I’ve been reading and writing a lot about creating value. Value creation is what sustains our spirits as well as insuring us a livelihood. It preserves quality in our relationships as well as justifying our existence.
A recent headline in the Financial Times challenged the premise of Michael Porter and Mark Kramer’s ideas on creating shared values caught my attention. Corporate Shared Value, (CSV) conceptually seeks to align social impact and company success. A very noble goal, akin to what John Mackey, the CEO of whole foods describes as Conscious Capitalism. Andrew Crane’s Financial Times article merely wishes the CSV theory found its way into execution and not corporate report window dressing and lip service.
15 years ago, Frederick F. Reichheld and Thomas Teal working for Bain Capital discovered that too few growth strategies successfully drove profits and explained competitive advantage. Since the traditional profit drivers failed to explain the discrepancy in performance, they turned to study costs. Their research delved into a firm’s relationship between customer duration and its cash flow and found the relationship also differentiated advantage. As they had eliminated one metric after another their discovery proved that value starts with building loyalty, growth follows and then profits result. Dual loyalty, they explained isn’t merely the reciprocal relationship between a firm’s leadership and its customers. The duality extends to employees and includes relationships with investors.The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value published in 2001, detailed this research. For businesses to focus and sustain this value creation process, the authors recognized would require fundamental changes in business practices including new ownership structures.
Porter and Kramer’s CSV theory in part recognizes a similar fundamental shift in business practices. Their focus seeks to compensate for the historic failure of accounting balance sheets to report and record shared value as an asset. Is it an output, or is Shared Value part of a larger social movement?
Mark Cheng, Director of Ashoka UK and Ashoka’s senior advisor on social finance explains the challenges in this article that appeared in Forbes, How Philanthropists And Investors Can Work Together To Create Social Change. He suggests, that trying to build a social innovation isn’t a company but a social movement and that’s why it requires very different investments.
To change consumer behavior whether you plan to build a new market or a social movement requires organizations to earn people’s loyalty to principles. Reichhold and Teal explain these learnings as necessary to properly differentiate between creating measurable value and creating profits. Porter and Kramer hope businesses will value social progress, but this alone won’t re-legitimize a business. A verbal commitment to value can’t create the cost-benefit advantages necessary to sustain the firm.
Social forces of loyalty can and often do bind customers, employees and investors. Indeed they serve as measures of cash flow and indicate a company’s ability to deliver superior value. The interlocking set of a firm’s operating principles creates both a cause and effect which satisfies, inspires and engages all stakeholders to sustain the firm.
Alternatively, a collective solution and collaborative mindset that aligns around a broader set of principles or values clearly stated presents an opportunity to create shared value. Because the concept of shared value offers people the means to take part with the resources of a firm, these mechanisms also share in, and contribute to, the success of the wider social movement.
Cheng explains that different funders should rightly have different roles. A social business partnership between a business enterprise and an NGO doesn’t have to compromise or tradeoff its economic goals for the benefit of social good. Using philanthropic funds to cover start-up costs for the shared venture and utilizing the distribution prowess of the corporate entity is one way to make win-win social impact possible.
Social progress is difficult to achieve by a single player, however a shared operating model based on sound principles can be adopted and replicated to spread the changes more widely. The goal for the business may be self-interest, where self-preservation will be a result of its underlying value creation principles and relationships.