Can businesses really do good for society AND maintain profit?! This is the emerging question that is on the minds of leaders globally.
Today we explore the evolution of the role of business and why the next wave of growth matters for both business and society.
- The mindset of business leaders is starting to move away from thinking about profit only.
- An organisation’s purpose can be unlocked using shared value principles by creating competitive business strategies that leverage core expertise to drive social/environmental impact and business returns.
- The future of business and society rests on leaders moving to the profit and purpose mindset.
1. The profit only mindset
The view for decades has stemmed from Adam Smith and more recently Milton Friedman’s theory that a ‘company should have no ‘social responsibility’ to the public or society because its only concern is to increase profits for itself and for its shareholders and that the shareholders in their private capacity are the ones with the social responsibility.’
The focus was delivering shareholder returns only in the short term and consequently the long term implications of business decisions were not realised.
The prevailing belief seemed to be that positive social outcomes would flow from jobs creation and delivering shareholder returns.
However, many of the challenges we see today from climate change, environmental destruction, social inequality and financial exclusion largely stem from the role of short term thinking and not understanding the value and impact beyond profit.
Outcome: Very little social change being led by business. Profit maximisation was the focus to drive shareholder returns.
2. The profit and philanthropy mindset
The introduction of Corporate Social Responsibility (CSR) and Philanthropy/Foundations was the first step away from Friedman’s theory. CSR would often be costs that would detract from profit but improve society and/or the environment. These activities could range from:
- Delegating a percentage of profits to a charitable cause
- Creating initiatives or programs that address specific issues
- Allowing employees to have volunteer days or matching workplace giving.
This largely stemmed from the reality that business should play a role to minimise their negative impact on society and contribute back in a meaningful way. The challenge with CSR is that the ‘profit’ mindset is still deeply entrenched in business and in times of economic downturn, often the first things to go are internal cost centres, including CSR functions.
Outcome: Businesses started to become aware of the role they played in society and what could be done to increase benefits beyond profit. Social change remained a cost to the business at the expense of profit, thus limiting scale.
3. The profit and purpose mindset
Purpose in practice is hard. It is often just a series of fluffy words that don’t affect any change.
If only there could be a way of unlocking purpose and contributing to society through core profit-driven strategy?!
Welcome to shared value!
Shared value is a management theory originally launched by Michael Porter and Mark Kramer in 2011 who contended that the next wave of capitalist growth and innovation will come when social issues are connected to core business strategy.
Realising value has long been purely a financial equation of profit equalling revenue minus costs. The value created is the profit. However, this is such a narrow view of value. It is clearly incredibly important, although if it is at the expense of communities and the environment, then the profit has limited long term use. By increasing the scope of value to include social and environmental, new ways of unlocking value that contribute to both social and economic outcomes can be achieved.
For example, when Walmart understood the environmental impact their transportation and packaging had, they were able to address their supply chain issues to minimise the impact and streamline their operations. In the process, they saved over $200 million dollars and actually increased the amount they could ship. Their ability to explore new value metrics actually led them to increased profit.
Shared value is a tangible and business led approach to unlocking a company’s purpose.
This can be done in 3 key ways:
- By reconceiving products and services: Developing new products and services that meet unmet needs of underserved markets (Example: New financial products with tools and low cost credit for consumers who cannot access mainstream credit)
- By redefining productivity in the value chain: Understand impacts of a company’s value chain and creating new strategies or operations to drive new growth. These could include examining procurement, energy and resource use, employee productivity and distribution (Example: Walmart packaging above).
- By enabling local cluster development: Placed based approach to working with a range of partners in a specific geographic location to drive business and societal outcomes. (Example: A travel company investing in local community infrastructure, environment and education in the Pacific Islands which becomes a stop on a travel route.
Outcome: Shared value offers a new way for business to maximise both their social impact and commercial returns. It is not the only way to deliver social change and is often most powerful alongside CSR and philanthropy.
There will be more shared value examples and posts in the future. If you want to read more, here is a link to the Shared Value Project Australia’s Harvard Business Review article by Michael Porter and Mark Kramer introducing shared value.