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Michael Porter’s Shared Value Theory Explained

michael-porter

Keeping in line with last week’s post on Malcolm Gladwell, we’re going to touch on the ideas of another business icon today, Michael Porter. Porter was the creator of landmark concepts, including the Five Forces Analysis, that are taught in business courses around the world, and he currently serves as a professor at the Harvard Business School. Porter obviously isn’t using his position at Harvard Business School as an opportunity to kick back, because a recent article on Harvard Business Review (co-written with Mark Kramer) has the potential to be another landmark point in his career. Today, we’ll look at his theory of shared value.

I’d encourage you to watch this 15 minute video where Porter explains his ideas very thoroughly.

What Is Wrong With Capitalism Today?

A few weeks ago, I wrote about how customer is a dirty word, and I think that Porter expresses the point I was trying to reach even better than I was able to myself. Porter argues that companies current approach to value is an outdated one in that they are increasingly creating profit at the expense of the surrounding community. As a result, government has come to view businesses as problems, leading them to regulate, tax, and becoming pressured into creating policies that aren’t business friendly. In the past, what was good for businesses (profits) was also good for the consumer. After all, that’s what capitalism is all about (Go America!?). But if you look today at the shady things that went down leading up to the mortgage crisis, how there seem to be fewer jobs than ever, and even at what Taco Bell uses to make their beef, you’ll see that larger profits do not always benefit the community.

Enter: Shared Value

What we need to do is change our mindset. There is no longer a fixed pie of value that forces us to try to maximize the amount of that pie that we can take home (meaning our competitors and our customers receive less value). Now, the pie is no longer a fixed size and we’re not playing in a zero-sum game. It is actually our job to try to make the pie bigger by increasing the amount of value that we offer to the consumer, meaning that both we and the consumer take home more pie. The consumer will realize this and even help us increase our slice of the pie. Analogies aside, we make an effort to create both economic and social value.

What this boils down to is beginning to think with the mindset that creating social benefits for the community is a powerful way to create this economic value for our business. We create products that are actually good for the consumer and fulfill their human needs, which in turn increases our profit. Our old model of trying to create a competitive advantage by cutting costs and improving features is no longer sustainable. A sustainable competitive advantage comes from creating shared value with more and more communities, meeting their underlying needs. If you can accomplish this, the consumer will even be less price sensitive.

Shared value is the ultimate differentiator.

If you’re pressed for time or happy with what you’ve learned so far, feel free to stop right here, but I feel like below is a pretty good mock case study that helps explain the concept and even prove its possible effectiveness.

An Example

Let’s imagine we work for Lowe’s Home Improvement. Lowe’s origins come in the form of a local hardware store deep in the great state of North Carolina. It has grown a tiny bit since then, but at its core, I believe it still likes to think of itself as a local resource to contractors and DIYers. Home Depot on the other hand, started as a huge warehouse retailer and has pretty much been the same ever since…except it has gotten even bigger.

Alright, the scene is set. Let’s look at how a scene played out under the old capitalism mindset.

lowes

A few years ago, right down the road from my house a Lowe’s Home Improvement and a Home Depot were built directly across the street from one another. In the first place, the local community wasn’t too thrilled about these retailers coming into our neighborhood because the buildings they were in (mainly the Lowe’s store) were practically in the backyard of families living in the nearby neighborhood. Lowe’s could care less. They were more concerned about being in Home Depot’s backyard and earning more money than them. How did the two compete? The same way they’ve always competed, by trying to say that they offer better and more products and even lower prices.

Now, I have no insider information on how these two locations did, but they’ve done well enough to both stay where they are. What that tells me is they both did about the same and neither ever gained much of a competitive advantage over the other.

Now, let’s look at the same scene, except with the Shared Value, new capitalism mindset (from the perspective of Lowe’s).

We want to open up a store right smack in the same area as Home Depot, build a competitive advantage (differentiate ourselves), and effectively take so many sales away from Home Depot that they shut down the store (is that cutthroat enough for ya?)

What do we know? Well first, our two biggest groups of customers are contractors and DIYers. Secondly, we have the benefit of being able to try to tie in our roots of being a local hardware store. Let’s do it…

What it comes down to is not approaching this store opening with the perspective of “We’re opening another location (#134,000) in order to increase our sales and make profit from an untapped market,” rather “We’re opening a location in this neighborhood because we believe that we can serve an unmet need in that community by helping them complete their home improvement projects more efficiently.” Dare I say if this were an election, you’d win with that position statement. So, how do you execute?

Let’s begin with contractors. As the new location is being built, have someone, whether it be the store owner or someone who may be in charge of contractor business, meet with local contractors (preferably in person) to explain your goal in opening this new store and how they’ll benefit from it. Tell them about the discounts that are available to them as contractors and any other services that may be available to them and leave them a card where they can contact you (realistically, 90% never will call you, but it leaves one heck of an impression). Every now and then, once the store does open, check in with them to see if there are any products you don’t carry that they needed, any suggestions they may have for how you can add more value to them, and just to see how business is going.

Now, the DIYers. These folks are pissed off you’re moving into their backyard, so you’re really going to have to demonstrate how you can share value with them (and not by offering low prices). Again, while the store is being built, send out a mailing that outlines the services that Lowe’s has to offer. I don’t know what services they currently offer, but they could hold seasonal DIY classes like “How to go green this Christmas,” “Prepping your home for winter,” “Keeping heat out in the summer,” etc. Heck, you could even work with some passionate DIYers in the community to start ongoing classes around building projects. Here, you don’t even do the work, you’re just the enabler. There are countless other things you can do to help ignite the passion of the local DIYers.

Something else you can do to prove your commitment to helping the community is use the inherent strengths of Lowe’s to help the community. Maybe a local park is really in need of a new playground, or maybe the school down the road needs some renovations here and there. This is a great opportunity for Lowe’s to partner up with folks in the community (and even those contractors) to take on these projects and really help out the community (and get some great PR out of it, too).

And the store opening will be crucial. The actual opening of the store will be a very important time to communicate your commitment to delivering value to the community (because you know most of those mailings will get tossed and you can’t rely on WOM beforehand). So, having all sorts of informational kiosks set up around the store about relevant services/information offered in different areas is key (and probably have a bulletin board when you walk in listing community events you’re putting on). Maybe you can have a video playing when they walk in of the work you did on the local park (or a sign up sheet to help out in renovating the school).

Something…anything to drive home the point that you’re here not to take their money in exchange for goods. You’re here to make the pie larger for the both of you by creating more value for them, the consumer, which in turn makes both of your slices of the pie bigger.

And, as for Home Depot? Notice that we haven’t had to sabotage their store or do anything shady. We differentiated ourselves based on our shared value offering, which means many of the customers don’t even care if they can buy their PVC at Home Depot for 20 cents less. That has to be frustrating for them, but man it feels good, for us, doesn’t it?

What do you think about Michael Porter’s Shared Value theory? Is it a viable strategy for gaining a competitive advantage and generating profit? Or is it all rainbows, unicorns, and fluff?

Images by Nestlé and aka Kath

{ 5 comments… add one }

  • Danny Prager January 31, 2011, 10:43 am

    Hey Jackie –

    Really enjoyed this post. Thanks for the concrete example of how focusing on shared value can create strategic advantage for businesses.

    While I love the Lowe’s example, I’m not sure that it goes far enough. Shared value, in your example at least, focuses on the collaboration between a brand and consumer to provide the utmost utility for the consumer that results in larger profits for the brand.

    Maybe this concept of shared value can be taken a step further, with a focus on collaboration not just between consumers and brand but between rival brands themselves. If the ultimate competitive advantage for brands in todays world is to benefit communities, societies, the environment, and future generations of consumers the best way to provide these benefits might be through collaboration.

    Maybe Home Depot and Lowe’s could have increased their impact, and profits, by working together to provide the greatest amount of shared value to the community.

    I love how your example is inherently consumer focused. But if brands want to gain the greatest strategic advantage, by being as consumer focused as possible, does that not require greater collaboration between brands themselves? To really redefine, or at the very least rebrand capitalism, structures need to change. Maybe A great place to start is with greater collaboration between brands that benefits consumers and brands alike?

    Phew — Sorry for the length of this post. It just came at a pretty opportune time, as I was thinking about this http://fearlessrevolution.com/blog/introducing-common.html, all weekend.

    I would love to come up with some ideas of how Lowe’s and Home Depot could have worked together in you example. Any ideas? Or is asking brands to collaborate for the benefit of society too much to ask?

  • liz February 9, 2011, 2:19 pm

    hi,
    I have to agree with the article in the sense that shared value and strategic business plans should be implemented. furthermore, i believe, the same principle should be applied to online businesses. Lets look at a few examples, the sucess of many social sites comes from being able to supply an in demand service, yes i know its totally obvious. Yet, the current sites that are going to emerge and lead big this year are Quora and Crowdbeacon. Both are Q/A sites but Quaras about anything, an answer is supplied (not time dependant) while Crowdbeacon lets you know what is happening around you in real time, all you have to do is ask and someone responds to you in minutes. both sites provide a service that has been in demand recently. go check them out to see businesses with good strategic approaches and shared value.

  • Henk Campher February 26, 2011, 2:42 pm

    I think Porter and Kramer makes the exact same mistake as Karmani did a few months ago – confuse the definition of CSR with some of its practices. What Porter and Kramer did so excellently here is describe how CSR SHOULD be practiced – not redefine CSR. It is CSR but they cloaki it in a different name. And, of course, the idea of ‘shared value” isn’t new – it’s how some of us have practiced CSR in any case and how some companies have practiced it for a few years already – Starbucks and their sourcing, Levi’s and their consumers, Best Buy and old technology. I wrote a detailed critical analysis of CSV at http://corporatesocialreality.net/2011/02/25/the-mythmakers-the-end-of-csr-again/

    Great work, but it’s still CSR and it’s not that new – just an excellent way of capturing some of the latest thinking and practices.

  • David McCuistion February 21, 2013, 12:29 pm

    Shared Value sounds a lot like maintaining the moral and ethical aspect of the theory of Capitalism. As I was reading your aritlcle, Conscious Capitalism came to mind, as well as The Rev. Robert Sirico’s book “Defending the Free Market: The Moral Case for a Free Economy”. There seems to be a strong connection between the two concepts, both of which place CSR and profits on the same plane. Shared Value, i.e. serving the needs of the consumer while meeting the needs of the organization, certainly correlates with the Servant Leadership practices of putting other first; in this case the consumer ahead of the corporation.

    Great Article. I have saved it for future reference. Thank you.

    • Jackie Adkins February 21, 2013, 1:07 pm

      Thanks for your comment David and happy to hear you enjoyed it! That’s not a book I’m familiar with so I’m going to have to check it out.

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