Competing to change the world: creating shared value
Professor Michael Porter, one of the world’s most influential thinkers in the areas of strategy, competitiveness, and innovation, presented two inspiring and practically-oriented sessions on how the latest business model – CSV, creating shared value – can reshape and reinvigorate business and society during the seminar Competing to change the world: creating shared value at the Van Nelle Fabriek in Rotterdam, the Netherlands on 20 May 2016. The event was co-organised by Rotterdam School of Management, Erasmus University (RSM) and FOCUS Conferences.
With a particular focus on health care, the seminar featured speakers from two organisations which, with Professor Porter’s input, have made or are making the shift to creating shared value in the area of well-being and health: Nestlé and Erasmus MC. They were joined by experts from academia and practice during a final panel discussion moderated by Rick Nieman, author and former RTL News presenter.
Creating shared value
According to the Harvard Business School Institute for Strategy and Competitiveness, of which Professor Porter is director, the next transformation of business thinking lies in the principle of shared value: creating economic value in a way that also creates value for society by addressing its needs and challenges.
So what is shared value? Corporate policies and practices that enhance the competitive advantage and profitability of the company while simultaneously advancing social and economic conditions in the communities in which it sells and operates. Shared value is not corporate social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success.
Business must compete to change the world
Pursey Heugens, professor of organisation theory, development and change in the Department of Strategic Management & Entrepreneurship at RSM, provided an introduction to the day for the 200-plus professionals in the audience, many of them currently working in the field of health care such as hospital administration, pharmacists or medical equipment.
Professor Heugens framed the significance of Porter’s work over the past 40 years, including early scholarly work that led to the publication of the seminal The Competitive Advantage of Nations in 1998 (Free Press), and the publication in 2006 of Redefining Health Care: Creating value-based competition on results (Harvard Business Review). “Michael has been able to continuously reinvent himself, investing in the conceptual tools and global measurement strategies that have made his ideas measurable and actionable,” Heugens said, noting the “continuing relevance of the ideas he has given us through his research, teaching and consultancy.”
He then turned the microphone over to the energetic Michael Porter, who received an honorary doctorate bestowed by Erasmus University Rotterdam in 1993. “I’m happy to be here,” said Porter. “I feel proud of this wonderful university and its great business school RSM, and I’m honoured that so many professors are in the audience.”
Sustainable competitive advantage
In this first session, Professor Porter made a review of the role of business in society, and why CSV is the new guiding ethos for business – one that will improve the lives of people as well as create sustainable competitive advantage for business. “These are topics I’m passionate about, and I emphasise that my approach today is not academic,” said Porter. “We are going to change the way we think about what we actually do. My goal is that everyone here does something different tomorrow – hopefully you’ll walk out with some powerful, practical things we can do differently in business.”
“Only business can create large-scale positive change”
The CSV model creates long-term sustainable value for business and people by focusing the unique attributes of business upon societal issues that must be solved. And only business, said Professor Porter, is equipped to create large-scale positive change. “Societies everywhere are facing significant social, environmental and economic challenges,” said Porter. “Governments and NGOs lack sufficient resources, technology and capabilities themselves to fully meet these challenges alone. Only business can create economic prosperity. But we need a new approach.”
Corporate philanthropy and social responsibility
He showed the evolution of business’s involvement with society over the past 30 years. First, there was corporate philanthropy – basically, business giving money and volunteers to social causes. “How successful have we been? It’s been good – we’ve supported worthy causes and done our best to be generous,” said Porter. “But if we’re very honest we can agree corporate philanthropy is good but hasn’t solved social problems. There’s only so much we can donate; we have shareholders. And typically corporate philanthropy is a lot of donations to a lot of different causes, so we dole out little bits of money to lots of organisations but the impact is small.”
“We’ve got to think about the consequences of what we’re doing today so we can keep making profit – we need a more sustainable long-term view of our company in order to not harm society in pursuit of short-term economic success.” However once again, while CSR is good, it doesn’t actually solve any big societal problems.
“I started worrying about what we would actually do to solve these problems because governments and NGO’s can’t solve them and what we’re doing in business today isn’t going to solve them.”
Why ‘creating shared value’ is the answer
Professor Porter said that the answer to these societal issues has been staring business in the face – but it requires a new way of thinking about how we do business. CSV means addressing societal needs and challenges through business itself, with a business model – and making a profit. “Shared value says there is no conflict between meeting social needs and making a profit,” said Porter. “In fact some of the greatest opportunities for business are meeting the unmet needs of society.”
He described the three levels of CSV:
- Reconceiving needs, products, and customers
- meeting societal needs through products
- serving unserved or underserved customers
- Redefining productivity in the value chain
- utilising resources, energy, suppliers, logistics, and employees differently
- Improving the local and regional business environment
- improving skills, the supplier base, the regulatory environment, and the supporting institutions that affect the business
- strengthening the cluster on which the company depends.
Again, it is the mindset of business that must shift, said Porter. “We have to take social problems from the side of what business and capitalism are, and put them in the core of what we do,” he said. “This is transformational. And as CSV starts to get more and more momentum and traction, we are starting to see huge impact.”
Concrete examples followed, outlining the successes of CSV across a variety of sectors and geographic areas: shared value in pharmaceuticals created by Novartis in rural India; shared value in banking from Regions Bank in the USA; shared value in insurance through Discovery Health in South Africa; and other innovative enterprises from around the globe.
“I guarantee you that every single organisation in the room can do this, but you’ve got to understand where you can play,” said Porter. “Shared value has to do with your particular company, your particular business, your particular skills, your particular assets. Societal deficits create costs for us – we want society to be effective and efficient, that’s better for business,” he said.
Health and value
Creating shared value is important for all business, said Professor Porter – but one area of acute, global need is the area of health care reform. No country is doing it well; quality is unpredictable; costs continue to rise.
And it is precisely because of the large scale reform needed that health care provides the most opportunities to simultaneously create societal benefit and sustainable profit for business. It invites innovation.
“This is a path I’m drawn to because there are no answers – we’ve been complaining about health care costs and other problems for 40 years and a lot has been tried, but nothing has succeeded,” Porter said. “We can’t just pay more and more. We also know that quality is only so-so, and that a lot of patients don’t get the results we’d like them to have. So – how do we take a fresh look at health care and create a different approach which will allow us to achieve what society wants: affordable, efficient health care that delivers great results?”
Uncomfortable with thinking differently
Data from his presentation clearly showed the problem: health care spending has ascended more swiftly than either GDP or average income since 1992, unsustainable on any level. Further, the quality of care – even in countries such as the Netherlands, Germany and Sweden – is erratic and seems to have little to do with where the patient chooses treatment. Big research hospitals don’t have better outcomes than the ‘hospital on the corner’. This has nothing to do with the quality of people who work in health care, Porter hastened to tell the audience.
“The people who work in health care are spectacular. They are passionate, they work hard, and they care about us as patients. So it’s not about talent, work, attitude or values, it’s actually about the structure of health care. It’s about the way we’ve configured and designed the system,” he said.
“Let’s all understand we need to think in a new way. It will be uncomfortable, it’s always uncomfortable to think in a different way – but if we can get on a different path, everyone will be happier including those who work in health care.”
Value-based health care
Porter has created a framework for Value-Based Health Care Delivery that offers a fundamentally new strategy in the world of health care. [This 2012 article from Harvard Business Review, The Strategy that will Fix Health Care, gives the background and aim of value based health care delivery.]
The first and basic action of Porter’s framework is the creation of the Integrated Practice Unit (IPU). Derived from the Strategic Business Unit (SBU) that has been deployed in business for a century, the IPU is designed to create the greatest value for the patient – that is, consistent high-quality health care – while reducing the cost and complexities of care all around.
An IPU is focused on treating a particular condition – breast cancer or migraine, for example – in centres in which staff, from surgeons to nurses to physical therapists to administrators, have specific experience in working with the condition.
“We can’t measure value in a hospital where hundreds and hundreds of patients are being treated for hundreds of problems,” said Porter. “You can’t measure the value of a surgeon because, even if they do a great operation, the rehabilitation may not go well – and then whatever the surgeon did was worthless, despite their brilliance you might have been better off without surgery.”
The future: integrated practice units
An IPU enables other parts of Porter’s Value-Based Health Care Delivery framework, for example the crucial ‘measurement of outcomes’ and ‘measurement of costs’ which together create the basis for ‘bundled prices’ in which patients and insurance companies pay the flat rate for an entire cycle of care. Systems integration increases efficiency and patient satisfaction in the entire health care system (because non-acute conditions are removed from the overtaxed hospitals and handled by the IPUs and their affiliates) and creates geographic expansion in which facilities known for their excellent services help bolster the quality of local clinics and hospitals. Building an enabling information technology platform helps to restructure care delivery and measure and record results.
While this is a radical rethinking of health care as a value-delivering proposition – a business – Professor Porter described himself as “very, very optimistic” about the future of health care.
He gave successful examples of IPU-based health care reform, including the West German Headache Centre.
The punch line
To wrap up his sessions, Porter asked the audience, “So – what’s the punch line?”
“The message is that we are in business to create economic value and prosperity. If we don’t, there will be no prosperity, only business can create that. And profit is not bad. Profit is actually the key to everything, the key to prosperity but also to scalability and sustainability. We can’t be ashamed of that – we’ve to celebrate how important it is when we can do that. But we’ve got to do it in a way that also creates shared value for society, and doesn’t erode value for society.”
“Business acting as business is arguably the most powerful force for addressing many of society’s pressing issues and needs."
Porter’s methods in action
Afternoon sessions included presentations by organisations who have embraced Porter’s CSV message and methods: Nestlé, one of the world’s largest and most decentralised food and nutrition companies; and the Erasmus Medical Centre.
Rick Nieman, author and former long-time news anchor for RTL Nieuws, was the presenter for the afternoon sessions.
Nestlé: “Food should always feel good”
The history of Nestlé is a history of feeling, said Marc Aurel Boersch, CEO at Nestlé Netherlands. Founded by Henri Nestlé and his family to produce a nutritious baby formula in 1866, the company is now the largest food company in the world with around 2,000 brands. “At Nestlé I have learned that it is great when a company is founded on a feeling, caretaking moment, but like so many organisations in the industry we are bringing this caretaking further – we take good care of our business, but explicitly and simultaneously we have to take into account what society needs,” said Boersch, adding that “Michael Porter helped us. We inspired him with our issues and change needs, to frame that into creating shared value.”
CSV at Nestlé has been translated into four pillars: nutrition, water, rural development, and youth employment. A video featuring Paul Bulcke, CEO of Nestlé S.A., entitled ‘Nestlé in society: creating shared value and meeting our commitments‘ showed how CSV is “the fundamental way we want to behave as a company and as persons,” and how they honour their 39 commitments, “A company behaves like a citizen, with the same sense of responsibility and with the size we have we can make a difference,” said Bulcke in the video.
Erasmus MC: “Healthy people and excellent care”
Jan Hazelzet, professor of quality and health outcomes and chief medical information officer at Erasmus MC, discussed the current advances and challenges facing Erasmus MC as the organisation moves to a value based health care (VBHC) system. The rapidly-growing complexity of healthcare, in which more and more options for diagnosis and treatment are arising at the same time that chronic and life threatening diseases are on the rise, has created a fragmented, expensive and sometimes ineffective scenario. “Currently our health care is not really patient-centred, it is profit-centred,” said Professor Hazelzet. “It should be more about demand, and listening to the needs and preferences and values of patients.”
There are six determinants towards which Erasmus MC is working; health care must be Effective, Patient-Centred, Safe, Efficient, Timely, and Equitable. As discussed by Michael Porter earlier in the day, measurement of outcomes plays a crucial part in creating health care systems according to the above six determinants; and Erasmus MC is the first European health care institution to become a Strategic Partner of the International Consortium for Health Outcomes Measurement (ICHOM), a non-profit organisation founded by Professor Porter, the Swedish Karolinksa Institutet, and Boston Consulting Group to drive the VBHC agenda.
The seminar concluded with a panel discussion on shared values, led by Rick Nieman. The panel members were Marc-Aurel Boersch, CEO at Nestlé Nederland; Professor Jan Hazelzet from Erasmus MC; Wilma van der Scheer, managing director of the Erasmus Centre for Health Care Management; Jack Tabbers, general manager at Mars Netherlands; and Professor Pursey Heugens from Rotterdam School of Management, Erasmus University.
Jack Tabbers was challenged by Rick Nieman to describe how a Mars bar creates shared value. “That’s a question we get an awful lot,” said Tabbers. “We are in the business of selling a treat, and a treat can be part of every healthy diet. We listen to our consumers, and if you look at the evolution of our bar it’s getting smaller.”
Van der Scheer let Nieman know that the biggest issue in health care and the move to value-based health care had not been addressed during the day: “Health care is a service, and health care professionals aren’t taught to think this way. It’s about attitude, and currently professional autonomy is higher than patient autonomy.” How to shift this attitude? “Training, training, training,” she said.