Porter Prize India | Prof. Michael E. Porter Presentation
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Prof. Michael E. Porter delivered a talk at Porter Prize 2013 held at The Leela on October 11. 2013
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Porter Prize India | Prof. Michael E. Porter Presentation
- 1. The ideas drawn from ―Creating Shared Value‖ (Harvard Business Review, Jan 2011) and ―Competing by Saving Lives‖ (FSG, 2012). No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Michael E. Porter. For further materials, see the website of the Institute for Strategy and Competitiveness, www.isc.hbs.edu, and FSG website, www.fsg.org. Professor Michael E. Porter Harvard Business School Porter Prize India Boston, MA / Gurgaon, India October 11, 2013 The New Competitive Advantage: Creating Shared Value
- 2. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter2 • Only business can create economic prosperity • Societies are facing significant social and environmental challenges • Business is facing growing scrutiny as the cause or a contributor to many of these challenges • Corporate social responsibility efforts are greater than ever, but the legitimacy of business has fallen • Government and NGO’s alone lack sufficient resources and capabilities to fully meet the challenges alone We need a new approach The Role of Business in Society
- 3. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter3 Philanthropy The Role of Business in Society Evolving Approaches • Donations to worthy social causes • Volunteering
- 4. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter4 Corporate Social Responsibility (CSR) Philanthropy • Donations to worthy social causes • Volunteering The Role of Business in Society Evolving Approaches • Compliance with community standards • Good corporate citizenship • ―Sustainability‖ • Mitigate risk and harm
- 5. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter5 Corporate Social Responsibility (CSR) Creating Shared Value (CSV) Philanthropy • Donations to worthy social causes • Volunteering • Compliance with community standards • Good corporate citizenship • ―Sustainability‖ • Mitigate risk and harm • Address societal needs and challenges with a business model The Role of Business in Society Evolving Approaches
- 6. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter6 CSR CSV Fair Trade • Paying a higher price to farmers for the same products • Certification as a fair trade company Transforming Procurement • Collaborate with farmers to improve quality and yield • Supporting investments in technology and inputs • Higher prices for better quality • Higher yield increases quantity produced CSR versus Shared Value Fair Trade
- 7. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter7 • Social deficits and environmental impact create economic costs for companies • Community weaknesses affect company productivity • Social needs represent the largest market opportunities Company Productivity Workforce Skills Worker Safety Environmental Improvement Education Water Use Energy Efficiency Health Affordable Housing Community Economic Development Social Needs and Economic Value Creation
- 8. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter8 Levels of Shared Value I. Reconceiving needs, products, and customers – Meeting societal needs through products – Serving unserved or underserved customers II. Redefining productivity in the value chain – Utilizing resources, energy, suppliers, logistics, and employees differently III. Improving the local business environment – Improving workforce skills, the supplier base, the regulatory environment, and supporting institutions in the communities and regions in which a company operates – Strengthening the cluster in which the company operates while improving company productivity • Strengthens the link between company success and community success
- 9. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter9 Creating Shared Value in Products and Markets Jain Irrigation Systems • Drip irrigation equipment for small farmers in India and Africa • Serves more than 4 million farmers worldwide as of 2012 • Reduces water use by over 40% • Enables higher crop yields that improve food security while raising farmers’ income • Jain is now a $820 million company that is rapidly growing
- 10. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter10 Creating Shared Value in Products and Markets Novo Nordisk in China • Product design that reflects Chinese patient demographics and culture • Diabetes training programs for physicians in partnership with government, NGOs, and opinion leaders to promote the latest thinking on diabetes prevention, screening and treatment – The program has trained 55,000 physicians to date • New types of diabetes education programs for patients focusing on prevention, lifestyle changes, and effective use of insulin products • Novo’s market share in China increased from 0% to 63%, and China has become the company’s third largest market with revenues of $935 million in 2011
- 11. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter11 Shared Value in the Value Chain Marketing & Sales (e.g., Sales Force, Promotion, Advertising, Proposal Writing, Website) Inbound Logistics (e.g., Incoming Material Storage, Data Collection, Service, Customer Access) Operations (e.g., Assembly, Component Fabrication, Branch Operations) Outbound Logistics (e.g., Order Processing, Warehousing, Report Preparation) After-Sales Service (e.g., Installation, Customer Support, Complaint Resolution, Repair) M a r g i n Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Procurement (e.g., Components, Machinery, Advertising, Services) Technology Development (e.g., Product Design, Testing, Process Design, Material Research, Market Research) Human Resource Management (e.g., Recruiting, Training, Compensation System) • Procurement that enhances supplier capabilities and efficiency • Improving energy, water and resource efficiency across the value chain • Minimizing logistical intensity • Improving employee health and safety • Enhancing the productivity and wages of lower income employees • Recruiting that represents the diversity of customers and the communities where a company operates • Others
- 12. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter12 Shared Value in the Value Chain Fibria, Brazil • Fibria, the world’s leading manufacturer of chemical pulp, utilizes planted eucalyptus trees rather than harvesting native and old growth forests, and cultivation methods that incorporate partial native habitat on Fibria land • The company also encourages small-scale producers near its mills to plant eucalyptus in conjunction with other crops, assisting them with technical training and inputs • Fibria achieves far greater land and water efficiency versus old growth forest production and traditional plantation methods • Small scale producers currently contribute 27% of the raw materials utilized in Fibria mills, improving efficiency • 4000 households have significantly increased their income
- 13. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter13 Redefining Productivity in the Value Chain Intercontinental Hotels Group • Energy represents the second highest cost in a hotel, with water use and waste also significant • IHG introduced the GreenEngage program in 2009 to address its environmental footprint as an efficiency improvement opportunity – The program led to a wide array of options for improvement, and tools for franchisees to assess the ROI in each area • More than 1,900 IHG hotels are using the Green Engage tools to enhance environmental and economic performance. IHG is tracking results • IHG hotels have achieved energy savings of up to 25% to date • Differentiates IHG hotels with consumers and corporate clients
- 14. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter14 Improving the Local Business Environment Cisco Networking Academy • Cisco established the Networking Academy to train network operators • The company has trained 4 million young people from all backgrounds in 165 countries in ICT skills • 70% of graduates have attained a new job, or a better job at their existing employer • The program strengthens Cisco’s relationships with suppliers, customers and government • The Networking Academy has alleviated a key workforce constraint for not only the company but for Cisco customers, increasing industry growth
- 15. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter15 Improving the Business Environment: Upgrading Channels Arca Continental • Arca Continental is the second largest bottling company in Latin America, and one of the largest Coca-Cola bottlers in the world • Arca Continental established a program to train and invest in the micro- entrepreneur retailers who sell more than 60% of the Company’s products, including management, sales and marketing and merchandising • Invests in low energy use coolers and fixture improvements • Participating retailers register sales increases of 25% or more, with improved customer satisfaction, leading to similar increases in the sales of Arca’s products • Arca Continental recovers its investment in 6 months or less • Beginning in Mexico, the program is being extended to Argentina and Ecuador
- 16. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter16 Skill and Supplier Development Rio Tinto, Canada Rio Tinto’s Diavik Diamond mine has helped create a variety of community based training partnerships with communities, contractors, governments and educational institutions in remote Northern Canada • Education: Promotes careers in diamond mining. Offers apprenticeships that employ and train students • Worker training: Partners with communities, colleges and government to train workers in mining related activities • Supplier development: Sources local inputs and capacity building for local providers of goods and services • Rio Tinto hires 62% of its employees locally • The company sources 71% of goods and services locally
- 17. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter17 Integrating Strategy Across Levels Novartis in Rural India Enabling Local Cluster Development Reconceiving Products and Markets Redefining Productivity in Value Chain • Community health education programs to address lack of health- seeking behavior • Frequent health camps for physicians in rural areas • Microfinance partners to improve healthcare delivery infrastructure and access to working capital • Localized sales teams that know the culture and speak the dialect, understand needs and reduce mistrust • A dense network of local distributors to reduce stock-outs • Portfolio of the appropriate and affordable medicines drawn from the company’s patented, generics, and over-the-counter (OTC) businesses • Packaging of OTC medicines to reflect consumers’ limited spending power
- 18. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter18 Corporate Social Responsibility (CSR) Creating Shared Value (CSV) Philanthropy • Platform investments to enable shared value approaches: - Educate - Research - Invest in enabling assets and infrastructure - Incubate • Engaging stakeholders to collaborate on societal problems • Address societal needs and challenges with a business model Connecting the Dots
- 19. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter19 Creating Shared Value: Deciding Where to Concentrate Nestlé Water Rural Development Nutrition • Opportunities to create shared value are inevitably tied closely to a company’s particular businesses
- 20. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter20 Putting Shared Value Into Practice Dow Chemical • Dow has a legacy of innovation to solve problems (―solutionism‖) • It recognized that global social issues represent huge market opportunities • Created the “Breakthroughs to World Challenges” Program – Each business unit is challenged to apply ―solutionism‖ to a range of global problems inspired by the MDGs Example • Dow developed Omega-9 canola and sunflower seeds that produce cooking oil with no trans fats and low saturated fats • The technology yields twice the oil per hectare for farmers than soybeans • The oils have longer shelf life and usage life for food processors • One of Dow’s biggest selling product lines with total revenues of approximately $700 million
- 21. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter21 Adding a Social Dimension to Strategy • Shared value opens up new needs, new markets, new value chain configurations, and new ways of thinking about the business • This creates new opportunities for strategic positioning and new competitive advantages • Companies should incorporate a social dimension in their value proposition • Adding social dimensions makes strategy more sustainable vs. competitors than conventional cost and quality advantages
- 22. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter22 • Natural, fresh, organic, and freshly prepared foods and health items with excellent service at premium prices • Cater to specialized nutritional requirements (gluten allergies, vegan, etc.) • Serve educated customers who are passionate about food and a healthy lifestyle • Well-lit, inviting supermarket store formats with appealing displays and extensive prepared foods sections • Produce section as ―theater‖ • Café-style seating areas with wireless internet for meals and meetings • Each store carries local produce and has the authority to contract with the local farmers. Company provides low-interest loans if needed • Nutrition information and education provided to shoppers along with products • High touch in-store customer service via knowledgeable, flexible, and highly motivated personnel • Flat compensation structure • Own seafood procurement and processing facilities to control quality, sustainability and price from the boat to the counter • Heavy emphasis on environmental sustainability in all activities • Emphasis on supporting community development Value Proposition Distinctive Activities • Whole Foods is the most economically successful food retailer in North America • Successful strategies in the future will embody a significant shared value dimension Shared Value and Company Strategy Whole Foods Markets
- 23. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter23 Purpose Based Strategic Positioning Traditional Positioning New Positioning • Food and Beverage Company • Nutrition CompanyNestlé • Footwear and Apparel Company • Health and Fitness CompanyNike • Scientific and Laboratory Instruments Company • Making the World Healthier, Cleaner, and Safer Thermo Fisher • A clear social purpose opens up new opportunities for growth and profitability, while motivating and attracting consumers, business partners, employees, shareholders, and the public
- 24. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter24 Redefining Corporate Purpose Danone • In the late 1990’s, Danone realized that it had drifted away from its origins as a manufacturer of healthy foods • Sold off its beer, meat and cheese units • Refocused the company on dairy and water • Acquired medical nutrition and baby foods businesses • Created Innovation Committees in business units to provide ―healthy food for as many people as possible‖ Bringing health through food to as many people as possible by refocusing on four complementary business lines and expanding into fast-growing new regions Vision Mission The ‘dual economic and social’ project, creating economic value by creating social value
- 25. 20131011—Porter Prize India CSV Presentation—FINAL Copyright 2013 © Professor Michael E. Porter25 The Purpose of Business • Our purpose in business is to create shared value for society, not economic value for its own sake • Businesses acting as businesses, not as charitable givers, are arguably the most powerful force for addressing many of the pressing issues facing our society • Shared value will give rise to far broader opportunities for economic value creation • Shared value thinking will drive the next wave of innovation, productivity, and economic growth • A transformation of business practice around shared value will give purpose to the corporation and represents our best chance to legitimize business again
Notes de l'éditeur
- Companies should approach social issues through a portfolio approach. Many companies engage in philanthropy. It’s an important part of a company’s obligation to its communities.However, all too often, companies limit their engagement in their communities to traditional philanthropy
- Most companies do CSR to mitigate risk; activities are often disconnected from the core business.Discuss the importance of a portfolioPhilanthropy and CSR serve as platform investments for CSV, helping incubate CSV solutionsCompanies are trying to engage their communitiesThe question is how?How to do it well?Aligned with businessFocus (lots of causes are worthy)Value not just amount of givingBut what is the impact???
- What is shared value? Shared value is: policies and practices that enhance competitiveness while advancing economic and social conditionsShared value is differentShared value is about solving societal problems through core business activities, while creating economic value for your company.It is exciting to see that companies are making this shift from more traditional philanthropic activities to shared value as part of a portfolio.We see even the most advanced companies who are pursuing shared value, still have a portfolio. They understand the importance of allocating resources and making investments in each of these areas, and they coordinate them, so that they are mutually reinforcing and supporting the same overall goals.
- ** Social includes environmental and social issues togetherTradeoffs not thereNot “externality”Expand boundariesHigher form of capitalism and what matters_____________________________________________________________________________________________________________________As we learn more about social issues – we see the big points of congruenceList of social issues here, not exhaustiveWorkplace SafetyOld way to look at this was to think about the optimum number of accidents; how to have a good balance with the cost of safety programsNew way to look at this involves CEOs who now understand that investing in eliminating accidents has one of the highest ROI they can makeImproves process, making them more rationalZero accidents = higher profitsThis is not a tradeoff – but a win-win situationEnvironmentOld way: if you meet strict environment standards you become less competitive. Companies should fight all environmental standardsNew way: sign of wasted / underutilized resources. Can make profit in the short term, but results in catastrophe over the long-runSaving energy makes companies more competitive; reduce pollution / discharge / waste means that resources are being used more effectivelyConception of productivity drivers is deepening. It used to be about “beating up your suppliers. Now we know that you won’t be productive if your suppliers aren’t productive. Make suppliers better/more productive, and they can provide you with better inputsEmployee HealthOld: was cost, should minimize health benefits – beat down premiumsNew: cost of poor health is 3 times the cost of health benefitsEroded benefits for health is counterproductive for a firm’s productivityNow firms are expanding the idea of employee health: Wellness programs; exercise programs; on site clinics, etc.Lending: if cannot pay back, punitive fees, etc to make money vs. allowing customer to restructureDanger of self-contained idea of the companyEverything outside of the firm used to be considered a costNow we must think about how to increase productivity including by engaging outside agentsOld approaches costly in the long termMigrating jobs to lower wage countries ->Retraining, additional capital investmentsDe-skilling through automation->Lack of innovation, more training needed for value added activitiesLax environmental standards->Costs of cleanup, high costs of polluting inputs (e.g., oil)New emphasis on a living wage, retention and training, eliminating pollution, improving quality, and reducing rework
- These 3 levels are important to understand because they take the theory of shared value to a more practical level. These levels are important because they help to explain how SV is different from sustainability, philanthropy, CSR or other language that is out there to describe corporate social engagement. STEP 1: AVOID DESTROYING SOCIAL VALUE TO GET ECONOMIC VALUE
- Updated 8/6/2013Company/ ProductJain Irrigation Systems Limited (JISL) works with individual farmers to develop a micro-irrigation system (MIS) that is tailored to their crops, soil and local weather patterns to maximize the production potential of their land. It also has segments in PVC pipe and plastic sheet production, as well as food processingJain not only sells MIS, but provides after sales agronomic and technical supports for getting better crop returnsImpactUse of MIS has recorded increases in yield up to 230%Saves water up to 70% compare to flood irrigationFertilizer use efficiency increases by 30%Jain serves more than 4 million farmers worldwide as of 2012Over the past 15 years, JISL has trained over 100,000 people (farmers and other stakeholders) at the Jain R&D development centers In March 2012, JISL and Enterprise Solutions to Poverty (USA) held a symposium, “Building Shared Value in Agribusiness,” keynoted by Dean NitinNohria, Dr. Ray Goldberg, and Dr. KasturiRangan from HBSIndustry/ PerformanceIn 2012, JISL was the largest MIS company in India with over 55% market share, and second largest worldwide with 15% total global market shareJISL share of the sprinkler irrigation (SIS) industry in India is about 35% (different from micro drip irrigation)JISL revenue in 2012 was $822 million. MIS and SIS contribute 51% ($419 m) of turnover and has been growing at a CAGR of 39%Estimates of the Micro and Sprinkler Irrigation industry in India are around half a billion USD. Currently only 5 million Ha (7% of the possible farm land in India) uses micro or sprinkler irrigation, but growth is very strong - partially driven by a government task force. 17 million Ha are expected to be added by the end of 2012The prospect for global growth of MIS is very strong. Experts estimate that by 2025, most developed countries will confront issues resulting from a scarce water supply
- Patient education programs include:Television, radio, and print media campaigns about diabetes prevention, detection, and treatmentChangingDiabetes Bus program to raise patient awareness and provide on-site adviceNovoCare telephone hotline and NovoCare Club providing ongoing support to members
- In any business company performs many different activities (every company is a value chain)All differentiation comes from something you do in the Value Chain that customer is willing to pay for, or which lowers costPrice + cost advantage emanates from value chainAll competitive advantage comes from the value chainHigher price? (b/c you give some higher benefit to clients)Lower cost? (b/c of specific activities that the company does especially/uniquely Strategy is choices about how to conduct activities in the value chainHow to generate superior position?How can configure each activity?How relate to other activities?Set of choicesFor each business how configure each activity, then relate activities.Key systemic tool is the value chain identifies where competitive advantages/disadvantages come fromValue chain lays out systematically the activities performed by the businesswell)Must tie competitive advantage to value chain“Business Model” value chain is more rigorousPerformance emanates from value chain
- IHG EXAMPLECompany Overview – Largest hotel company in the world with over 4500+ hotels globally in over 100 countries – Crowne Plaza, Holiday Inn, InterContinental Hotels; >80% operate under franchise agreementsBusiness Issues – Environmental and energy assessment leads company to realize that energy represents the second highest cost in a hotelSocial Issues – Environmental issues of water, waste and energy usage; greater societal / customer understanding of the importance of these issuesShared Value Program ElementsTested dozens of energy reduction options within a hotel operating environment from cooling/warming systems to solar panels to automatic computer shutdown applicationsProvided a detailed ranking of all possible energy investments linked to environmental issues in terms of returns to IHG’s hotels as well as those of its franchisesAreas with high environmental impact and return became distinguishable from other areas popular with the public, such as solar energy, which yielded fewer emissions reductions or economic valueFranchise owners then make the investment decisions based on transparent investment and ROI dataInvestments are tracked by franchisees and fed back to IHG improving the initial model with realized returnsLinkages to CompetitivenessImprovements in cost position versus competitors – some hotels have reduced energy expenditures by 25%Improve engagement with / commitment from customers – individual and corporate
- Shared value is different. Shared value is about solving societal problems through core business activities, while creating economic value for your company.It is exciting to see that companies are making this shift from more traditional philanthropic activities to shared value as part of a portfolio.We see even the most advanced companies who are pursuing shared value, still have a portfolio. They understand the importance of allocating resources and making investments in each of these areas, and they coordinate them, so that they are mutually reinforcing and supporting the same overall goalsOvercome/mitigate market failuresDiscuss the importance of a portfolioPhilanthropy and CSR serve as platform investments for CSV, helping incubate CSV solutionsCompanies are trying to engage their communitiesThe question is how?
- As we spend time with lots of companies, there are often topics that come up about “how” to create shared value:“Where to concentrate” in terms of social issuesHow to find resources to “incubate shared value”New roles and relationships for government and NGOsHow to measure shared valueWhere to Concentrate: When we work with companies, we often talk about shared value initiatives and what is needed to accelerate shared value at the enterprise level. Nestle took an important step when it articulated the areas of focus where they would concentrate – they picked three areas that are of paramount importance to business and society: Water, Nutrition, and Rural Development
- Updated 8/6/13ProductOmega-9 Oils is a category of oils that are high in monounsaturated fatty acids, which help reduce heart disease and risk of type 2 diabetes. Omega-9 Oils are free of trans fat and containing the lowest saturated fat content of any vegetable oil, about half that of olive oilOmega-9 Oils are distributed through leading oil supply partners and their respective brands. Dow AgroSciences works with 80 percent of the North American canola processing capacity, and capacity continues to grow. Currently, six major oil suppliers offer these oils under their own brand namesCanola is an optimal oilseed crop, yielding around 42 percent oil versus only 18 percent for soybeans. An acre of canola produces approximately 1,500 to 1,800 lbs of seed, which yields about 650 to 750 lbs of oilImpactSince 2005 Omega-9 Oils have eliminated nearly a Billion pounds of trans fat and 250 million pounds of saturated fat from North American foodsIndustry/ PerformanceGlobal sales for all vegetable oils: $81B in 2012Over the last five years, canola has become the second largest oil used by food manufacturers and foodservice companies and is one of the leading oils purchased by consumers in grocery stores. North America processing capacity has doubled since 2007, adding more than 3 million metric tons to meet the growing demandMany food and restaurant companies have made the switch to Omega-9 oils, including Taco Bell, Denny’s, White Spot and KFC
- Companies that fail to align their strategic positioning with shared value principles will be left at a competitive disadvantageAdditional Examples: Thermo Fisher Scientific’s mission is “to enable our customers to make the world healthier, cleaner and safer.”Zip Car moved from a traditional positioning of car rental service to a CSV positioning of “rethinking urban mobility”
- Note MM: Corporate changes started in 2000, year when Danone started selling its beer, meat and cheese business