[Special Feature: Corporate Sociality in the SDGs Era] Masahiro Okada: The Significance of Solving Social Issues Through CSV (Creating Shared Value)

2022/06/06

CSV (Creating Shared Value) is a corporate strategy concept proposed by Harvard Business School Professor Michael Porter and Mark Kramer, a consultant in the field of corporate social impact, in their co-authored papers in 2006 and 2011*1. The 2011 paper includes statements such as: "The pursuit of shared value is about creating economic value in a way that also creates value for society by addressing its needs and challenges," "The principle of shared value involves creating economic value in a way that also creates value for society by addressing its needs and challenges," "Shared value is about expanding the total pool of economic and social value," and "The purpose of the corporation must be redefined as creating shared value, not just profit per se."

In the past, and even today, corporate activities sometimes create negative value for society and the environment in exchange for creating economic value. For example, in Japan, this included pollution such as air and water pollution and noise during the post-war high-growth period; in modern times, poor working environments, harassment, and human rights violations are frequently reported. CSV strategy goes beyond simply not creating such negative social or environmental value (which falls under the scope of Corporate Social Responsibility) to corporate actions where solving problems leads to new profit generation by creating further positive effects (e.g., improving QOL by solving the issue of "shopping refugees" among the elderly, richer lives through increased employee income, expanded educational opportunities, improvement of the global environment, and promotion of children's health) (Table 1). In other words, it is the allocation and implementation of resources that ensures profit generation and social value creation are not in a trade-off, but rather in a relationship where both are consistent and enhance each other. Incidentally, economic value here refers to accounting profit and shareholder equity value, while social value refers to value creation for diverse stakeholders (including the global environment), including shareholders.

Corporate Social Responsibility (CSR) and CSV are often confused. If CSV is defined as corporate activity that generates profit while solving social and environmental problems, it could be said that all businesses have CSV aspects to some degree (with exceptions such as business activities subject to negative screening by institutional investors, such as businesses that promote war, crime, environmental degradation, or harm health). In that sense, CSV and CSR have commonalities when viewed broadly. However, this article views CSV as a "strategy," in which case the implications of the two differ.

That is to say, without repeating Professor Porter's words, the result of a strategy is the realization of continuing to earn profits on a scale that other companies in a certain industry cannot (sustainable competitive advantage). To achieve this, the strategy (management resource allocation) must possess the ability to create economic value (Value), Rareness, and Inimitability—collectively known as VRI. Rareness means that the strategy is only implemented by a small number of companies within the industry. Inimitability means that it is extremely difficult or prohibitively expensive for competitors to imitate the strategy because one of the following is met: (1) path dependency, (2) social complexity, (3) causal ambiguity, or (4) difficulty of imperfect substitution (mainly intellectual property rights). Therefore, CSV strategy is something that some companies try, and a small number of those succeed in gaining a sustainable competitive advantage. On the other hand, Corporate Social Responsibility (CSR) is an obligation that all companies must fulfill universally.

The concept of CSV strategy also has its limits. In reality, a solution that satisfies "all" diverse stakeholders rarely exists, and trade-offs occur somewhere. For example, if a company increases employee salary levels, investment in their education, or purchase prices from suppliers (increasing value for employees and suppliers), the current net income for capital providers will likely decrease, at least in the short term.

In that sense, the success of a CSV strategy can be said to be quite difficult. However, it is precisely because it is difficult that CSV strategy is worth pursuing. If a company tries a CSV strategy and succeeds, that corporate action is highly likely to satisfy the aforementioned VRI*2.

Now, let us introduce Yamaha Motor's outboard motor business in coastal Africa and Kagome's "Farm Support" activities as examples of practicing "CSV as a strategy."

Yamaha Motor began its outboard motor sales business in "general areas" (the company's internal term for markets other than developed countries), starting with its entry into the East Pakistan (now Bangladesh) market in the 1960s. The catalyst was a meeting between the then-Ambassador of East Pakistan to Japan and then-President Genichi Kawakami.

The Ambassador expressed concern, saying, "In East Pakistan, when the rainy season comes, water overflows from the rivers and even buses cannot pass through the roads." In response, President Kawakami made an immediate decision, saying, "Yamaha has outboard motors, so we might be able to be of some help." Immediately after, the company sent products and sales staff to the site. Subsequently, product demonstrations conducted in cooperation with the East Pakistan government did not yield favorable results. After much trial and error, they accumulated know-how through a grassroots sales approach, traveling around fishing villages.

However, in 1970, the War of Independence broke out, and activities in the country were forced to cease. Nevertheless, the company sought to horizontally deploy the experience it had gained and began expanding into general markets, developing markets in South America, Sri Lanka, and coastal Africa.

However, market development was not so straightforward. In a market where purchasing power was extremely low, hand-rowed wooden boats lined the beaches, and individuals fished with cast nets, it was extremely difficult to sell "expensive" outboard motors that cost as much as a fisherman's annual income. Furthermore, even when they finally managed to sell one unit and the fisherman could go offshore with the outboard motor, they could not catch fish using traditional cast-net fishing methods.

Therefore, the company came up with a plan to thoroughly investigate fishing ports throughout Japan and identify fishing methods (such as gill nets) applicable to coastal fishing in general areas. They compiled these into illustrated manuals ("Fishery Journal"), distributed them free of charge, and developed activities to teach Japanese fishing methods. Furthermore, they fostered alliances with various entities (cross-sector alliances), such as utilizing subsidies from local governments and the Japanese government (the Fisheries Agency at the time) and collaborating with non-profit organizations. As a result, it is said that in one fishing village in Sri Lanka, the fish catch increased tenfold with the spread of outboard motors.

By that time, the company realized that their business was not actually "selling outboard motors" but "promoting the fishing industry." The cooperative network with various stakeholders was also effective as a barrier to entry against competitors. In this way, a "business ecosystem approach" (an expression used by the company's executives) to develop the fishing industry over more than 20 years was established. As a result, the company's share of outboard motors in coastal fishing in general areas reached 90% to 100%, which was sustained for many years. At the same time, the income and quality of life of coastal fishermen improved, creating various social values such as improved education and hygiene levels and the acquisition of skills (fishing methods and management techniques).

The factors behind the success of the company's strategy are mainly the following seven points:

(1) The business was 100% consistent with the company's management philosophy of "realizing enrichment."

(2) Awareness and pride as a for-profit enterprise: The business activities were based on the premise of generating mutual profit (a win-win relationship) on equal footing with customers, rather than charity or donations, and were intended to ensure sustainability by adhering to list-price sales and securing profits.

(3) "Cross-sector alliance": By building cross-sector alliances that transcend the boundaries of diverse stakeholders (whether for-profit or non-profit, public institutions or not, etc.), they succeeded in complementing resources and capabilities lacking in their own company and building entry barriers through complex networking.

(4) Thorough focus on the field, listening to customer feedback, responding single-mindedly to product defects, and establishing compatibility for inexpensive used replacement parts, they were able to establish their reason for existence from a "business that is nice to have" to an "indispensable business" for fishermen.

(5) Intentional entry into white spaces: Challenging difficult markets that other major competitors avoided (practicing Porter's secret to winning in strategy: "not competing").

(6) Respect for people and culture: Gaining trust and credit by respecting the historical culture and religious values of the markets they entered and not infringing upon them.

(7) Reverse innovation: In addition to profit, the know-how and technological development opportunities gained from that market had economic value (technological development progressed, such as improving durability under the harshest usage conditions, which was then applied to products for developed countries).

In addition to Yamaha Motor, there are several other examples of CSV strategies by Japanese companies. Let's look at an overview of another company, Kagome.

During its founding period in the Meiji era, the company was involved in agricultural reform (high value-added) through initiatives with Western vegetables. In modern times, its mission includes extending healthy life expectancy, global food issues, regional revitalization, and agricultural promotion. In Japan, it is developing a strategy aimed at making agriculture a growth industry. The company owns large-scale high-tech vegetable gardens and contract gardens nationwide. There, fresh tomatoes, baby leaves, and kailan are mass-produced with environmental consideration, such as using clean energy. It also conducts agricultural support activities in nine regions across Japan (Hiroshima, Okinawa, Hokkaido, Yamagata, Fukushima, etc.), addressing labor shortages, production area formation, reconstruction support, and sales channel expansion.

While these various "Farm Support" activities lead to stable procurement of high-quality raw materials for the company and support its top market share, the economic opportunities for farm managers become more solid, encouraging further development. These activities are designed with ingenuity throughout to "turn regional problems into regional confidence."

The practice of "Agriculture-Welfare-Commerce-Industry Collaboration" by the non-profit organization Dream Works, which the company established, is also part of this. Following tomato cultivation by people with disabilities in Yoichi Town, Hokkaido, and packing work by people with disabilities at Kobushi-kan in Sapporo, the products are sold to 450,000 customers nationwide as "Healthy Direct Delivery."

Through these diverse business activities composed of multiple perspectives, the company aims to realize the formation of more resilient regional agricultural clusters. The "industrial promotion of the entire region" and the formation of "cross-sector" networks seen in the company's activities are elements that also underlie the case of Yamaha Motor's fishing industry promotion seen earlier.

Solving social problems by companies can be said to be quite natural in a sense. This is because business is established by responding to some kind of need (unmet need) that exists in the world (society). However, as mentioned in the SDGs, various unmet needs (social and environmental issues) remain on Earth, many of which are difficult to satisfy on a for-profit basis. CSV strategy is to dare to satisfy these through business activities that involve profit generation, aiming to implement and succeed in a way that satisfies diverse stakeholders, including shareholders.

More companies trying this high-difficulty strategy will create positive value for society and the environment as a whole. The final goal of the SDGs (the 17th) is the promotion of global partnerships. Companies challenging CSV strategies through cross-sector collaboration are expected not only by shareholders pursuing new profit opportunities but also by diverse stakeholders around the world.

*1 Porter, M.E. and Kramer, M.R. (2006) “Strategy & society: the link between competitive advantage and corporate social responsibility,” Harvard Business Review, December.

Porter, M.E. and Kramer, M.R. (2011) “Creating shared value: how to reinvent capitalism---and unleash a wave of innovation and growth,” Harvard Business Review, January-February.

*3 Based on the lecture material "Kagome's Initiatives Toward Solving Social Issues" by Masanori Miyachi, Executive Officer of Kagome Co., Ltd., at the Japan Management Association, and the NPO Dream Works website. (Accessed April 26, 2022)