#1The New Competitive Advantage: Creating Shared Value Professor Michael E. Porter Harvard Business School Tetra Pak Customer Event Sao Paulo, Brazil November 5th, 2013 This presentation draws on ideas from Professor Porter's articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic Foundations of Competitiveness," in The Global Competitiveness Report (World Economic Forum), "Clusters and the New Competitive Agenda for Companies and Governments" in On Competition (Harvard Business School Press, 2008), "Creating Shared Value" (Harvard Business Review, Jan 2011), the Social Progress Index Report (Social Progress Imperative) and ongoing related research. 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), FSG (www.fsg.org) and the Social Progress Imperative (www.socialprogressimperative.org).#2● The Role of Business in Society 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 lack sufficient resources and capabilities to fully meet the challenges alone 20131105 HSM Brazil CSV Presentation-FINAL We need a new approach 2 Copyright 2013 Professor Michael E. Porter#3The Role of Business in Social and Environmental Issues Evolving Approaches Philanthropy . • Donations to worthy social causes Volunteering 20131105 HSM Brazil CSV Presentation-FINAL 3 Copyright 2013 Professor Michael E. Porter#4The Role of Business in Social and Environmental Issues Evolving Approaches Philanthropy Corporate Social Responsibility (CSR) . • Donations to worthy social causes Volunteering • • Compliance with community standards Good corporate citizenship "Sustainability" 20131105 HSM Brazil CSV Presentation-FINAL • Mitigate risk and harm 4 Copyright 2013 Professor Michael E. Porter#5The Role of Business in Social and Environmental Issues Evolving Approaches • Corporate Social Creating Shared Philanthropy Responsibility (CSR) Value (CSV) Donations to worthy social causes Volunteering • • Compliance with community standards Good corporate citizenship "Sustainability" 20131105 HSM Brazil CSV Presentation-FINAL • Mitigate risk and harm • Address societal needs and challenges with a business model 5 Copyright 2013 Professor Michael E. Porter#6CSR Fair Trade CSR versus Shared Value Fair Trade • Paying a higher price to farmers • for the same products Certification as a fair trade company 20131105 HSM Brazil CSV Presentation-FINAL 6 CSV 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 • Environmental impact also improved Copyright 2013 Professor Michael E. Porter#7• • Social Needs and Economic Value Creation Energy Efficiency Environmental Improvement Water Use Community Economic Development Education Workforce Skills Company Productivity Affordable Housing Worker Safety Health Social deficits and environmental impact create economic costs for companies Community weaknesses affect company productivity Social needs represent the largest market opportunities 20131105 HSM Brazil CSV Presentation-FINAL 7 Copyright 2013 Professor Michael E. Porter#8Levels 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 and regional business environment - Improving skills, the supplier base, the regulatory environment, and supporting institutions - Strengthening the cluster on which the company depends Strengthens the link between company success and community success 20131105 HSM Brazil CSV Presentation-FINAL 8 Copyright 2013 Professor Michael E. Porter#9· • 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 20131105 HSM Brazil CSV Presentation-FINAL 9 Copyright 2013 Professor Michael E. Porter#10Creating Shared Value in Products and Markets Becton Dickinson Health Worker Safety • There is pressing need to protect health workers from needle stick injuries that spread HIV and other infections BD redesigned syringes to prevent accidental sticks · Substantial reduction in health worker injuries . • $2 billion business in 2012, representing 25% of the company's revenues Largest source of company growth over the past two decades. 20131105 HSM Brazil CSV Presentation-FINAL 10 10 Copyright 2013 Professor Michael E. Porter#11Shared Value in the Value Chain I I Firm Infrastructure (e.g., Financing, Planning, Investor Relations) Human Resource Management (e.g., Recruiting, Training, Compensation System) Technology Development I (e.g., Product Design, Testing, Process Design, Material Research, Market Research) I Procurement (e.g., Components, Machinery, Advertising, Services) Inbound Logistics Operations (e.g., Incoming Material Storage, Data (e.g., Assembly, Component Fabrication, Collection, Service, Customer Access) Outbound Logistics Marketing & Sales (e.g., Order Processing, (e.g., Sales Force, After-Sales Service (e.g., Installation, Customer Support, Warehousing, Promotion, Branch Operations) Report Advertising, Complaint Preparation) Proposal Resolution, Writing, Website) Repair) M a g i n • 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 20131105 HSM Brazil CSV Presentation-FINAL 11 Copyright 2013 O Professor Michael E. Porter#12● • Shared Value in the Value Chain Fibria, Brazil Fibria, the world's leading manufacturer of chemical pulp, utilizes planted eucalyptus trees and integration of native habitat to dramatically reduce the land required in cultivation 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 traditional plantation methods • Small scale producers currently contribute 27% of the raw materials utilized in Fibria mills, improving efficiency while 4000 households have significantly increased their income 20131105 HSM Brazil CSV Presentation-FINAL 12 12 Copyright 2013 Professor Michael E. Porter#13. • Shared Value 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 Green Engage 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 20131105 HSM Brazil CSV Presentation-FINAL 13 Copyright 2013 Professor Michael E. Porter#14Identifying Opportunities for Shared Value in the Value Chain Mining • Qualifying local Enhancing skill training partnerships with local colleges and universities 1 Firm Infrastructure ¦ (e.g., Financing, Planning, Investor Relations) Human Resource Management I (e.g., Recruiting, Training, Compensation System) Technology Development (e.g., Product Design, Testing, Process Design, Material Research, Market Research) Procurement (e.g., Components, Machinery, Advertising, Services) M a • suppliers r • Value added Exploration purchasing Mine Mine Processing Outbound Sales & After-Sales Acquisition & Operations Logistics Marketing Customer • Employee i Development practices with Support • ⚫ Recruiting from disadvantaged surrounding communities Employee education and job training Enabling nearby family housing health initiatives n suppliers Energy and water use • Limiting emissions and waste • Minimizing use and effects of hazardous materials Recovering additional materials from “exhausted” mines • • Worker safety practices 20131105 HSM Brazil CSV Presentation-FINAL 14 . • Minimizing logistical and handling impacts Copyright 2013 Professor Michael E. Porter#15Improving 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 20131105 HSM Brazil CSV Presentation-FINAL 15 Copyright 2013 Professor Michael E. Porter#16Skill 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 20131105 HSM Brazil CSV Presentation-FINAL 16 Copyright 2013 Professor Michael E. Porter#17Integrating Strategy Across Levels Novartis in Rural India Reconceiving Products and Markets • 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 Redefining Productivity in Value Chain • 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 Enabling Local Cluster Development • 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 20131105 HSM Brazil CSV Presentation-FINAL 17 Copyright 2013 Professor Michael E. Porter#18· New Stakeholder Roles and Relationships The focus on social impact unites the goals of companies, NGOs, and government • Shared value fosters new relationships between companies, philanthropists, NGOs, and government in addressing social issues. Traditional Roles Philanthropists • Donate to charitable causes NGOs • Receive grants to deliver social services • • New Roles Partner with companies and NGOs to catalyze shared value initiatives Partner in implementing new shared value business models Governments Companies • • Tax and regulate business; operate social programs Donate to charitable causes or ESG programs • Make platform investments and support shared value strategies; regulate to encourage shared value solutions • Partner with NGOs and government to initiate and scale shared value strategies • Partner with other companies to leverage impact in shared value 20131105 HSM Brazil CSV Presentation-FINAL 18 Copyright 2013 Professor Michael E. Porter#19Connecting the Dots Within the Company Philanthropy • Platform investments to · enable shared value approaches: - Educate Research - Invest in enabling assets and infrastructure - Incubate Corporate Social Responsibility (CSR) Creating Shared Value (CSV) Engaging stakeholders to collaborate on societal problems 20131105 HSM Brazil CSV Presentation-FINAL 19 19 • Address societal needs and challenges with a business model Copyright 2013 Professor Michael E. Porter#20Creating Shared Value: Deciding Where to Concentrate Nestlé Nutrition Water Rural Development • Opportunities to create shared value are inevitably tied closely to a company's particular businesses 20131105 HSM Brazil CSV Presentation-FINAL 20 Copyright 2013 Professor Michael E. Porter#21• · 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 20131105 HSM Brazil CSV Presentation-FINAL 21 21 Copyright 2013 Professor Michael E. Porter#22. Shared Value and Company Strategy Value Proposition Whole Foods Markets 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 • • Distinctive Activities • . • • . 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 • . Whole Foods is the most economically successful food retailer in North America Successful strategies in the future will embody a significant shared value dimension 20131105 HSM Brazil CSV Presentation-FINAL 22 Copyright 2013 Professor Michael E. Porter#23Purpose Based Strategic Positioning Traditional Positioning Nestlé Thermo Fisher Scientific • Food and Beverage Company • Scientific and Laboratory Instruments Company Nike • Footwear and Apparel Company • New Positioning Nutrition, Health and Wellness Company Making the World Healthier, Cleaner, and Safer • Health and Fitness Company • A clear social purpose opens up new opportunities for growth and profitability, while motivating and attracting consumers, business partners, employees, shareholders, and the public 20131105 HSM Brazil CSV Presentation-FINAL 23 Copyright 2013 Professor Michael E. Porter#24• 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" Vision The 'dual economic and social' project, creating economic value by creating social value Mission Bringing health through food to as many people as possible by refocusing on four complementary business lines and expanding into fast-growing new regions 20131105 HSM Brazil CSV Presentation-FINAL 24 Copyright 2013 Professor Michael E. Porter#25The Purpose of Business • Our purpose in business is to create economic value while creating shared value for society . . 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 strategy and economic value creation and 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 20131105 HSM Brazil CSV Presentation-FINAL 25 25 Copyright 2013 Professor Michael E. Porter