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Section 2: Creating Shared Value
CSV was advocated by Michael E. Porter and the concept firstly appeared in Porter’s 2006 Harvard Business Review article entitled “Strategy & Society:
The Link between Competitive Advantage and Corporate Social Responsibility.
The concept was further expanded in another Porter’s Harvard Business Review article entitled “Creating Shared Value: How to reinvent capitalism- and unleash a wave of innovation and growth”. It is time for everyone to sit down and think rationally that is business the only entity to be blamed for the problems or are we all responsible for the severe situations that have bothered us and made us confuse about where to go in the future.
Creating shared value seems to be promising framework for corporations and governments to work together to create business that would both benefit the society and the economy. Strategy leading authority, Michael E. Porter, has always been on a lookout for business new frontiers. Porter advocates SVM is able to create a link between business strategies and corporate social responsibility (CSR), if one can build a social value proposition into corporate strategy. However, SVM recognized the mutual dependence of the competitiveness of a company and the health of the communities surrounding it. On the other hand, social responsibility should always be considered on all levels of planning as well as in the implementation stage and in the operations.
CSR is a post World War II phenomena and it was not until the 1960s that businesses have start to recognize its importance23. The nature of CSR as the
23 Archie B. Carrol &Kareem M. Shabana. (2010) The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice. International Journal of Management Reviews, 12(1), 1.
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term suggested is to take responsibility, whereas CSV is about creating value in both business and economic terms. Some claimed that CSV is the extension of CSR, while others believe it is about creating value. Though both talks about
“doing well by doing good”, but CSV is fundamentally different than past activities of CSR. In some cases, social care programs are set-off to provide resolutions for certain social issues. Moreover, considerable amount of effort has been given to improve the living conditions of “the bottom of the pyramids”.
Many studies have shown the used-to-be CSR approach has evolved and is considered as to set the course for corporations to build a positive relation with governments and non-government organizations (NGOs). However, CSV is completely different to that of CSR. CSV is to emphasized on creating values while CSR focuses on taking responsibility.
The definitions of shared values24 according to Michael E. Porter are as the followings:
1. By reconceiving products and markets 2. By redefining productivity in the value chain 3. By enabling local cluster development
24 Porter, Michael E., and Kramer, Mark R. (2011). "Creating Shared Value". Harvard Business Review. P. 5
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25CSV and CSR both talk about the value but have different meanings, in the CSR value meant doing good for the society and in CSV it is about creating value of both economic and societal benefits while using cost-effective analysis. CSR is usually done through corporate philanthropy, talks about been a responsible citizen and focus on the sustainable development of mankind and the earth. CSV on the contrast is about combining companies and the community to achieve value creation. In many circumstances of the past, we can see that CSR often is created to respond to the external pressure but CSV is about integrating effort to create competitive advantage. As for the shareholder, CSR is often seen as a drawback for profit maximization while CSV could be more preferred option of integrate the resources, effort, skills, knowledge and technologies to maximize profit. When it comes to the project agenda, CSR often revolves around personal preferences of the agenda together with the reporting mechanism from the outside to drive the project.
Whereas in the CSV, the agenda is more company specific and generated internally. The source of investment often comes from the CSR budget for CSR project, but CSV wages the entire company budget to create a business model that would deliver both economic and societal values.
25 Porter, Michael E., and Kramer, Mark R. (2011). "Creating Shared Value". Harvard Business Review. P. 16
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from FSG to serve as the value creation framework to create values for both the business and the society. Thus, it is important to know how the results of shared value can be measured.Table 2-5. Levels of Shared Value in Both Business and Social Results
Source: FSG(2012), Measuring Shared Value
Levels of Shared Value Business Results Social Results
Reconceiving product
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Sections 2: Research Targets and Data Collection
2-1.Research Targets:
This research focuses on smart grid stakeholders of the developed countries, mainly United States of America, together with the smart grid stakeholders of Taiwan. The research employs the case study technique from qualitative research.
2-2.Data Collection:
Data collection was done mainly through the secondary resources. The sources of data include governmental official reports of United States of America, governmental official reports of Taiwan, websites related to smart grid sector like Greentechmedia, official documentations of utilities adopted smart grid, official documentations of IBM Company, official documentations of Taiwan Power Company, McKinsey & Company, GTM Research. A valuable insights of consumer’s attitude towards energy saving was gained from IBM Company’s Global Utility Consumer Survey. Secondary data helped to learn about the relations between the attitudes of different stakeholders towards the concept of smart grid and its relation with energy saving. All sources have helped to identify the relevance of IBM’s smart grid solutions with CSV. The reason for choosing these domains as sources of information is to ensure data reliability is reached to validate the research.
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Section 3: Data Analysis Methods
In this case study, IBM’s shared value approach will be used. IBM, “A century of leadership-Since its founding in 1911, IBM has strived to do more than simply giving back to society. To us, corporate responsibility has always meant expanding the expectations of what companies can and should do for society. Michael E. Porter’s definition of Creating Shared Value approach will also be used: “There are three ways companies can create shared value opportunities: by reconceiving products and markets; by redefining productivity in the value chain; by enabling local cluster development”.
In terms of smart grid, IBM’s definition of smart grid will be used: “A Smart Grid is transparent, accessible, resilient. And optimized from the user on up.26” In addition to that U.S Department of Energy’s definition of smart grid will also be used: “Smart grid” generally refers to a class of technology people are using to bring utility electricity delivery systems into the 21st century, using computer-based remote control and automation. These systems are made possible by two-way communication technology and computer processing that has been used for decades in other industries.”
The sources of data are mainly secondary information of literature, publications and trustful documentations from the government and the industry.
Data are then comparing with the principles of Shared Value to find how relevant is IBM’s CSV approach to that of Michael E. Porter’s CSV in the smart grid landscape.
26 IBM Company, IBM Smart Energy Program,
http://www.ibm.com/smarterplanet/us/en/smart_grid/ideas/
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Chapter Four: Research Findings
Section 1: Emergence of CSV Business and Smart Grid in Developed Countries
For over a century of time, IBM has always put itself on the business frontier and continues to lead to create solutions that ultimately became either a common tool or practice of its time. The hereditary motto of THINK still strikes IBM’s best effort to combat the problems that our humanity faces.
United Nations’ publication of WORLD POPULATION TO 2300 indicated the world population is projected to peak at the level of 9.22 billion by the year of 2075. This number has gone beyond the projected level of 8.92 billion for year 2050 in another United Nations’ publication of 2002 Revision. Whether the city would be able to maintain sustainable growth depends on how we manage our own energy system.
The world is seemingly carrying the weight of longevity of human race, which directly contributes to the ever growing population. IBM is well aware of the issues revolving around the center attention of sustainability. By the year of 2050, estimation of over 70% of the world’s population will live in cities. Utility of power is increasing exponentially. Concerns about the stability and security of the environment surfaced. Global population is expanding at the expense of the environment and whittles down the natural resources we need to support human activities. The modern economy heavily relies on the process of transformation of resources. Society feeds on the outputs of the products and services generated by corporations. Corporations have become the major
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source for consumption of natural resources. The transformation processes could be explained by the value chain of Michael Porter. Value chain of a company is composed of two types of activities, primary and support. A company’s competitive advantage comes from the distinctive combination of its value units in the value chain to meet the demand of the consumers by providing unique values. Quite often this would only create economic values and leaving the societal needs and environmental protections untouched. It goes without saying that earth is the home to humanity. There is only one earth for us to live on and the essence to all things. Having understood that, IBM began the program of smart planet. IBM has spend tremendous amount of effort investing on new technologies and taking actions that would provide not only economic value but also creating values for the society to reach a even bigger goal of sustaining the environment.
A corporation is only responsible for the creation of profit for the shareholders and to create jobs for the society (Friedman 1970). That is a classic example of traditional capitalistic approach of business. We must come into the realization that without the society, business would not be able to make progression. Everything that business world is taking are coming from the society. SVM is there to indicate business to find the point where the business values intersect with the social values and to provide those values from your best practices related to the core of the business. It is nothing like the corporate philanthropy or CSR or sustainability, it is mostly about value creations (Porter 2006). It should be clear that sustainability is the basis of all, for the business community, the economy, the society to prosper sustainably.
Without them it would be like building castles in the sky when talking about
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sustainability. We must consider the fact that to be environmentally aware is one thing but to be able to turn that awareness into practices is another thing.
As we can see countries that are more environmentally aware are mostly coming from the developed world. To reach that stage, many have to be done.
The thing is that most of the so called environmentally aware corporations must have gone through the time when the operations are seen as harmful.
We must know that we are all too easy to live in the comfort zone, and that is partly the human nature. In the business world, we often talk about the downsides of staying in the comfort zone, it would wear off the competitiveness of the organization along with many other organizational problems that businesses might not be able to fully utilize its assets and the resources possessed. There would not be any innovation formed if we stay satisfy the achievements of the past and grab hard onto and would not let them go. You might not like to think it as a direct execution to an organization but in fact it is like a tumor that is slowly eating away the energy of any organization.
That also applies for the society, we choose to stay with the things we have and refuse to go the extra mile to start doing things that are beyond out ability in order to break through the bottlenecks. Grid system is a good example as it was builds on the technology that has existed since the early 20th century but hardly modified ever since. Government is responsible for providing the public infrastructure as the citizens of any nation have the right to be treated fairly in terms of access to the commodities that would support their lives. The economic reason why the grid system has not been upgraded to my best guesses probably are it would be too expensive doing so. U.S government has estimated that it would take as tens of billions U.S dollar to reform the entire
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system.
At time when the only concern for any industrialized countries was to create as many products possible to boost the GDP level. I would hardly imagine anyone would have think that the grid system that once helped the nation to achieve those remarkable GDP would come back firing at them one day. The discussions about how to greatly sustain the world did not come into people’s attention until the first U.N conference about climate change took place in June 1992. With so many parties’ interest to consider, it takes a long time for people to finally see the clear reduction of greenhouse gasses. We must know that everything we do in the business world has its own limitations, but the traditional capitalistic approach has a fatal flaw of overrating the values in monetary term.
From many of the business cases from the U.S, many corporations were asked by the governments and the NGOs to act more responsibly when deliver the values and to reform the value chain. No business is able to do everything by itself; outsourcing has become the way for companies to save the capital.
So now it has become the responsibilities of the entire value chain and the supply chain to act in order to the governmental regulations to prove it as both environmentally and socially responsible. It seemed to be a complicated thing to do as now corporations also have to make sure that every single entity in the supply chain and the value chain has to also act responsibly. Clearly, it has become the competition between different sets of supply chains and how the value chain is comprised in the most socially and environmentally accepted manner. I do not see how this could be reached by corporate philanthropy, so it
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is out of the discussion. As for CSR, many programs have focused too much attention on creating values that cost too much capital investments for the corporations.
The economic progress simply feeds on electric power, mostly from coal and oil combustion in the world today. Though most power providers claimed most electricity supporting the average demand of the consumers are produced as cleanly as it could be. Inevitably, fossil fuels and natural gas still remained the essential resources for producing electric power and are emitting considerably huge amount of green gasses to the environment. In the case of more environmentally aware utilities, they have started to prioritize ways of electricity generation according to the level of externalities created. However, when the peak demand occurs, for instance, everyone turns on the air conditioning system in a hot summer day, more electricity is required. To respond to that, standby coal and crude oil power generators are activated to produce more electricity to keep up with the peak demand. As the result, more carbon and hazardous gasses are emitted into the air and resources are wasted to meet that temporary high demand year after year.
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The fundamental idea of electric power generation and the consumption of electricity are based on keeping the equilibrium point in real-time. Unlike, any other commodities, electricity is hard to be stored at large amount without additional equipments such as batteries of all sizes to store that power. In order to avoid power shortage from happening, the electricity supply has to be higher than the demand from the demand side. If the supply of electricity is higher than the demand, excessive supply could be reserved to ensure that power outage does not happen. The difference between the supply and the demand would be the margin of electricity. Electricity supply also has to follow the pattern of the demand in order to reach security, flexibility of both are equally important, shown in figure 4-1.
When the peak demand occurs, normally it would mean the supply also has to increase to cover peak demand. This is why demand management is so important. Demand management means that rather than increasing the supply throughout the day, it would be better to maintain or in best wishes to decrease
Figure 4-1. Demand and Supply of Electric Power
Source: This Research Summarized
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the demand for electricity occur at the peak time. This would mean that supply does not have to increase drastically at the peak time.
Reducing the electricity is more accessible than increasing the supply. It’s faster and it’s less expensive. To reduce the demand of electricity it requires energy saving by the consumer through the realization of demand response.
Utilities need to engage the consumers to participate in energy reducing programs; the demand sides have the responsibility to take actions more than the supply side. This is the demand response, which means that the demand sides have take actions to the request of the demand management. To put it in short, once the energy efficiency is improved, less money would spend on the construction of new power plants to meet the increasing high demand. Utilities can also design cost effective tariffs for the customers. Smart grid promises a win-win situation for all stakeholders in the broader picture. Thus, it is in the mission of utilities to take active role in the establishment of smart grid. If the demand and supply could be predicted by, for instance through the use of “Dig Data” analytics, consecutive actions like demand response can support to ease that peak demand. Old fashion ways for producing electricity like oil and coal combustions have extreme high level of externalities to not only the environment but also to the society and economy. List of “Oil Crisis” from the
Utilities need to engage the consumers to participate in energy reducing programs; the demand sides have the responsibility to take actions more than the supply side. This is the demand response, which means that the demand sides have take actions to the request of the demand management. To put it in short, once the energy efficiency is improved, less money would spend on the construction of new power plants to meet the increasing high demand. Utilities can also design cost effective tariffs for the customers. Smart grid promises a win-win situation for all stakeholders in the broader picture. Thus, it is in the mission of utilities to take active role in the establishment of smart grid. If the demand and supply could be predicted by, for instance through the use of “Dig Data” analytics, consecutive actions like demand response can support to ease that peak demand. Old fashion ways for producing electricity like oil and coal combustions have extreme high level of externalities to not only the environment but also to the society and economy. List of “Oil Crisis” from the