Nestlé’s Creating Shared Value Approach as Competitive Advantage Jonas Babics 5th November 2009 -
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Corporate social responsibility is a topic, which cannot be ignored anymore by CEOs or board members of big multinational enterprises, as well as small and medium enterprises. The current climate change, labour conditions in developing countries and shrinking reserves of natural resources are too big an issue and a danger for the companies’ reputation. A survey by the Economist Intelligence Unit showed, that the importance of CSR is rising for global executives (The Economist, 2008). A reason for this, among others, is the pressure from governments, activists and the media. More and more companies integrate a CSR report in their annual report and adopt programmes and activities to improve the social and environmental consequences of their businesses. However, regarding Porter and Kramer (2006) many of these efforts have not been as productive as would be possible. They state two reasons for this. First, the companies pit business against society, although they are interdependent. Second, they do not think of CSR in they way, which would suit the firm’s strategy. Porter and Kramer (2006) propose an approach for companies to use the same framework for CSR that guides their strategy for their core business. With that, CSR can get a source of opportunity, innovation and competitive advantage and not only a cost factor. Reading and preparing the CSR report from Nestlé, the statement called my attention that Nestlé’s core business itself is sustainable and that Nestlé follows the principle to align shareholders interests and the interests of the society in order to achieve long-term business success (Nestlé, 2008). With the strategy of creating shared value - creating value for shareholders and creating value for society - Nestlé seems to follow Porter’s and Kramer’s framework. It is not yet possible to find out, if Nestlé is more successful with its CSR strategy than other companies, as they introduced the approach only in 2007. To measure, if Porter’s and Kramer’s approach really leads to a competitive advantage, will be a very interesting and important topic. In this report I will analyse the CSR report or “Creating Shared Value report” of Nestlé to find out accordance or similarities with the framework from Porter and Kramer and will also criticise Nestlé’s approach. If Nestlé aligns their strategy with Porter’s and Kramer’s framework, the success should be examined in further studies.
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The link between competitive advantage and corporate social responsibility Porter and Kramer (2006) criticise in their report about CSR and competitive advantage the responses from corporations on the pressure from the public. Most of these responses are rather cosmetic than strategic or operational and CSR reports from companies rarely offer a coherent framework for CSR activities. The CSR practices and initiatives are often isolated from the operating units and have no strategic value. Furthermore, CSR experts focus on the tension between business and society rather to focus on their interdependence. Therefore, Porter and Kramer propose a new way to look on the relationship between business and society. The object for enterprises should be to develop a CSR agenda that produces maximum social benefit and gains for the business at the same time. According to Porter and Kramer the same tools can be used than to analyse competitive position and to develop strategy. In their framework Porter and Kramer use the value chain, introduced by Porter in his book “Competitive Advantage” (Porter, 1985) and the diamond framework, also introduced by Porter in the book “The Competitive Advantage of Nations” (Porter, 1990). Value Chain The value chain shows all the activities a company engages in while doing business. For CSR purposes, the value chain can be used to identify activities in the value chain with a negative social impact or to find opportunities in the value chain that can bring social and strategic advantages. The mapping of the social impact of the value chain is called “inside out”. Diamond Framework On the other hand there are external social conditions that influence corporations (outside in), which can be identified in the diamond framework. Porter and Kramer suggest that companies identify the areas of social context with the greatest strategic value and choose one or few social initiatives. A company is not able to take on every area in the diamond. After identifying inside out activities with a social impact and outside in areas with impact on the company’s business, the enterprise should prioritise their social issues. The social issues can be categorised in three categories: 1) Generic Social Issues, which are social issues that do not have a significant impact on a company’s competitiveness, nor are affected by the company’s operation. 2) Value Chain Social Impacts, which are social issues that are significantly affected by the ordinary business activities from a company. 3) Social Dimensions of Competitive Context, which are social issues in the external environment in the location of a company and which have an affect on the company’s competitiveness.
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Prioritising social issues helps the company to choose CSR activities. CSR has to create shared value and is a long-term investment in a company’s future competitiveness. The test that should guide CSR is whether the activities present an opportunity to create shared value and not whether the cause is worthy. Going beyond sustainability: Nestlé’s Creating Shared Value strategy “By operating in line with the goals of sustainable development, we aim to ensure that our actions today do not compromise the needs of tomorrow. But we believe our role can go further, in generating value for society at the same time as we generate value for our shareholders.” (Nestlé Management Report 2008, p. 14) This is a courageous statement from Nestlé. The first part of the quote is already known as one definition of sustainability, created in 1987 at the World Commission on Environment and Development (The dictionary of sustainable management, 2009). However, Nestlé wants to go beyond sustainability with creating value for shareholders at the same time as creating value for the society. In order to achieve long-term business success, Nestlé believes that shareholders interests and the interests of society must be aligned (Nestlé, 2008). To achieve that, Nestlé investigated their value chain and searched at each stage for opportunities to create shared value.
Source: Nestlé (2008)
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While trying to improve every stage of the value chain in order to create shared value, Nestlé focuses its efforts in three key areas: nutrition, water and rural development (Creating Shared Value.org, 2009). These can also be defined as key competences, since Nestlé is the biggest food company of the world and it belongs to the daily work to invent healthier nutrition, produce clean water and work together with suppliers from rural areas. However, we do not yet know how Nestlé is able to create value for the society while creating value for the shareholders. This takes place in different projects, where Nestlé improves living standards of farmers or works on innovation in more eco-efficient packaging, which also helps to save costs or enhance quality. One of these projects is described in the box below. What all the projects have in common is, that in each case, as Nestlé has prospered, so has the community (Nestlé, 2008).
Improving prospects for Guatemala’s coffee growers The aim of this project is to improve coffee production in a way that will ensure long-term social, economic and environmental sustainability. Through contributing directly to the health and productivity of farming households and through protecting the rich soils in this area in Guatemala that produce some of the world’s finest coffees, Nestlé created shared value for its suppliers as well as for its shareholders. Nestlé constructed two new classrooms at the local school, increased the daily supply of drinking water through the construction of a 10 kilometres supply pipe, planted avocado trees on every family holding and constructed efficient stoves and a primary care health centre. Source: Nestlé (2009)
Critical examination and comparison To be able to examine Nestlé’s approach, I have listed different projects or actions stated in the Management Report 2008 (Nestlé, 2008) and tried to allocate them either to inside out projects or outside in projects. Nestlé does not make this difference, they only call their actions to be along the value chain.
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Value Chain (inside out) o
Value created for consumers: better nutrition
o
Eco-efficient packaging
o
Innovations in bottled water packaging
o
Reducing water withdrawals
o
Reductions in energy usage, cost and greenhouse gas emissions
o
Reductions in workplace accidents - constant goal: zero accidents
o
Responsible consumer communications
Diamond Framework (outside in) o
Microcredit loans to farmers worldwide (CHF 30 million)
o
Suppliers: 600’000 farmers - raising the standards of living, access to quality raw materials
o
Helping to develop the dairy industry in East Africa
Analyzing the inside out actions and comparing them to Porter’s (1985) value chain, one can find a project for nearly every primary and every support activity. It seems that the responsible person at Nestlé followed Porter’s and Kramer’s advice, combed through the value chain and identified activities with negative social impacts (e.g. greenhouse gas emissions) or activities with positive social impacts (e.g. better nutrition) and figured out projects to make a shared value creation possible. It is the stated objective from Nestlé that all the projects should create value for the society and for the shareholders. I did not find any projects considering a generic social issue, where the business would no benefit at all. However, Nestlé’s approach could of course still be improved. The creating shared value strategy could be even more implemented in all business fields and all activities and above all should the impacts be examined. Nestlé reports one project - reducing water withdrawals where they work together with NGOs and academic partners to develop a sound basis for the measurement of the activities and their impact that can lead to further improvements. If all these projects really created shared value, that means also value for the shareholders, it would be worth to spend more money on research, like for marketing or product research. Porter and Kramer (2006) state that a company cannot take on every area in the diamond. However, in my opinion a company should concentrate on maybe one or few social initiatives, but in the same time try to improve the other areas constantly. Creating shared value is a long-term strategy and especially the outside in activities need a longer time to show improvement. That makes them less attractive for communication purposes and the direct impact on the shareholder value is less obvious. Nevertheless, these projects are very
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important and help to get a sustainable competitive advantage for a company that is hard to copy for competitors. According to Porter and Kramer creating shared value is “a meaningful benefit for society that is also valuable to the business” (Porter and Kramer, 2006:8). In this definition the value for the business or the value for the shareholders is kind of a bi-product. An advantage of the strategy from Nestlé is that it has the focus from the other side. All the activities from Nestlé should create value for shareholders and create value for society. This approach has a much better opportunity to survive in our shareholder oriented business world. Nestlé has the chance to win over the shareholders and make creating shared value as a core strategy and long-term goal for the company. However, the question remains: Is that possible? Can Nestlé create a strategy that brings maximum profit for the shareholders and at the same time is not only sustainable, but creates also value for society? If it is possible and Nestlé could get the reputation of a responsible company that even creates value for society, it really would be a competitive advantage. Conclusion and outlook on the future of CSR “Business and society need each other” (Porter and Kramer, 2006:7). This is a core statement in the creating shared value report and could help CSR to survive the current economic downturn. Business and society must never start to fight against each other, as they are too interdependent. When people realise that business and society have to work together and both can win at the end, it would be a huge contribution to solve the problem. However, as always, one has to take a long-term view and can not rely on short-term profits, but also not only on short-term positive impacts for the environment or society. If Nestlé is able to prove that creating shared value is possible, it will have a big impact on the discussion about CSR. To prove that, Nestlé has to scientifically examine their CSR activities and their impacts on society or environment. As Porter and Kramer (2006) already criticised, the impacts of CSR activities are almost never described in CSR reports. The scientific research would also be very expensive. However, if a real competitive advantage and a value creation for shareholders were possible, the return on this investment would be enough high to be justifiable. It will be interesting to follow the development of Nestlé’s creating shared value strategy. Nestlé was often criticised for its ruthless business in developing countries and was involved in several scandals, for example the baby milk scandal in 1974 (EvB, 2004), which still influences the people’s attitude toward big multinational companies and toward Nestlé especially. If the creating shared value approach is only a communication purpose to improve the reputation, it will have now further positive impact on worldwide CSR activities Nestlé’s Creating Shared Value Apporach as Competitive Advantage
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and will not make a difference. Furthermore, Nestlé cannot only state that their business, they are already doing, creates value for the society, but has to find opportunities to constantly improve their value chain activities and analyse the positive and negative impacts, which is an ongoing process. The activities should be scientifically examined and be shown in the annual creating shared value report. With the initiative of the creating shared value approach and its improvements, Nestlé is able to gain a real competitive advantage and to contribute to a more sustainable world.
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References
Creating Shared Value.org (2009) “About Nestlé’s Creating Shared Value (CSV)” (online) (cited 6 June 2009). Available from
EvB (2004) Nestlé tötet Babys, Zürich, Erklärung von Bern. Nestlé (2008) “Creating Shared Value”, Nestlé Management Report 2008, pp. 13-23. Nestlé (2009) “Creating Shared Value in Action” (online) (cited 6 June 2009). Available from
Porter, M. E. (1985) Competitive Advantage, New York, Free Press. Porter, M. E. (1990) The Competitive Advantage of Nations, New York, Free Press. Porter, M. E. and Kramer, M. R. (2006) “The Link Between Competitive Advantage and Corporate Social Responsibility”, Harvard Business Review, December 2008. The dictionary of sustainable management (2009) “Sustainability” (online) (cited 9 June 2009). Available from The Economist (2008) “Corporate Social Responsibility”, The Economist, 17th January 2008.
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