Impact of the concept of shared value (SV) on developing countries (Creating Shared Value)

2. From Corporate Social Responsibility (CSR) to
Creating Shared Value (CSV) - Definitions

This chapter will introduce fundamental definitions needed to understand the essence of this work.

In the beginning the basic definition of the term “Developing Countries” used in this thesis will be presented. This is significant for the selection of relevant projects in a later following chapter.

For a better understanding, a definition of Corporate Social Responsibility (CSR) will be given prior to the introduction of the Concept of Creating Shared Value (CSV).

The Concept of CSV will then be defined, its relevance for the different affected groups shown, the differences to CSR discussed and critiques revealed.

2.1. Developing Countries

A standardized definition of the term “Developing Country” is hard to find in related literature.

In a speech in front of the UN Conference, the former Secretary General of the UN KOFI ANNAN defines “[…] a developing country is one in which civil society is able to insist, not only on material wellbeing, but on improving standards of human rights and environmental protection as well”.^[1]

Beneath this more civil society and human rights focused brief definition by KOFI ANNAN there are several definitions by other organisations. The World Bank for instance classifies countries solely by financial figures, GDI serving as the main indicator.^[2]

Although UN Statistics Division (UNSD) remarks on their website, ”[…] there is no established convention for the designation of ‘developed’ and ‘developing’ countries […]”^[3], a list classified in developed regions, developing regions and Least Developed Countries (LDC) is given.^[4]

The Committee for Development Policy (CDP) as part of the UN defines LDC by reviewing following criteria every three years^[5]:

- Low Income
- Weak Human Assets
- Economic Vulnerability

Low Income is measured at hand of the three years average of the Gross National Income per capita. Weak Human Assets is rated according to the Human Assets Index (HAI). The Economic Vulnerability is measured through the Economic Vulnerability Index (EVI). Additionally to these criteria a LDC must have a population below 75 million. Several other criteria are summarized within the HAI and the EVI.^[6]

Without going deeper in the components of the indexes, the UN definition of LDC is more detailed as for instance the classification used by the World Bank. This thesis therefore will apply the classification of the UN.

2.2. Corporate Social Responsibility (CSR)

The literature offers several different definitions of CSR. Often used synonyms are Corporate Citizenship (CC) or Business Ethics.^[7] As CARROLL states in his article “Corporate Social Responsibility - Evolution of a Definitional Construct” published in the Business and Society Journal in 1999^[8] the early construct of CSR goes back to the 1950s.

Because the definition of this concept is important for a better under­standing of CSV, this section will summarize the most relevant definitions.

DINH describes in her publication from 2010 that CSR refers to responsible acting of companies towards society and natural environment. Responsible acting of companies is said to be based on social values and norms.^[9] This idea of CSR implies an interdependence between companies and their surrounding environment, such as nature, society or stakeholders.

The Commission of the European Communities gives a more detailed definition of CSR. The Green Paper of 2001 defines CSR not only as a voluntary concept, but also as a concept which is going beyond legal obligations.^[10]

One of the latest and well discussed CSR-models is the Three-Domain-Approach introduced by CARROLL and SCHWARTZ in 2003.^[11] It is based on a former four component model called the Pyramid of Corporate Social Responsibility first introduced by CARROLL in 1991.^[12]

Unlike CAROLL’s former model it consists out of three main responsibilities: economic, legal and moral. The philanthropic responsibility as in Carroll’s former model is included in the moral and economic responsibility.^[13]

The responsibilities themselves already have been defined in Carroll’s former approach. The economic responsibility states that in order to sustain workplaces and wealth, a company is required to sell publicly demanded goods and services for a fair price with a profit. While acting in this way, a company has to remain within the legal borders. The company therefore has legal responsibility. The moral aspect represents the none-law, society-based boundaries.^[14]

One of the main differences of CARROLL’s Pyramid of Corporate Social Res­ponsibility and the Three-Domain-Approach by CARROLL and SCHWARTZ is based in the intersection between the different responsibilities, as revealed by the later introduced model.

As it is stated by SCHWALBACH, there seem to be two main directions in the discussion of the CSR-term.^[15]

One of these directions is given by the above introduced model of CARROLL and the related model of CARROLL and SCHWARTZ. On the other side there is the often cited FRIEDMAN: “There is […] only one social responsibility of business […] to increase its profits so long as it stays within the rules of the game […]”.^[16] FRIEDMAN restricts the responsibility of companies on CARROLL’s and SCHWARTZ’s economic and legal responsibility.

A common critique about CSR is described by MOSKOWITZ. Referring to the widely use of CSR as a marketing instrument he understands CSR as “[…] 95 percent rhetoric and 5 percent action”.^[17] In an article, which will have wider relevance in the following introduction of CSV, KRAMER and PORTER come to similar conclusions. They describe that CSR often is used to distract the public view from inconvenient issues, as an instrument with a short-term focus or as a precaution for future crises.^[18]

2.3. Creating Shared Value (CSV)

Two relevant articles can be found on the concept of “Creating Shared Value” (CSV).

The actual term “Creating Shared Value” (CSV) goes back on the article “The Big Idea: Creating Shared Value” published in the January-February issue of the Harvard Business Review in 2011.^[19] In this article KRAMER and PORTER introduced CSV for the first time as a stand alone concept.

The base of this concept, the idea of “Shared Value” (SV), was first mentioned in the earlier article “Strategy and Society: the link between competitive advantage and corporate social responsibility” by the same authors. This article has been published in the December 2006 issue of the Harvard Business Review.^[20]

In their earlier article of December 2006 KRAMER and PORTER introduced SV as an approach for an improved implication of CSR. As they reveal in the article, greater deficits in companies’ perception and implication of CSR can be found.^[21]

The main issue is said to be based on a frequently overlooked inter­depen­dence between society and business, which goes as far as “A temporary gain to one will undermine the prosperity of both”.^[22] SV is said to offer benefits to either side: society and business. Social and conventional economic needs are both recognized as market defining factors. Furthermore KRAMER and PORTER state that ignoring the social needs and therefore the idea of SV might lead to additional costs.^[23]

FIGURE 1. illustrates various areas in which companies are mutually interacting with their surrounding.

Abbildung in dieser Leseprobe nicht enthalten

FIGURE 1 . Interdependence Companies - Society

(revised, based on KRAMER and PORTER – “The Big
Idea:
Creating Shared Value”, January-February 2011)

In their later article of January-February 2011 KRAMER and PORTER are closing in on the greater meaning of SV. Their concept of CSV is first introduced.^[24]

The following citation shows the problem identified by KRAMER and PORTER in their January-February 2011 article: “(…) Capitalism is under siege. (…) business increasingly has been viewed as a major cause of social, environmental and economic problems”.^[25]

In contrast to their former article KRAMER and PORTER point out that the focus lies not only on companies but on the greater model of today’s capitalism. They emphasize the importance of capitalism as an “unparalleled vehicle for meeting human needs, improving efficiency, creating jobs and building wealth”.^[26] KRAMER’s and PORTER’s main critique is based on the narrow perception of capitalism itself.

Combined, KRAMER and PORTER state the legitimacy of business within the society has reached an all time low. They describe that even com­panies embracing CSR are getting blamed for society’s failures.^[27]

In their article of January-February 2011 KRAMER and PORTER identified two main groups contributing to the described effect.

KRAMER’s and PORTER’s main focuses is on the first group, the companies, which are said to have an outdated approach to value creation. A second group are the political leaders and governments. Resulting from the fading legitimacy and trust in business, governments impose ever harder policies and regulations on companies. KRAMER and PORTER recognized the disadvantages these policies and regulations are creating in competitiveness and economic growth.^[28]

A further group is only briefly introduced by KRAMER and PORTER and is not an integral part of further research of this thesis. The Non-Government-Organisations (NGOs) are said to be more suitable in addressing certain societal needs and be especially important in cooperation with companies and governments.^[29]

2.3.1. Companies and CSV

As KRAMER and PORTER state in both their articles companies are widely getting blamed for social, environmental and economic problems. But also companies themselves would be a main source for these issues. Companies’ mostly narrow perception of value creation and their short-term shareholder strategic alignment is pointed out.^[30]

Illustrated in the “Theory of Externalities”, KRAMER and PORTER are showing that environmental and social issues are mostly out of companies’ scope. BAUMOL and OATES are giving a mathematic-related definition of the Theory of Externalities.^[31] Summarized, it states that the action of a company might create costs for other parties that the company itself has not to bear.

In the Theory of Externalities KRAMER and PORTER recognise a chance for companies. They imply, if companies are willing to take responsibility in the field of social and environmental issues instead of shifting it to governments and NGOs, new markets could emerge. Therefore exter­nalities would have to be internalised.

KRAMER and PORTER define three key ways for companies to generate SV.

The first step is by Reconceiving of Products and Markets. Companies would have to identify the potential of their products and would have to understand the advantages and disadvantages their products causing for society.

As KRAMER and PORTER illustrate, a new perception of products might reveal yet unconsidered markets or revive the old, traditional ones. The business potential would be based on satisfying social needs while opening new profit-opportunities for companies.^[32]

A good example is the micro credit. This idea is often linked to YUNUS and the Grameen Bank in Bangladesh. Little sums of money are lend to starting up an own business, creating independence and self-sustainability. This concept is not only used in developing countries but also in more advanced countries for instance the USA.^[33]

Another advantage of this perception would be the ever changing, social needs defining factors, which are said to trigger further innovations.^[34]

KRAMER’s and PORTER’s second step for companies to generate SV is by Redefining of Productivity in the Value Chain.

They emphasize that the described interdependence between companies and society would have a mutual effect on the Value Chain of companies.^[35]

With focus on the productivity of companies, opportunities would arise because of the internal costs of societal issues. These costs would originate from externalities simultaneously leading to internal costs, which might even occur in the absence of resource taxes or regulations.^[36]

This interrelation is illustrated by KRAMER and PORTER by means of a WAL-Mart example. Wal-Mart has been able to reduce its packaging and improve its logistic system. Therefore Wal-Mart saved costs on packaging and truck fuel while simultaneously reducing the impact on the environ­ment.^[37]

KRAMER and PORTER identify several areas in the Value Chain with high potential for a SV-based productivity increase and according to PORTER’s Value Chain concept^[38] a direct effect on the margin of companies. The high potential areas have been displayed and can be derived from FIGURE 1.

The last and third step for companies to generate SV is by Enabling of Local Cluster Development.

The dependence of the success of companies on local clusters is pointed out. According to the official OECD definition a cluster is “[…] an agglomeration of vertically and/ or horizontally linked firms operating in the same line of business in conjunction with supporting institutions”.^[39] KRAMER’s and PORTER’s definition additionally considers the dimension of the logistical infrastructure and further public framework assets as education, fair competition-law and quality standards. The main requirement for effective cluster building would be an open and transparent market.^[40]

Referring to KRAMER and PORTER, clusters are highly significant for productivity, innovation and competitiveness. A company investing in cluster building would express its commitment to the community. Contrary the absence of a cluster or a weak surrounding framework would lead to internal costs for a company. Various examples are given as public education or infrastructure.^[41]

To support cluster building, companies would first have to identify deficiencies in clusters and framework and second focus on weaknesses representing the greatest constrains and can most effectively be antagonized. Other companies, institutes or organisations would be able to address certain weaknesses more effectively. Therefore the importance of cooperation is emphasised.^[42]

The CSV approach is said to have the potential of saving costs and leading to innovations in technology, operating and management methods. KRAMER and PORTER emphasise that companies doing business in deve­loped but also in developing countries would be affected.^[43]

2.3.2. Governments and CSV

SAMUELSON and NORDHAUS described the regulative function of governments within the economy.^[44] KRAMER and PORTER are recog­nizing this basic governmental function, nevertheless they criticise the institutionalization of trade-offs and overregulation.^[45]

According to the CSV approach governmental regulations should drive companies towards SV. KRAMER and PORTER describe fundamental characteristics of SV-stimulating regulations. Governmental regulations should clearly define societal goals for companies. A performance standard would have to be determined, which should allow companies to find a suitable solution within a fair phase-in-period. For timely and efficient governmental audits a universal benchmarking measurement and reporting system would have to be established. Artificial price-setting of resources should only be applied as a last measure.^[46]

2.3.3. Critique

As initially revealed, the concept of CSV has just recently been introduced, therefore critical remarks are difficult to find within the literature.

Referring to FRIEDMAN’s statement about CSR, it could equally be argued that the only responsibility of business is to maximise profit.^[47]

An article by DENNING indicates that CSV would be merely a different name for CSR.^[48] Considering FREDERICK’s “Four-Stages”-model^[49], which integrates approaches as Corporate Citizenship (CC) into an evolutionary development of CSR, CSV might be another form of CSR.

While research for suitable CSV-projects for this thesis some companies like Nestlé S.A.^[50] seem to have a mostly marketing related approach to CSV, despite KRAMER’s and PORTER’s concept. Nestlé S.A is also listed in KRAMER’s and PORTER’s article as an example for CSV. As DENNING is describing several examples as one-sided, some of the listed companies interfere with the understanding of a responsible business.^[51]

CSV is displayed as superior toward CSR. The trigger for CSV is said to be the fading legitimacy of business and the increasing pressure of civil society. In their earlier article KRAMER and PORTER state that companies are often getting accused falsely.^[52] This is leaving the question, if CSV can prevent such accusations.

The macro economical theory of opportunity costs^[53], which represents the value of the best alternative forgone when another one is chosen, appears to be widely unconsidered, although an investment in a CSV-project mostly has a middle or long term focus for companies.

Finally KRAMER and PORTER leave open a description of a company that optimally adopted CSV. It can be assumed that despite social entrepreneur companies, a complete SV based company is highly unlikely. It is question­able if the outlook for advantages through innovations and new markets, which is hard to grasp, will be sufficient to replace the nowadays shareholder view.

2.4. Differentiation CSV to CSR – Characteristics of CSV

KRAMER and PORTER describe CSV as a holistic, integrated approach, which vastly includes the driving intention of companies to maximise profit. CSV is said to bring business and societal benefits together. There would be no futile, non-business related, additional costs. It would even lead to new innovations and enhanced competitions, while opening new markets and improving old, traditional ones.^[54] Still the critique of Chapter 2.3.3. has to be considered.

Contrary CSR is pictured by KRAMER and PORTER as a limited and reactive approach. CSR is said to be mostly detached from companies driving intention and has a more marketing, cosmetic based orientation. It often would be the result of external, public pressure. The impact is said to be limited on single CSR-projects and strictly bound to these budgets.^[55]

The differences between CSV and CSR are illustrated in FIGURE 2 .

Abbildung in dieser Leseprobe nicht enthalten

FIGURE 2 . Compared approaches: CSR and CSV

(revised, based on KRAMER and PORTER – “The Big Idea:

Creating Shared Value”, January-February 2011)^[56]

As already revealed in Chapter 2.3.3., KRAMER and PORTER are describing the CSV approach as superior to CSR. The CSV critique of Chapter 2.3.3. suggests that CSR might be an evolutionary forerunner of CSV. Eventually both approaches are offering different answers to the same question: Social issues and the role of business.

[...]

^[1] ANNAN, K. (2010), date of retrieval 28.12.2011

^[2] Cf. WORLD BANK (2011), date of retrieval 28.12.2011

^[3] UNSD (2011), date of retrieval 29.12.2011

^[4] Cf. ib. date of retrieval 29.12.2011

^[5] Cf. CDP (2011), date of retrieval 29.12.2011

^[6] Cf. ib.

^[7] Cf. MATTEN, D. / MOON, J. (2004), p.324ff.

^[8] CARROLL, A.B. (1999), p.268f.

^[9] Cf. DINH, H. V. D. (2011), p.13

^[10] Cf. Commission of the European Communities (2001), date of retrieval 02.01.2012, pp.6-8

^[11] Cf. SCHWARTZ, M. / CAROLL, A.B. (2003), pp. 503-530

^[12] Cf. CAROLL A.B. (1991), pp.39-48

^[13] Cf. DUBIELZIG, F. / SCHALTEGGER S. (2005), pp.240-243

^[14] Cf. CAROLL, A.B. (1991), pp.39-48

^[15] Cf. SCHWALBACH, JOACHIM (ed.) (2008), editorial

^[16] FRIEDMAN, M. (1970), p.122f.

^[17] MOSKOWITZ, M. (2002), p. 4.

^[18] Cf. KRAMER, M.R. / PORTER, M.E. (2006), p.79ff.

^[19] Cf. KRAMER, M.R. / PORTER, M.E. (2011), pp.62-77

^[20] Cf. KRAMER, M.R. / PORTER, M.E. (2006), pp.78-91

^[21] Cf. ib., p.79ff.

^[22] KRAMER, M.R. / PORTER, M.E. (2006), p.82

^[23] Cf. ib., p.78ff.

^[24] Cf. KRAMER, M.R. / PORTER, M.E. (2011), pp.62-77

^[25] Ib., p.64

^[26] KRAMER, M.R. / PORTER, M.E. (2011), p.64

^[27] Cf. ib., p.64

^[28] Cf. ib., pp.64-77

^[29] Cf. ib., p.72f.

^[30] Cf. ib., pp.64-77

^[31] Cf. BAUMOL, W.J. / OATS W.E. (1988), pp.7-14

^[32] Cf. KRAMER, M.R. / PORTER, M.E. (2011), p.67f.

^[33] Cf. YUNUS, M. / JOLIS A. (2003), pp.115-192

^[34] Cf. KRAMER, M.R. / PORTER, M.E. (2011), p.67f.

^[35] Cf. ib., p.68f.

^[36] Cf. KRAMER, M.R. / PORTER, M.E. (2011), p.68f

^[37] Cf. ib., p.68f

^[38] Cf. PORTER, M.E. (1985), p.33ff.

^[39] OECD (2005), date of retrieval 05.01.2012, p.29

^[40] Cf. KRAMER, M.R. / PORTER, M.E. (2011), p.73

^[41] Cf.ib., pp.72-75

^[42] Cf. KRAMER, M.R. / PORTER, M.E. (2011), pp.72-75

^[43] Cf. ib., pp.64-77

^[44] Cf. SAMUELSON, P.A. / NORDHAUS, W.D. (2010), p.45f, p. 377 ff

^[45] Cf. KRAMER, M.R. / PORTER, M.E. (2011), p.64f, p.74

^[46] Cf. ib., p.64f, p.74

^[47] Cf. FRIEDMAN, M. (1970), p.122f.

^[48] Cf. DENNING, S. (2011), date of retrieval 07.01.2012

^[49] Cf. FREDERICK, W.C. (2008), p.523ff

^[50] Cf. NESTLÉ S.A.(2011), date of retrieval 08.01.2012

^[51] Cf. DENNING, S. (2011), date of retrieval 07.01.2012

^[52] Cf. KRAMER, M.R. / PORTER, M.E. (2006), p.79ff.

^[53] Cf. McEACHERN, W.A. (2011), p.30 ff.

^[54] Cf. KRAMER, M.R. / PORTER, M.E. (2011), pp.75-77

^[55] Cf. ib., pp.75-77

^[56] Cf. ib., p.76