Creating Shared Value: A new paradigm for business

Asit K. Biswas and Cecilia Tortajada

SANCHAR EXPRESS | April 7, 2014 

In 1970, the eminent economist and Nobel Prize winner Milton Friedman wrote that “social responsibility of business is to increase profits”. Nearly a decade later, the US Business Roundtable argued that “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy. Even as late as 1997, the US Business Roundtable argued that the main purpose of a business is to “generate economic returns to its owners.”

From Wall Street to Dalal Street, Friedman’s free market philosophy has continued to be the primary mantra over the past four decades. Egged on by the shareholders, financial institutions, media and the self-serving and often extraordinarily high compensation packages, business leaders are under tremendous pressure to increase profits every quarter so that the stock prices can continue to go up.

Societal benefits and serving the communities within which they operate have often taken a back seat. Corporate social responsibility has now become primarily philanthropic and public relations exercises and sometimes used for damage control when the reputations of companies take a hit.

Albert Einstein once said “We can’t solve a problem by using the same kind of thinking we used when we created them.” Fortunately, a few major companies and business leaders are using a different mindset to overcome the intense pressure to show only increasing shareholder returns. There are a few enterprises which are developing new and functioning business models that can contribute to prosperity of the people whose lives they touch. This is what a major multinational company, Nestlé, calls creating shared value, and Bill Gates has termed creative capitalism. Like all new paradigms, this one also has its supporters and detractors. For example, Nobel Prize winner Edmund Phelps considers that altruism might resolve many market imperfections. Another Nobel Prize winner, Gary Becker thinks altruistic companies may not survive in an increasing cut-throat competitive economy. Larry Summers, former US Treasury Secretary, thinks that corporations may not be able to meet multiple corporate objectives.

In order to test the creating shared value paradigm, a term that was coined by Nestlé in 2011, the Third World Centre for Water Management decided to do an independent case study of one of Nestlé’s activities in Moga, Punjab, India, to see what this concept has actually achieved in terms of rural development, poverty alleviation, improved standards of living and better quality of life of people in the region.

The story of Nestlé at Moga started in 1958, when the Government of India decided to ban imports of milk powder and other milk products to conserve foreign exchange and kick-start domestic production capacity. Nestlé was invited to consider the possibility of establishing a milk district in an area of 11,000 km2 around the village of Moga from where the company could buy fresh milk.

When Nestlé decided to construct the factory at Moga, it was a place of abject poverty, widespread malnutrition, and poor living conditions. Subsistence agriculture was the main source of living. Only a very few villages and villagers had access to electricity or clean water.

The area had no milk culture, and the prevailing dairy sector was a low input and output activity for supplementing household nutrition. Taboos and social-religious reservations were major constraints which discouraged increasing milk production.

In order to succeed and become an agent of change, Nestlé had to reshape social, economic, and cultural attitudes to dairying, organize a formal milk trade, address infrastructural and production shortcomings, establish reliable milk collection system, set strict and transparent measuring standards for both quantity and quality of milk purchased and pay regularly to its supplying farmers competitive and profitable rates.

In spite of all these handicaps, Nestlé successfully established a milk operation at Moga. On the very first day of the factory, on November 15, 1961, Nestlé collected only 511 kg of milk from 180 farmers from four villages, which accounted for only 5.6% of the then plant capacity. In 1962, the first full year of operation of the factory, Nestlé purchased 2,054 tonnes of milk. But 10 years later, this amount had increased to 26,660 tonnes, a 13-fold increase.

From about 1985, the Moga area witnessed an economic renaissance when the farmers realized the benefits of switching from buffaloes to cows for milk production. This is because the average annual milk yield of a female buffalo is about 1,600 kg and it cannot be increased by cross-breeding. In contrast, cows can be cross-bred and the yield could be increased to about 4,000 kg, and the lactation period could be as high as 300 days per year. This high milk yield completely transformed the social and economic landscape of the region.

Nestlé has consistently provided free animal husbandry advice to the farmers. It also provided good quality semen, drugs for sick animals and specially manufactured high-quality animal feed at cost. As a result of these efforts, vast majority of farmers now use cows for milk production compared to near 100% buffaloes at the beginning.

With the strong support and encouragement from Nestlé, social, economic and environmental conditions of the Moga have undergone major transformation. In 1962, Nestlé’s total milk payments to the farmers were Rs. 910,000. By 2010 to 2011, this had ballooned to over Rs. 6,120 million. The multiplier effects of this injection of funds to the area have been truly remarkable. As the farmers’ disposable income increased, so did their spending capacity and the aggregate demand for additional goods and services. This in turn has contributed to additional economic activities in the region. We estimate that, for every rupee that Nestlé has injected to Moga’s economy, it had a multiplier effect of around Rs. 3.50 in promoting additional private economic activities.

In Moga, Nestlé now provides full-time employment to 2,400 people in its factory. However, this is only a small part of the story. Our analysis shows that another 86,371 people are employed full-time in the region to support the direct and exclusive requirements of the Moga factory. This number will be much larger if indirect employments are considered which has resulted because of Nestlé’s presence in the area.

In 2011, total taxes paid by the Moga factory to various levels of government amounted to Rs. 557 million. Between 1997 and 2006, when Octroi taxes were levied, the Moga factory and its direct suppliers (considering only Nestlé-related activities) contributed to 25-35 percent of the total income of the Moga municipality. If the factory did not exist, all these taxes and thus incomes of the various levels of the government, including Moga municipality, would have been significantly less.

Nestlé’s work over the past 50 years to transform Moga into a thriving milk district is an excellent example of how goals, successes, needs and demands of different interests, like communities, businesses and governments are closely interlinked.

Without claiming to be a development agency, Nestlé nevertheless consciously and determinedly made essential contributions to the development of the Moga community. These have been major components for bringing economic prosperity to the region. They have also contributed significantly to improve the living standards and quality of life of hundreds of thousands of households in the Moga region.

Fifty years after the then unnamed business model was put in place, Nestlé’s engagement in Moga now stands out as a pioneering case of how a company can position itself at the forefront of the food industry, and then successfully build and expand markets, develop quality and innovative products and enlarge secure value chains. All these were accomplished whilst continuously meeting societal needs and directly continuing to press forward with the social and the economic advancements of hundreds of thousands of families in an area that used to be one of the most impoverished areas of Punjab.

Now termed as creating shared value, this business model successfully brought together Nestlé and the hundreds of thousands of farmers, workers, ancillary companies and local consumers that constitute the company’s primary stakeholder cluster in Moga.

Together they have built a community of interest that has made the region an economically, socially and environmentally better place to live in for its suppliers and consumers, and a profitable enterprise for the company. Within this overall business framework, the company has created “shared values” for itself, its shareholders, suppliers and the society within which it has operated. This is what is needed from the private sector in the future.

Asit K. Biswas is the Distinguished Visiting Professor, Lee Kuan Yew School of Public Policy, Distinguished Visiting Professor at the Indian Institute of Technology, Bhubaneswar, and co-founder of the Third World Centre for Water Management, Mexico. Cecilia Tortajada is the co-founder and President of the Third World Centre for Water Management, Mexico. One of their latest books is Creating Shared Value: Impacts of Nestlé in Moga, India, Springer, Berlin, September, 2013.