserved communities – Often requires redesigned products or different distribution methods

• Meeting such needs spurs self-reinforcing economic growth

Reconceiving Products and Markets

© 2010 FSG11

• Businesses have the potential to be more effective than governments andNGOs in marketing solutions to social problems

• Shared value offers new opportunities for differentiation, innovation, andgrowth

• A new generation of social entrepreneurs is capturing these opportunities,often faster than mainstream businesses



FSG.ORG

Shared Value Profile

• Zero Trans Fat

• High in heart-healthy monounsaturated fat

• Lowest saturated fat of typical cooking oilsand half the saturated fat of olive oil

Dow Chemical: Omega-9 Healthy Oils

© 2010 FSG12

• Since 2005 Omega-9 Oils have eliminatednearly a Billion pounds of trans fat and250 million pounds of saturated fat fromNorth American foods

• Studies show people prefer the taste of foodsfried in Omega-9 Canola Oil over commonoils



FSG.ORG

Better Nutrition in West Africa

• Bio-fortification of common crops such as cassava

and maize

• Micro-nutrient fortification

• Severe Iron, Vitamin A and Iodine

deficiencies

© 2010 FSG13

• Maggi bullion

– 75 million units/day

– 200 million people

• Golden Morn

– Iron and Vitamin A

• Nido – Iron

Each year, Nestle renovates more than 6,000 products

to lower salt, fat and sugar content while maintaining the taste appeal to consumers



FSG.ORG

The Fibria Pulp Value Chain

• Fibria in Brazil is the world’s largest manufacturer of pulp for paper

• All production is based on planted eucalyptus -- No tropical native trees

– A mosaic of 170,000 hectares of preserved native reserves areinterspersed with 286,000 hectares of eucalyptus plantations to insurebiodiversity

• - - -

© 2010 FSG14

,

technologies control pollution in the mills

• Small-scale farmers are permitted to grow maize, beans and manioc inareas belonging to the company to increase biodiversity

• Over 4,000 households currently obtain income from eucalyptusproduction

• 1 hectare of eucalyptus can produce the same volume of wood as 30hectare of native forest



FSG.ORG

7.3m3 /t

6.1m3 /t 5.6

m3 /t4.7

3

W a t er c on s u

n v o l u m e ( t )

West Africa Water Conservation

© 2010 FSG15

- 21%Waterusage

+ 22%Volumeincrease

m

p t i on ( m 3 )

P r o d u c

t i



FSG.ORG

Improved Grain and Soya Crop Quality

• Reduce toxins and spoilage in maize andsoya

– Aflatoxins increase cancer risk, reducenutrient uptake and stunt children’s growth

–

© 2010 FSG16

• Education in safe cultivation, storage andtransport

– Price premiums for mycotoxin-free crops

Improving the safety and reducing the loss of staple crops



FSG.ORG

• Cisco’s growth is limited by the

number of trained network

administrators worldwide

• As a result, Cisco established the

Networking Academy

Business Problem and Innovation

•Over 10,000 Academies established in

all 50 states and 165 countries

•Over 4,000,000 students have beentrained

•More than 70% have attained a new

job, a better job, increased

Social ImpactCisco Networking Academy: Skills Training

© 2010 FSG17

• eve ope a s ance earn ng

program that combines a web-based curriculum with local

instructors and lab facilities

• Partnered with industry peers,

schools, governments and

universities• Focused on economically

deprived regions around the

world

,

Business Impact

•Alleviates a key labor constraint for

Cisco customers

•Students become familiar with Cisco

products

•Strengthened relationships with key

suppliers and government



FSG.ORG

Novartis Arogya Parivar: Creating New Markets in Rural India

Products

Portfolio:• 79 pharmaceutical

products in 12 therapeuticareas

Affordable:

Services

Community healtheducation:• ~300 health educators• Focus on prevention, child

& maternal health,symptom awareness

Results & next steps

Improved access to healtheducation and medicines for42 million patients in28,000 villages

Partnering with ~50 000pharmacists and clinics

© 2010 FSG18

• Sandoz generics

• Over-the-counter (OTC)medications & nutrients

• Custom small packsbranded in local dialect

Healthcare providereducation:• Address low level of

medical training

Supply chain management:• Ensure continuity of supply

in village pharmacies

Portfolio expansion in 2011:vaccines, generics,diagnostics and more

Will pilot in Indonesia,Vietnam and Kenya (2011)

Partnering to expand accessto health infrastructurefinancing



FSG.ORG

Economic Issues

Unsustainable

income

Limited use of fertilizer

Limited use of pesticides

No new plant

materialsInability toinvest infarms/coops

No quality

Smallhold Farmers Can Face a Self-Perpetuating Cycle of

Economic, Social and Environmental Decline

© 2010 FSG19

Limited

social servicesLoss of human capacityfor farming

Farmers lack access to healthcare; many can’t affordschool fees

Declining interestin farming; increasedmigration to cities

Social Issues

Environmental Issues

DeforestationAging plantstock & trees

Loss of biodiversity exposure to pests and

disease

Full sun systems

Declining soil fertility

Decliningcrop yields &

quality



FSG.ORG

Nestlé’s Farmer Programs: Building Incomes that Build Customers

• Nestlé operates 63 farmer programsacross Africa, Asia, Latin America andEurope to source milk, coffee and cocoa.

• Farmer programs combine microfinance,technical skills training, education insustainable farming methods andim roved water mana ement, and new

© 2010 FSG20

• Over 1,000 agronomists and 15,000 extension workers offered assistance to150,000 farmers around the world in 2011

• $60 million in financial assistance to farmers and $2 million for research lab in

Abidjan• In West Africa, Nestlé is distributing 12 million disease-free highyielding cocoa plants and more than 13 million coffee plants over 10years

opportunities for women.

As farmer incomes rise, they purchase more Nestle products in a self-reinforcing cycle



FSG.ORG

Creating Shared Value Redefines the Role of Business in Society

• Business must create economic value by creating societal value

• Profit involving shared value enables society to advance more rapidly andallows companies to grow faster

© 2010 FSG22

• The pursuit of shared value represents the next evolution of capitalism

Incorporating societal issues into strategy and operations

is the next major transformation in management thinking



FSG.ORG

How to Begin:

• Redefine the business around unsolved customer problems or concerns,not traditional product definitions

• Think in terms of improving lives and strengthening the competitivecontext, not just meeting consumer needs

• Identify customer groups that have been poorly served or overlooked by the’

© 2010 FSG23

• Identify constraints on the business that the company has the expertise andresources to fix

• Start with no preconceived ideas about product attributes, channel

configuration, or the economic model of the business (e.g., small loans areunprofitable)



FSG.ORG

What We Need to Do• Academia: Establish a rigorous body of academic research and teaching

materials to support the development of the shared value field

• Government: Create policies, incentives and subsidies to encourage sharedvalue initiatives

• NGOs: Identify business opportunities for companies to address social issues

© 2010 FSG24

in partnership with NGOs

• Corporations: Exploit the opportunities for creating shared value in all threelevels; forge new partnerships; measure business benefit of social impact

• Investors: Hold companies accountable for the risks of ignoring sustainabilityand depending on scarce resources; factor in the upside potential of tacklingthe worlds problems

Shared Value creates a new agenda for action



FSG.ORG

• There is an opportunity to transform thinking and practice about the role ofthe corporation in society

• Shared value gives rise to far broader approaches to economic valuecreation

• Shared value thinking will drive the next wave of innovation, productivity

The Purpose of Business

© 2010 FSG25

enhancement, and economic growth

• Businesses acting as businesses, not as charitable givers, are arguably themost powerful force for addressing many of the pressing issues facing oursociety

• A transformation of business practice around shared value will give purposeto the corporation and legitimize business again

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