Spring 2011

A Higher Capitalism

– The Wilson Quarterly

Businesses have pursued narrow, short-term strategies that maximize quick profits and don't address societies greatest needs for too long.

For too long, businesses have pursued narrow, short-term strategies that maximize quick profits and don’t address society’s greatest needs. They are squandering an incredible opportunity, argue Harvard Business School professor and management strategy guru Michael E. Porter and Mark R. Kramer, cofounders of the social impact consulting firm FSG. Business leaders believe that all profits are equal, but Porter and Kramer argue that “profits involving a social purpose represent a higher form of capitalism.” By investing in communities, a clean environment, and a healthy and well-paid work force, companies will reap big profits over the long haul, they say.

When it comes to addressing problems such as housing and health care affordability, and assistance for the elderly, companies have relegated helpful initiatives to peripheral social-responsibility units.

By exploring business solutions to such problems, managers can create what Porter and Kramer call “shared value,” meaning, simply, everybody wins—society will benefit from the innovation business can bring to bear, and businesses will be more productive and more efficient, and over time will create greater markets for their goods. “The purpose of the corporation must be redefined as creating shared value, not just profit per se,” the authors write.

They contrast their plan with well-intentioned strategies such as fair trade, which attempts to see that farmers in the developing world are paid more than the prevailing rate for their crops. In a shared-value approach, companies would train farmers in more productive techniques and supply them with better tools, seeds, and fertilizer, improving productivity and output. Preliminary evidence indicates that such a strategy can boost farm incomes more than fair trade does.

When a company’s link to one specific community is tight, as with the computer industry in Silicon Valley or the diamond-cutting trade in Surat, India, the benefits of a “shared-value” approach will be bigger and more obvious. For example, Nespresso, a Nestlé brand, located the procurement facilities for its coffee beans near the farms where the beans grow. This allowed it to assess the quality of the product on the spot and pay growers a premium for superior beans.

Social entrepreneurs and companies in the developing world have led the way in making societal improvement central to their business plans. The challenge now is to do so across the business community, in every decision companies make.

Capitalism has long been “an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth,” Porter and Kramer say. New opportunities await.

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The Source: “Creating Shared Value” by Michael E. Porter and Mark R. Kramer, in Harvard Business Review, January-February 2011. 

Photo courtesy of Flickr/Caroline Gagné