Pennies from Heaven: An Economist and a Marketing Strategist Discuss Porter on Shared Value

by JenniferCobb on 02/06/2011

Michael Porter and Mark Kramer’s article, Creating Shared Value, is intended to throw down a gauntlet for a more a socially-conscious form of capitalism.  “Capitalism is under siege” they proclaim, harmed by decades of practices and policies focused on short-term profits.  Guided by laissez-faire economic ideology, businesses have elected to ignore externalities that harm society, such as pollution, leaving government and civil society to clean up the messes they make.  This has been a long-standing arrangement underscored by the widespread belief that there is a fundamental trade-off between doing well and doing good.  The kernel of Porter and Kramer’s argument is that there is in fact no such trade-off.  Companies that seek to do good will in fact be more sustainable and do better financially over time than others.    “Profits involving a social purpose represent a higher form of capitalism – one that will enable society to advance more rapidly while allowing companies to grow even more.”

I personally find this argument deeply attractive.  Who wouldn’t?  Business is the single most effective force of change on the planet and if we can begin to use its firepower to build a better world, we will all be better off.  If, in fact, this is true, why hasn’t business done this before?  Is the trade-off that we have all bought into something we can realistically move beyond?

To help me answer this question, I turned to my very able economist husband.   He explained that anytime there is an additional constraint to a company that is a cost.  This is a fact.  Therefore, to the extent that creating social value adds to the constraints of doing business, it will add costs to the creation of economic value.  Porter and Kramer would reply, of course, but there are many ways to create social value that do not add additional cost to business.

At this point, my husband shook his head and laid out the following argument.

Let us assume that product A generates $1 of social value and can be sold on the market for $1.  This product costs 80¢ to produce.  Let us now assume that product B costs also cost 80¢ to produce and it generates $1.01 of social value but it will only sell for 99¢.  Product B is clearly the better choice from a social value creation point of view, but it only generates 19¢ of profit instead of 20¢.  Who is going to pay the extra penny that will induce the company to produce product B rather than product A?

No company is going to make the shareholders pay the penny.  The company is going to have to find the penny by decreasing employee benefits or salaries or, as Porter and Kramer argue, through increased innovation and productivity.  They write, “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.”

My husband’s response to that was, “If they can find the penny now, why couldn’t they have found it before? Are there pennies lying around that companies haven’t found?  Or is he arguing that it is inherently cheaper to produce something with social value?”

I believe Porter and Kramer’s response to that would be multifaceted.  If may be that poor business practices, driven by years of seeing social issues as externalities, are costing businesses through restrictive government policies and additional costs.  It may be costing them in other ways, such as inefficiencies in their supply chain.  So they may be spending pennies now that they won’t have to once they incorporate shared value perspectives.  But their biggest argument is that the shared value perspective will generate new products and open new markets where they will find pennies that were not available to them before.  The challenge with this argument is that nothing comes for free.  Creating new products and opening new markets costs lots of pennies and there may be tremendous sunk costs that will not return value for a long time.  Innovation is risky and while the pay-off can be big, it requires a kind of long-term thinking that many public companies are not very good at.

Hopefully, Porter and Kramer are right and there will be a lot of creative and interesting ways to find the penny.  A hard problem tucked inside their thinking that is related to the penny problem is how firms can more fully appropriate the positive externalities of their products as economic value.  In other words, how can positive social value creation help find the penny?  Generating products with maximum social good, even though there are costs to develop and bring them to market, can in fact have a positive impact on brand and help grow market share.  The example of Walmart making a commitment to organic food sourced from local suppliers is a good one.  The local organic strawberries may cost a bit more, even at Walmart, but the consumer may be willing to pay the extra penny because of a shift in the valuation of the product.  Or, even better, Walmart may decide that pricing the local organic strawberries competitively will bring new customers into their stores who may not have shopped at Walmart before.  Those new customers, coupled with an increased loyalty and frequency among their existing customers, will increase revenues.  The company will now have more pennies because more people will come to Walmart more often.

There are a number of complex questions that Kramer and Porter don’t address.  For example, how will increasingly mobile workforces in innovation-driven economies make it harder for companies to make pennies sustainably?   How can companies combat the short-termism endemic in shareholder expectations in order to invest more in R&D?  In the midst of all these questions, and many more, every business is going to have to deal with finding  the penny.

As long as the penny has to be found, there will be a large part of Porter and Kramer’s argument that turns on moral suasion.  As a marketing strategist, trained in ethics, I am more than comfortable with the belief that business should carry moral responsibility.  But, as my husband points out, by shifting from a corporate social responsibility model (CSR) to a Corporate Share Value (CSV) model, they have introduced the problem of the penny.  This could well be a good thing.  If it takes, CSV becomes a real factor in business decisions, because real money is at stake.  Social value creation moves from the periphery to the center.  And in doing so, it forces a broader conversation between finance, strategy, marketing, R&D and investor relations.  We need to use all the tools and talents we have to improve our world and if the concept of CSV offers some new thinking on pathways forward, we would do well to listen.  And maybe, if we are lucky, Porter and Kramer are right and pennies will fall from heaven.

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