nestlé’s creating shared value approach as competitive advantage

Nestlé’s Creating Shared Value Apporach as Competitive Advantage

Nestlé’s Creating Shared Value Approach as

Competitive Advantage

Jonas Babics

5th November 2009 - [email protected]

Corporate social responsibility is a topic, which cannot be ignored anymore by CEOs or

board members of big multinational enterprises, as well as small and medium enterprises.

The current climate change, labour conditions in developing countries and shrinking reserves

of natural resources are too big an issue and a danger for the companies’ reputation. A

survey by the Economist Intelligence Unit showed, that the importance of CSR is rising for

global executives (The Economist, 2008). A reason for this, among others, is the pressure

from governments, activists and the media. More and more companies integrate a CSR

report in their annual report and adopt programmes and activities to improve the social and

environmental consequences of their businesses. However, regarding Porter and Kramer

(2006) many of these efforts have not been as productive as would be possible. They state

two reasons for this. First, the companies pit business against society, although they are

interdependent. Second, they do not think of CSR in they way, which would suit the firm’s

strategy. Porter and Kramer (2006) propose an approach for companies to use the same

framework for CSR that guides their strategy for their core business. With that, CSR can get

a source of opportunity, innovation and competitive advantage and not only a cost factor.

Reading and preparing the CSR report from Nestlé, the statement called my attention that

Nestlé’s core business itself is sustainable and that Nestlé follows the principle to align

shareholders interests and the interests of the society in order to achieve long-term business

success (Nestlé, 2008). With the strategy of creating shared value - creating value for

shareholders and creating value for society - Nestlé seems to follow Porter’s and Kramer’s

framework. It is not yet possible to find out, if Nestlé is more successful with its CSR strategy

than other companies, as they introduced the approach only in 2007. To measure, if Porter’s

and Kramer’s approach really leads to a competitive advantage, will be a very interesting and

important topic. In this report I will analyse the CSR report or “Creating Shared Value report”

of Nestlé to find out accordance or similarities with the framework from Porter and Kramer

and will also criticise Nestlé’s approach. If Nestlé aligns their strategy with Porter’s and

Kramer’s framework, the success should be examined in further studies.


The link between competitive advantage and corporate social responsibility

Porter and Kramer (2006) criticise in their report about CSR and competitive advantage the

responses from corporations on the pressure from the public. Most of these responses are

rather cosmetic than strategic or operational and CSR reports from companies rarely offer a

coherent framework for CSR activities. The CSR practices and initiatives are often isolated

from the operating units and have no strategic value. Furthermore, CSR experts focus on the

tension between business and society rather to focus on their interdependence.

Therefore, Porter and Kramer propose a new way to look on the relationship between

business and society. The object for enterprises should be to develop a CSR agenda that

produces maximum social benefit and gains for the business at the same time. According to

Porter and Kramer the same tools can be used than to analyse competitive position and to

develop strategy. In their framework Porter and Kramer use the value chain, introduced by

Porter in his book “Competitive Advantage” (Porter, 1985) and the diamond framework, also

introduced by Porter in the book “The Competitive Advantage of Nations” (Porter, 1990).

Value Chain

The value chain shows all the activities a company engages in while doing business. For

CSR purposes, the value chain can be used to identify activities in the value chain with a

negative social impact or to find opportunities in the value chain that can bring social and

strategic advantages. The mapping of the social impact of the value chain is called “inside

out”.

Diamond Framework

On the other hand there are external social conditions that influence corporations (outside

in), which can be identified in the diamond framework. Porter and Kramer suggest that

companies identify the areas of social context with the greatest strategic value and choose

one or few social initiatives. A company is not able to take on every area in the diamond.

After identifying inside out activities with a social impact and outside in areas with impact on

the company’s business, the enterprise should prioritise their social issues. The social issues

can be categorised in three categories: 1) Generic Social Issues, which are social issues that

do not have a significant impact on a company’s competitiveness, nor are affected by the

company’s operation. 2) Value Chain Social Impacts, which are social issues that are

significantly affected by the ordinary business activities from a company. 3) Social

Dimensions of Competitive Context, which are social issues in the external environment in

the location of a company and which have an affect on the company’s competitiveness.


Prioritising social issues helps the company to choose CSR activities. CSR has to create

shared value and is a long-term investment in a company’s future competitiveness. The test

that should guide CSR is whether the activities present an opportunity to create shared value

and not whether the cause is worthy.

Going beyond sustainability: Nestlé’s Creating Shared Value strategy

“By operating in line with the goals of sustainable development, we aim to ensure that our

actions today do not compromise the needs of tomorrow. But we believe our role can go

further, in generating value for society at the same time as we generate value for our

shareholders.” (Nestlé Management Report 2008, p. 14)

This is a courageous statement from Nestlé. The first part of the quote is already known as

one definition of sustainability, created in 1987 at the World Commission on Environment and

Development (The dictionary of sustainable management, 2009). However, Nestlé wants to

go beyond sustainability with creating value for shareholders at the same time as creating

value for the society. In order to achieve long-term business success, Nestlé believes that

shareholders interests and the interests of society must be aligned (Nestlé, 2008). To

achieve that, Nestlé investigated their value chain and searched at each stage for

opportunities to create shared value.

Source: Nestlé (2008)


While trying to improve every stage of the value chain in order to create shared value, Nestlé

focuses its efforts in three key areas: nutrition, water and rural development (Creating

Shared Value.org, 2009). These can also be defined as key competences, since Nestlé is

the biggest food company of the world and it belongs to the daily work to invent healthier

nutrition, produce clean water and work together with suppliers from rural areas. However,

we do not yet know how Nestlé is able to create value for the society while creating value for

the shareholders. This takes place in different projects, where Nestlé improves living

standards of farmers or works on innovation in more eco-efficient packaging, which also

helps to save costs or enhance quality. One of these projects is described in the box below.

What all the projects have in common is, that in each case, as Nestlé has prospered, so has

the community (Nestlé, 2008).

Improving prospects for Guatemala’s coffee growers

The aim of this project is to improve coffee production in a way that will ensure long-term

social, economic and environmental sustainability. Through contributing directly to the health

and productivity of farming households and through protecting the rich soils in this area in

Guatemala that produce some of the world’s finest coffees, Nestlé created shared value for

its suppliers as well as for its shareholders.

Nestlé constructed two new classrooms at the local school, increased the daily supply of

drinking water through the construction of a 10 kilometres supply pipe, planted avocado trees

on every family holding and constructed efficient stoves and a primary care health centre.

Source: Nestlé (2009)

Critical examination and comparison

To be able to examine Nestlé’s approach, I have listed different projects or actions stated in

the Management Report 2008 (Nestlé, 2008) and tried to allocate them either to inside out

projects or outside in projects. Nestlé does not make this difference, they only call their

actions to be along the value chain.


Value Chain (inside out)

o Value created for consumers: better nutrition

o Eco-efficient packaging

o Innovations in bottled water packaging

o Reducing water withdrawals

o Reductions in energy usage, cost and greenhouse gas emissions

o Reductions in workplace accidents - constant goal: zero accidents

o Responsible consumer communications

Diamond Framework (outside in)

o Microcredit loans to farmers worldwide (CHF 30 million)

o Suppliers: 600’000 farmers - raising the standards of living, access to quality raw

materials

o Helping to develop the dairy industry in East Africa

Analyzing the inside out actions and comparing them to Porter’s (1985) value chain, one can

find a project for nearly every primary and every support activity. It seems that the

responsible person at Nestlé followed Porter’s and Kramer’s advice, combed through the

value chain and identified activities with negative social impacts (e.g. greenhouse gas

emissions) or activities with positive social impacts (e.g. better nutrition) and figured out

projects to make a shared value creation possible. It is the stated objective from Nestlé that

all the projects should create value for the society and for the shareholders. I did not find any

projects considering a generic social issue, where the business would no benefit at all.

However, Nestlé’s approach could of course still be improved. The creating shared value

strategy could be even more implemented in all business fields and all activities and above

all should the impacts be examined. Nestlé reports one project - reducing water withdrawals -

where they work together with NGOs and academic partners to develop a sound basis for

the measurement of the activities and their impact that can lead to further improvements. If

all these projects really created shared value, that means also value for the shareholders, it

would be worth to spend more money on research, like for marketing or product research.

Porter and Kramer (2006) state that a company cannot take on every area in the diamond.

However, in my opinion a company should concentrate on maybe one or few social

initiatives, but in the same time try to improve the other areas constantly. Creating shared

value is a long-term strategy and especially the outside in activities need a longer time to

show improvement. That makes them less attractive for communication purposes and the

direct impact on the shareholder value is less obvious. Nevertheless, these projects are very


important and help to get a sustainable competitive advantage for a company that is hard to

copy for competitors.

According to Porter and Kramer creating shared value is “a meaningful benefit for society

that is also valuable to the business” (Porter and Kramer, 2006:8). In this definition the value

for the business or the value for the shareholders is kind of a bi-product. An advantage of the

strategy from Nestlé is that it has the focus from the other side. All the activities from Nestlé

should create value for shareholders and create value for society. This approach has a much

better opportunity to survive in our shareholder oriented business world. Nestlé has the

chance to win over the shareholders and make creating shared value as a core strategy and

long-term goal for the company.

However, the question remains: Is that possible? Can Nestlé create a strategy that brings

maximum profit for the shareholders and at the same time is not only sustainable, but

creates also value for society? If it is possible and Nestlé could get the reputation of a

responsible company that even creates value for society, it really would be a competitive

advantage.

Conclusion and outlook on the future of CSR

“Business and society need each other” (Porter and Kramer, 2006:7). This is a core

statement in the creating shared value report and could help CSR to survive the current

economic downturn. Business and society must never start to fight against each other, as

they are too interdependent. When people realise that business and society have to work

together and both can win at the end, it would be a huge contribution to solve the problem.

However, as always, one has to take a long-term view and can not rely on short-term profits,

but also not only on short-term positive impacts for the environment or society.

If Nestlé is able to prove that creating shared value is possible, it will have a big impact on

the discussion about CSR. To prove that, Nestlé has to scientifically examine their CSR

activities and their impacts on society or environment. As Porter and Kramer (2006) already

criticised, the impacts of CSR activities are almost never described in CSR reports. The

scientific research would also be very expensive. However, if a real competitive advantage

and a value creation for shareholders were possible, the return on this investment would be

enough high to be justifiable.

It will be interesting to follow the development of Nestlé’s creating shared value strategy.

Nestlé was often criticised for its ruthless business in developing countries and was involved

in several scandals, for example the baby milk scandal in 1974 (EvB, 2004), which still

influences the people’s attitude toward big multinational companies and toward Nestlé

especially. If the creating shared value approach is only a communication purpose to

improve the reputation, it will have now further positive impact on worldwide CSR activities


and will not make a difference. Furthermore, Nestlé cannot only state that their business,

they are already doing, creates value for the society, but has to find opportunities to

constantly improve their value chain activities and analyse the positive and negative impacts,

which is an ongoing process. The activities should be scientifically examined and be shown

in the annual creating shared value report. With the initiative of the creating shared value

approach and its improvements, Nestlé is able to gain a real competitive advantage and to

contribute to a more sustainable world.


References

Creating Shared Value.org (2009) “About Nestlé’s Creating Shared Value (CSV)” (online)

(cited 6 June 2009). Available from <URL:http://www.creatingsharedvalue.org/about/>

EvB (2004) Nestlé tötet Babys, Zürich, Erklärung von Bern.

Nestlé (2008) “Creating Shared Value”, Nestlé Management Report 2008, pp. 13-23.

Nestlé (2009) “Creating Shared Value in Action” (online) (cited 6 June 2009). Available from

<URL:http://www.nestle.com/CSV/CSVinAction/AllCaseStudies/ImprovingProspects.htm>

Porter, M. E. (1985) Competitive Advantage, New York, Free Press.

Porter, M. E. (1990) The Competitive Advantage of Nations, New York, Free Press.

Porter, M. E. and Kramer, M. R. (2006) “The Link Between Competitive Advantage and

Corporate Social Responsibility”, Harvard Business Review, December 2008.

The dictionary of sustainable management (2009) “Sustainability” (online) (cited 9 June

2009). Available from <URL:http://www.sustainabilitydictionary.com/>

The Economist (2008) “Corporate Social Responsibility”, The Economist, 17th January 2008.

nestlé’s creating shared value approach as competitive advantage

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