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Monday, February 7, 2011

Michael Porter: A Strategy Change

The strategy-man talks shared value 

You cannot have graduated from business school without knowing Michael Porter. He’s the king of business strategy, the celebrated Harvard professor, the brain behind the famous paper, “The Five Competitive Forces that Shape Strategy”. Any good strategy class will undoubtedly teach you two things: Porter’s Five Forces, and Porter's concept of Value Creation. 

I have recently come across Porter’s interview with the Harvard Business Review entitled, “Re-thinking Capitalism”. The interview is a complimentary piece to his latest paper co-authored with Mark Kramer, “The Big Idea: Creating Shared Value”. In both contexts, Porter drives the same message home: “Creating societal benefit is a powerful way to create economic development for the firm”. 

My thoughts: THIS IS A REALLY BIG DEAL!

Michael Porter, the business strategy guru, is telling the world that “Business and Society need each other”. Of course, we’ve had many environmentalists, government representatives, and even CEO’s talk about sustainable supply chains and the like, but they often preach these triple-bottom-line ideas to advance their own interests (be it to help their cause, win an election, or sell more products). While it's understandable, it may just not be so credible to the public.

Michael Porter has nothing to gain or lose from speaking about shared value and so his words are both credible and objective. And because he has such influence on business education, the Adam Smith enthusiasts and profit-pansies may actually internalize the fact that corporate sustainability isn’t some fluffy idea that should get pushed to the side in bad times. They might, for the first time, truly understand that achieving long-term economic success requires a blended value chain. 

Allow me to halt for a second and make sure we’re all on the same page here, business and non-business grads alike: A value chain is the sequence of activities a firm undertakes to create value. This is different than a supply chain, because creating value implies additional activities like marketing, sales, customer service, etc.      Capiche?

SO, the next question is: How can businesses, especially large companies, simply up-and- change their value chains? Wouldn’t that be a costly and lengthy process? 

Porter argues the opposite. He’s saying companies can, and have, cut costs and improved efficiency by serving societal and environmental needs in disadvantage communities locally and internationally. He says: 

“The concept of shared value, in contrast, recognizes that societal needs, not just conventional economic needs, define markets. It also recognizes that social harms or weaknesses frequently create internal costs for firms—such as wasted energy or raw materials, costly accidents, and the need for remedial training to compensate for inadequacies in education. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches—and as a result, increase their productivity and expand their markets.” 

Here’s the Wal-Mart example Porter highlights: 

“By reducing its packaging and cutting 100 million miles from the delivery routes of its trucks, Wal-Mart lowered carbon emissions and saved $200 million.” 

And there are loads more examples that help improve the bottom line by integrating into your model important  issues such as energy use, employee health, and environmental safety. The idea is to delve deeply into each step of your value chain and ask some of these difficult but important questions: 

“Who are all the stakeholders in this link of my value chain?” 
“How are they specifically affected by this link's activity?” 
“Could this activity be more productive? Higher quality? Less wasteful?” 
“How do I fill those gaps?” 
“What effect will these value-added changes have on the environment, my community, and the international community?” 

Your answers will lead you to some surprising conclusions.

I’ll end this post by throwing in another one of Porter’s arguments in the article, one I feel strongly about and have mentioned before: 

“Businesses acting as businesses, not as charitable donors, are the most powerful force for addressing the pressing issues we face. The moment for a new conception of capitalism is now; society’s needs are large and growing, while customers, employees, and a new generation of young people are asking business to step up.” 

I couldn’t have said it better myself. 



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