Proxima examines the concept of a shared value approach, and questions whether such an approach is viable in the long-run
Fundamental to any repeat business transaction is the concept of “Shared Value”: the minimum responsibility each party has to the other to create mutual respect. The intricacies of this concept are perfectly captured through the “Prisoner’s Dilemma”. In a one-off transaction, the optimal strategy for each side of a deal is to squeeze as much out of the other as possible, at every opportunity. However, this ceases to be the case when both parties do repeat business with one another – in fact, scientific research has demonstrated that this is the very worst strategy in a human environment, as these behaviours are quickly recognised as detrimental by the community. This shared value is reflected in all aspects of the modern business world we live in today, from our relationships with customers, businesses, suppliers, employees and the environment.
Is the pursuit of success, with disregard for shared value, viable in the long-run?
The ‘business’ world is clouded by a stereotype that organisations profit by taking value away from customers and society, and creating shared value will be detrimental to financial performance. In the public sector, any mention of savings is accompanied by a perception that either specifications have been ‘dumbed down’ or service has become second to cost. One cannot blame some large Government Departments – as autonomous in cases as private sector organisations - for operating with short-term gains in mind. The macroeconomic landscape continues to exert pressure, with smaller budget envelopes, over shorter durations, and less resources – all pointing towards immediate success with limited consideration to long term sustainable strategies. Understandable though this is, it is a dangerous position to take as it is essentially taking the one-off strategy of the Prisoner’s Dilemma and applying it to a repeat business scenario. It is fundamentally damaging to sustainable value delivery.
Organisations who choose to operate with short term benefits in mind, sometimes do so unethically or unsustainably. These disingenuous strategies may provide financial gains, but eventually will cost the organisation in tangible and intangible losses, which are far greater in the long term, as seen with the most notorious example of recent years, Volkswagen and the recent emission scandal.
One may argue that the fines received by VW were less than the possible financial benefits that they were able to see over that period of time. However, the reputational damage from the scandal has meant that future sales are uncertain as customers have recognised VW’s low commitment to shared value.
Paradoxically to the unethical and short term practices of VW, research has identified how the most ethical and enlightened companies consistently outperform their industry competitors:
- - 4% to 6% higher valuation
- - Pay 8x fewer consumer related fines
- - Enhanced sales up to 20% in some instances
- - Reduction in employee turnover by 50%
This suggests, creating economic value in a way that also creates value for society by addressing its needs and challenges, benefits organisations as a result. A way for businesses to start increasing shared value within their ecosystems and begin to harness the benefits stated above are to improve relations with your supply chain.
Strategic procurement in today’s business world requires more complex relationships, than the simple transactional relationships of old. Modern relationships with suppliers require an ability to collaborate to generate increased value, but most importantly shared value. Rather than treating your suppliers in a transactional way and cutting their margins as much as possible, more forward thinking organisations are rewarding their suppliers by doing what is both right for the business, but also the customer.
The Ministry of Defence (MoD) have recently contracted with Future Biogas and EDF, developing a sustainable energy supply for RAF Marham, which showcases one of the many collaborative projects with suppliers to drive social value within the UK. The base is set to become 95% sustainable with its energy usage, through fermentation of locally grown crops and in the process, saving £300k per annum in electricity costs. As a result, the MoD is creating sustainable shared value through investment in their utility contracts, not only benefiting commercially but delivering social value to the wider community.
The shift in precedence that social value has now taken within public sector procurement can also been seen through local councils’ efforts across the UK. Salford City Council, Devon County Council and Hull City Council have commissioned reports from the Princes Trust, NBF and Impact HUB to help better their understanding of how they embed and align social value within their organisational operations.
Being successful while being fair to your partners can unlock value which can form the foundations of long term financial sustainability. However, creating an ecosystem in which every entity prospers is an extraordinarily challenging undertaking, especially when human nature often dictates that people will only carry out the bare minimum responsibilities required. Customers are fickle beasts, and cultivating a relationship where they themselves uphold their commitment to a raised shared value can be tricky.
Effective collaboration with the supply chain is critical to unlocking value. It's contagious: once your customers see that you and your third parties are doing the right thing they are more likely to embrace your products. Companies waste far too much valuable resource being prisoners of their own ethical dilemmas which may not result in long-term profit.