The following are the author’s remarks at the Financial Leader of the Year (FLY) awards dinner on October 4, 2017, sponsored by the McCracken Institute and Rollins College. This is Part 3 of 4.
To read Part 1, click here.
To read Part 2, click here.
At its root, shared value recognizes that the competitiveness of a business relies upon the health of the community surrounding it. Businesses need not only economically healthy customers to buy its goods and services but also a community that is willing and able to provide critical public assets like roads, schools, and police protection. The surrounding community needs businesses to provide jobs and wealth creation opportunities for its citizens.
In Michael Porter’s seminal work on this topic, he outlines three key ways that companies can create shared value opportunities:
- By reconceiving products and markets
- By redefining productivity in the value chain, and
- By enabling cluster development
In the interest of time this evening, I am going to focus on only one of these.
I’d like to talk about how the value chain can be redefined to achieve shared value?
Let’s start with the so-called Millennial Capitalists… This guy:
This is Matthew Scanlan. He and a partner founded Naadam Cashmere, a socially conscious enterprise. Now, if you want to make a cashmere sweater, you have to start with a cashmere goat. The dietary and geographic conditions of the Central and East Asian steppe, mountain plateaus and deserts have evolved the goats that dwell there into the most productive cashmere fiber growers in the world. 70% of the world’s cashmere is produced in China with most of the balance coming from Outer Mongolia, Iran, and Afghanistan. The scarcity of supply is why cashmere can command such a premium.
So, Scanlan and his partner, Diederik Rijsemus, decided to source their cashmere from Outer Mongolia. What they found did not encourage them. At the bottom of the value chain are the goat herders. Outside traders made their fortunes by buying directly from the herders at very low prices and selling at the highest prices the market will pay.
What Scanlan did was to go directly to the herders. By cutting out the middleman, they were able to realize higher margins while paying the herders a higher price. In order to ensure their success, they flew to Mongolia and drove 20 hours over mountain roads. They talked directly to the herders in an effort to address their pain points. They invested in veterinary programs to improve the health of the goats. Healthier goats led to more consistent quality, greater volume of product, and higher incomes for the herders and their families.
That’s what it means to redefine the productivity in the value chain. That’s Shared Value in action.
But suppose you’re not a Millennial with the inclination to travel to Outer Mongolia to do business directly with goat herders. (I can tell you that’s not on my bucket list.) Suppose you work for a big company. Let’s say a global corporation… like Nestlé.