UCSI University

Strategic Differentiation:
Creating Comparative Advantage
 Strategic Differentiation: Creating Comparative Advantage

A seminal contribution to strategy was Michael E. Porter’s five forces

model (1980) which profoundly influenced the thinking of researchers
and practitioners in business strategy around the world since the 1980s.

In essence, Porter argued from a relatively external, industry-based

perspective that the goal of the strategist is to understand and cope not
only with competition but with customers, suppliers, potential entrants,
and, inevitably, also substitute products.

These five forces define an industry’s structure and shape the nature of
competitive interaction within any industry sector.

(Porter's Five Forces are Threat of new entrants, Bargaining power of buyers, Bargaining power
of suppliers, Threat of new substitutes, and Competitive rivalry)
Originally Porter was skeptical about social issues affecting business, but he
started to integrate the idea of sustainable business in his strategy model,
recognizing that ESG issues form part of the competitive context in the medium
and long term.

His concept of shared value is the vehicle for this, first published with Mark
Kramer in the Harvard Business Review in 2006. In this book, we republished the
subsequent publication in 2011, again with Mark Kramer, which expands further
on their core thesis of CSV (creating shared value): that

businesses can create economic value and value for society in mutually beneficial
ways, creating a comparative advantage for the business and that the value for
stakeholders and society is more sustainable since it is underpinned by economic
fundamentals.
According to Michael Porter and Mark Kramer, there are three pathways to
creating shared value, i.e., developing sustainable value propositions to
stakeholders for the purpose of gaining competitive advantage:

1. Reconceiving products and services to better meet social and

environmental needs in a profitable way;

2. Redefining productivity in the value chain to generate more efficient and

more sustainable use of human and material resources, both in the supply
and distribution chain;

3. Local cluster development among producers and suppliers and also

between profit and non-profit sectors, including NGOs, who can become
partners in the business model instead of adversaries.
This reflects the core idea of Porter and Kramer’s Creating Shared Value (CSV):

- That business can create economic value AND value for society in mutually
beneficial ways.
- This can create a competitive advantage for the business and,
- as a result, the value for stakeholders and society is more sustainable
because it is underpinned by economic incentives.
 Failure of Capitalism in protecting sustainability

● In recent years business increasingly has been viewed as a major cause of social,
environmental, and economic problems. Companies are widely perceived to be
prospering at the expense of the broader community.

● As these issues over time emerged, matured and became publicly associated
with corporate responsibility, they have shifted an industry’s ground rules and
pose serious threats to the sustainability of the business.

● These trends produce issues that exacerbate risks in the business model and
strategy or create new risks, thereby affecting the sustainability of the business
model and strategy.
 Failure of Capitalism in protecting sustainability
● A big part of the problem lies with companies themselves, which remain trapped in an
outdated approach to value creation that has emerged over the past few decades.

● They continue to view value creation narrowly, optimizing short-term financial

performance in a bubble while missing the most important customer needs and ignoring
the broader influences that determine their longer-term success.

● How else could companies overlook the well-being of their customers, the depletion of
natural resources vital to their businesses, the viability of key suppliers, or the economic
distress of the communities in which they produce and sell?
● How else could companies think that simply shifting activities to locations with ever lower
wages was a sustainable “solution” to competitive challenges?

● Government and civil society have often exacerbated the problem by attempting to
address social weaknesses at the expense of business.
 The Solution

● The solution lies in the principle of shared value, which involves creating
economic value in a way that also creates value for society by addressing its
needs and challenges.

● Businesses must reconnect company success with social progress.

● Shared value is not social responsibility, philanthropy, or even sustainability

but a new way to achieve economic success. It is not on the margin of what
companies do but at the center.
 Moving Beyond Trade-Offs

● Business and society have been pitted against each other for too long. Because
economists believe in providing societal benefits, companies must temper their
economic success. In neoclassical thinking, a requirement for social improvement—
such as safety or hiring the disabled—imposes a constraint on the corporation.
According to the theory, adding a constraint to a firm that is already maximizing
profits will inevitably raise costs and reduce those profits.

● The concept of shared value, in contrast, recognizes that societal needs, not just
conventional economic needs, define markets. It also recognizes that social harms or
weaknesses frequently create internal costs for firms—such as wasted energy or raw
materials, costly accidents, and the need for remedial training to compensate for
inadequacies in education. And addressing societal harms and constraints does not
necessarily raise costs for firms because they can innovate by using new
technologies, operating methods, and management approaches—as a result,
increase their productivity and expand their markets.
 The Roots of Shared Value
At a very basic level, the competitiveness of a company and the health of the communities around it
are closely intertwined. A business needs a successful community not only to create demand for its
products but also to provide critical public assets and a supportive environment. A community
needs successful businesses to provide jobs and wealth-creation opportunities for its citizens. This
interdependence means that public policies that undermine the productivity and competitiveness
of businesses are self-defeating, especially in a global economy where facilities and jobs can easily
move elsewhere. NGOs and governments have not always appreciated this connection.

In the old, narrow view of capitalism, the business contributes to society by

making a profit, which supports employment, wages, purchases,
investments, and taxes. Conducting business as usual is a sufficient social
benefit. A firm is largely self-contained, and social or community issues fall
outside its proper scope.
 What Is “Shared Value”?
● The concept of shared value can be defined as policies and operating practices that enhance a
company's competitiveness while advancing the economic and social conditions in the
communities in which it operates. Shared value creation focuses on identifying and expanding the
connections between societal and economic progress.

● The concept rests on the premise that both economic and social progress must be addressed using
value principles.
 What Is “Shared Value”?
● Value is defined as benefits relative to costs, not just benefits alone. Value creation is an idea that
has long been recognized in business, where profit is revenues earned from customers minus the
costs incurred.

● However, businesses have rarely approached societal issues from a value perspective but have
treated them as peripheral matters. This has obscured the connections between economic and
social concerns.

● Strategy theory holds that to be successful, a company

must create a distinctive value proposition that meets
the needs of a chosen set of customers. The firm gains
a competitive advantage by configuring the value
chain, or the set of activities involved in creating,
producing, selling, delivering, and supporting its
products or services.
 How Shared Value Is Created?
● Companies can create economic value by creating societal value. There are three distinct ways to
do this:
○ by reconceiving products and markets,
○ redefining productivity in the value chain, and
○ building supportive industry clusters at the company’s locations.
● Each of these is part of the virtuous circle of shared value; improving value in one area gives rise to
opportunities in others.

● Better-connecting companies’ success with societal

improvement opens up many ways to serve new
needs, gain efficiency, create differentiation, and
expand markets.
● The ability to create shared value applies equally to
advanced economies and developing countries, though
the specific opportunities will differ.
 Reconceiving Products and Markets

● Society’s needs are huge—health, better housing, improved nutrition, help for aging,
greater financial security, and less environmental damage. Arguably, they are the
greatest unmet needs in the global economy. In business, we have spent decades
learning how to parse and manufacture demand while missing the most important
demand of all. Too many companies have lost sight of that most basic of questions: Is
our product good for our customers? Or for our customers’ customers?

● In advanced economies, demand for products and services that meet societal needs
is rapidly growing.

● In these and many other ways, whole new avenues for innovation open up, and
shared value is created. Society’s gains are even greater because businesses will
often be far more effective than governments and nonprofits are at marketing that
motivates customers to embrace products and services that create societal benefits,
like healthier food or environmentally friendly products.
 Redefining Productivity in the Value Chain

● A company’s value chain inevitably affects—and is affected by—numerous societal

issues, such as natural resource and water use, health and safety, working
conditions, and equal treatment in the workplace. Opportunities to create shared
value arise because societal problems can create economic costs in the firm’s value
chain. Many so-called externalities actually inflict internal costs on the firm, even
without regulation or resource taxes.

● The new thinking reveals that the congruence between societal progress and
productivity in the value chain is far greater than traditionally believed. The synergy
increases when firms approach societal issues from a shared value perspective and
invent new ways of operating to address them.

● In each of the following areas, a deeper understanding of productivity and a growing

awareness of the fallacy of short-term cost reductions (which often actually lower
productivity or make it unsustainable) are giving rise to new approaches.
○ Energy Use and Logistics
○ Resource Use
○ Procurement
 Enabling Local Cluster Development

● Clusters are prominent in all successful and growing regional economies and play a
crucial role in driving productivity, innovation, and competitiveness. Stronger local
capabilities in such areas as training, transportation services, and related industries
also boost productivity. Without a supporting cluster, conversely, productivity suffers.
● Deficiencies in the framework conditions surrounding the cluster also create internal
costs for firms. Poor public education imposes productivity and remedial- training
costs. Poor transportation infrastructure drives up the costs of logistics. Gender or
racial discrimination reduces the pool of capable employees.

● A key aspect of cluster building in developing and developed countries alike is the
formation of open and transparent markets.
● When a firm builds clusters in its key locations, it also amplifies the connection
between its success and its communities’ success. A firm’s growth has multiplier
effects, as jobs are created in supporting industries, new companies are seeded, and
demand for ancillary services rises. A company’s efforts to improve framework
conditions for the cluster spill over to other participants and the local economy.
 Creating Shared Value in Practice

● Not all profit is equal—an idea that has been lost in the narrow, short-term focus of
financial markets and much management thinking. Profits involving a social purpose
represent a higher form of capitalism that will enable society to advance more rapidly
while allowing companies to grow even more. The result is a positive cycle of company
and community prosperity, leading to enduring profits.

● Creating shared value presumes compliance with the law and

ethical standards and mitigating any harm caused by the
business, but goes far beyond that. The opportunity to create
economic value through creating societal value will be one of the
most powerful forces driving growth in the global economy. This
thinking represents a new way of understanding customers,
productivity, and the ex-access to housing. A shared value
approach would have led financial services companies to create
innovative products that prudently increased access to home
ownership
 Key Questions to Ask (Applicable to All Part IV Cases)
● How can a sustainability-related value proposition enhance strategic advantage? How
is this achieved: by new innovative products and services, redefining productivity in
the value chain, partnerships, and clusters?

● How can business models lower disadvantaged exposure to macro trends? How can
differentiation be achieved? Can it be sustained?

● How is this strategy informed by first mover advantage/ disadvantage analysis?

● Is the strategy backed up with critical resources such as preferential external

relationships with stakeholders, internal organizational capabilities, knowledge
management processes, and systems?

● Are these resources unique or difficult to imitate by competitors?

● Which normative framework needs to support the sustainability business

proposition?