University of California Santa Cruz Creating Shared Value Discussion

DescriptionCreating Shared Value
How to Reinvent Capitalism—And Unleash a Wave of
Innovation and Growth
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Michael E. Porter and Mark R. Kramer
THE CAPITALIST SYSTEM is under siege. 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.
Even worse, the more business has begun to embrace corporate responsibility,
the more it has been blamed for society’s failures. The legitimacy of business has
fallen to levels not seen in recent history. This diminished trust in business leads
political leaders to set policies that undermine competitiveness and sap economic
growth. Business is caught in a vicious circle.
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in an outdated approach to value creation that has emerged over the past few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
Capitalism is under siege….Diminished to set policies that sap economic growth…. The purpose of
the corporation must be trust in business is causing political leaders Business is caught in a vicious
circle…. redefined around
M. E. Porter (*) ∙ M. R. Kramer
HBR, Brighton, MA, USA
e-mail: mporter@hbs.edu
© Springer Science+Business Media B.V. 2019
G. G. Lenssen, N. C. Smith (eds.), Managing Sustainable Business,
https://doi.org/10.1007/978-94-024-1144-7_16
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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 presumed trade-offs between economic efficiency
and social progress have been institutionalized in decades of policy choices.
Companies must take the lead in bringing business and society back together.
The recognition is there among sophisticated business and thought leaders, and
promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social
responsibility” mind-set in which societal issues are at the periphery, not the core.
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. We believe that it can give rise to the next major transformation of
business thinking.
A growing number of companies known for their hard-nosed approach to business—such as GE, Google, IBM, Intel, Johnson & Johnson, Nestlé, Unilever, and
Wal-Mart—have already embarked on important efforts to create shared value by
reconceiving the intersection between society and corporate performance. Yet our
recognition of the transformative power of shared value is still in its genesis.
Realizing it will require leaders and managers to develop new skills and knowledge—such as a far deeper appreciation of societal needs, a greater understanding
of the true bases of company productivity, and the ability to collaborate across
profit/nonprofit boundaries. And government must learn how to regulate in ways
that enable shared value rather than work against it.
Capitalism is an unparalleled vehicle for meeting human needs, improving efficiency, creating jobs, and building wealth. But a narrow conception of capitalism
has prevented business from harnessing its full potential to meet society’s broader
challenges. The opportunities have been there all along but have been overlooked.
Businesses acting as businesses, not as charitable donors, are the most powerful
force for addressing the pressing issues we face. The moment for a new conception
of capitalism is now; society’s needs are large and growing, while customers,
employees, and a new generation of young people are asking business to step up.
The purpose of the corporation must be redefined as creating shared value, not
just profit per se. This will drive the next wave of innovation and productivity growth
in the global economy. It will also reshape capitalism and its relationship to society.
Perhaps most important of all, learning how to create shared value is our best chance
to legitimize business again.
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Moving Beyond Trade-Offs
Business and society have been pitted against each other for too long. That is in part
because economists have legitimized the idea that to provide 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. Adding a constraint to a firm that is already maximizing
profits, says the theory, will inevitably raise costs and reduce those profits.
Idea in Brief
The concept of shared value—which focuses on the connections between
societal and economic progress—has the power to unleash the next wave of
global growth.
An increasing number of companies known for their hard-nosed approach
to business—such as Google, IBM, Intel, Johnson & Johnson, Nestlé,
Unilever, and Wal-Mart—have begun to embark on important shared value
initiatives. But our understanding of the potential of shared value is just
beginning
There are three key ways that companies can create shared value
opportunities:
• By reconceiving products and markets
• By redefining productivity in the value chain
• By enabling local cluster development
Every firm should look at decisions and opportunities through the lens of
shared value. This will lead to new approaches that generate greater innovation and growth for companies—and also greater benefits for society.
Societal needs, not just conventional economic needs, define markets, and social harms can
create internal costs for firms.
A related concept, with the same conclusion, is the notion of externalities.
Externalities arise when firms create social costs that they do not have to bear, such
as pollution. Thus, society must impose taxes, regulations, and penalties so that
firms “internalize” these externalities—a belief influencing many government policy decisions.
This perspective has also shaped the strategies of firms themselves, which have
largely excluded social and environmental considerations from their economic
thinking. Firms have taken the broader context in which they do business as a given
and resisted regulatory standards as invariably contrary to their interests. Solving
social problems has been ceded to governments and to NGOs. Corporate responsibility programs—a reaction to external pressure—have emerged largely to improve
firms’ reputations and are treated as a necessary expense. Anything more is seen by
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many as an irresponsible use of shareholders’ money. Governments, for their part,
have often regulated in a way that makes shared value more difficult to achieve.
Implicitly, each side has assumed that the other is an obstacle to pursuing its goals
and acted accordingly.
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 through using new technologies, operating methods, and management approaches—and as a result, increase
their productivity and expand their markets.
Shared value, then, is not about personal values. Nor is it about “sharing” the
value already created by firms—a redistribution approach. Instead, it is about
expanding the total pool of economic and social value. A good example of this difference in perspective is the fair trade movement in purchasing. Fair trade aims to
increase the proportion of revenue that goes to poor farmers by paying them higher
prices for the same crops. Though this may be a noble sentiment, fair trade is mostly
about redistribution rather than expanding the overall amount of value created. A
shared value perspective, instead, focuses on improving growing techniques and
strengthening the local cluster of supporting suppliers and other institutions in order
to increase farmers’ efficiency, yields, product quality, and sustainability. This leads
to a bigger pie of revenue and profits that benefits both farmers and the companies
that buy from them. Early studies of cocoa farmers in the Côte d’Ivoire, for instance,
suggest that while fair trade can increase farmers’ incomes by 10–20%, shared
value investments can raise their incomes by more than 300%. Initial investment
and time may be required to implement new procurement practices and develop the
supporting cluster, but the return will be greater economic value and broader strategic benefits for all participants.
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 selfdefeating, 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, business contributes to society by making
a profit, which supports employment, wages, purchases, investments, and taxes.
Conducting business as usual is sufficient social benefit. A firm is largely a selfcontained entity, and social or community issues fall outside its proper scope. (This
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is the argument advanced persuasively by Milton Friedman in his critique of the
whole notion of corporate social responsibility.)
What Is “Shared Value”?
The concept of shared value can be defined as policies and operating practices that
enhance the competitiveness of a company while simultaneously 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. 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.
In the social sector, thinking in value terms is even less common. Social organizations and government entities often see success solely in terms of the benefits
achieved or the money expended. As governments and NGOs begin to think more in
value terms, their interest in collaborating with business will inevitably grow.
This perspective has permeated management thinking for the past two decades.
Firms focused on enticing consumers to buy more and more of their products.
Facing growing competition and shorter- term performance pressures from shareholders, managers resorted to waves of restructuring, personnel reductions, and
relocation to lower-cost regions, while leveraging balance sheets to return capital to
investors. The results were often commoditization, price competition, little true
innovation, slow organic growth, and no clear competitive advantage.
In this kind of competition, the communities in which companies operate perceive little benefit even as profits rise. Instead, they perceive that profits come at
their expense, an impression that has become even stronger in the current economic
recovery, in which rising earnings have done little to offset high unemployment,
local business distress, and severe pressures on community services.
It was not always this way. The best companies once took on a broad range of
roles in meeting the needs of workers, communities, and supporting businesses. As
other social institutions appeared on the scene, however, these roles fell away or
were delegated. Shortening investor time horizons began to narrow thinking about
appropriate investments. As the vertically integrated firm gave way to greater reliance on outside vendors, outsourcing and offshoring weakened the connection
between firms and their communities. As firms moved disparate activities to more
and more locations, they often lost touch with any location. Indeed, many companies no longer recognize a home—but see themselves as “global” companies.
These transformations drove major progress in economic efficiency. However,
something profoundly important was lost in the process, as more fundamental
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opportunities for value creation were missed. The scope of strategic thinking
contracted.
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
competitive advantage from how it configures the value chain, or the set of activities
involved in creating, producing, selling, delivering, and supporting its products or
services. For decades businesspeople have studied positioning and the best ways to
design activities and integrate them. However, companies have overlooked opportunities to meet fundamental societal needs and misunderstood how societal harms and
weaknesses affect value chains. Our field of vision has simply been too narrow.
In understanding the business environment, managers have focused most of their
attention on the industry, or the particular business in which the firm competes. This
is because industry structure has a decisive impact on a firm’s profitability. What has
been missed, however, is the profound effect that location can have on productivity
and innovation. Companies have failed to grasp the importance of the broader business environment surrounding their major operations.
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 the others.
The concept of shared value resets the boundaries of capitalism. By better connecting companies’ success with societal improvement, it 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. The opportunities will also differ markedly across industries and companies—but every company
has them. And their range and scope is far broader than has been recognized. [The
idea of shared value was initially explored in a December 2006 HBR article by
Michael E. Porter and Mark R. Kramer, “Strategy and Society: The Link Between
Competitive Advantage and Corporate Social Responsibility.”]
Reconceiving Products and Markets
Society’s needs are huge—health, better housing, improved nutrition, help for the
aging, greater financial security, 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?
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In advanced economies, demand for products and services that meet societal needs
is rapidly growing. Food companies that traditionally concentrated on taste and quantity to drive more and more consumption are refocusing on the fundamental need for
better nutrition. Intel and IBM are both devising ways to help utilities harness digital
intelligence in order to economize on power usage. Wells Fargo has developed a line
of products and tools that help customers budget, manage credit, and pay down debt.
Sales of GE’s Ecomagination products reached $18 billion in 2009—the size of a
Fortune 150 company. GE now predicts that revenues of Ecomagination products will
grow at twice the rate of total company revenues over the next five years.
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.
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Blurring the Profit/Nonprofit Boundary
The concept of shared value blurs the line between for-profit and nonprofit organizations. New kinds of hybrid enterprises are rapidly appearing. For example,
WaterHealth International, a fast-growing for profit, uses innovative water purification techniques to distribute clean water at minimal cost to more than one million
people in rural India, Ghana, and the Philippines. Its investors include not only the
socially focused acumen Fund and the international Finance corporation of the
World Bank but also Dow chemical’s venture fund. Revolution Foods, a four-year-­
old venture-capital-backed U.S. start-up, provides 60,000 fresh, healthful, and nutritious meals to students daily—and does so at a higher gross margin than traditional
The Connection Between Competitive Advantage and Social Issues
There are numerous ways in which addressing societal concerns can yield
productivity benefits to a firm. Consider, for example, what happens when a
firm invests in a wellness program. Society benefits because employees and
their families become healthier, and the firm minimizes employee absences
and lost productivity. The graphic below depicts some areas where the connections are strongest.
ENVIRONMENTAL
IMPACT
SUPPLIER
ACCESS AND
VIABILITY
ENERGY
USE
COMPANY
PRODUCTIVITY
EMPLOYEE
SKILLS
WATER
USE
EMPLOYEE
HEALTH
WORKER
SAFETY
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competitors. Waste concern, a hybrid profit/nonprofit enterprise started in Bangladesh
15 years ago, has built the capacity to convert 700 tons of trash, collected daily from
neighborhood slums, into organic fertilizer, thereby increasing crop yields and
reducing CO2 emissions. Seeded with capital from the lions club and the United
Nations Development programme, the company improves health conditions while
earning a substantial gross margin through fertilizer sales and carbon credits.
The blurring of the boundary between successful for-profits and non-profits is
one of the strong signs that creating shared value is possible.
Equal or greater opportunities arise from serving disadvantaged communities
and developing countries. Though societal needs are even more pressing there, these
communities have not been recognized as viable markets. Today attention is riveted
on India, China, and increasingly, Brazil, which offer firms the prospect of reaching
billions of new customers at the bottom of the pyramid—a notion persuasively articulated by C.K. Prahalad. Yet these countries have always had huge needs, as do
many developing countries.
Similar opportunities await in nontraditional communities in advanced countries.
We have learned, for example, that poor urban areas are America’s most underserved market; their substantial concentrated purchasing power has often been overlooked. (See the research of the Initiative for a Competitive Inner City, at icic.org.)
The societal benefits of providing appropriate products to lower-income and disadvantaged consumers can be profound, while the profits for companies can be substantial. For example, low-priced cell phones that provide mobile banking services, are
helping the poor save money securely and transforming the ability of small farmers to
produce and market their crops. In Kenya, Vodafone’s M-PESA mobile banking service signed up 10 million customers in three years; the funds it handles now represent
11% of that country’s GDP. In India, Thomson Reuters has developed a promising
monthly service for farmers who earn an average of $2,000 a year. For a fee of $5 a
quarter, it provides weather and crop pricing information and agricultural advice. The
service reaches an estimated 2 million farmers, and early research indicates that it has
helped increase the incomes of more than 60% of them—in some cases even tripling
incomes. As capitalism begins to work in poorer communities, new opportunities for
economic development and social progress increase exponentially.
For a company, the starting point for creating this kind of shared value is to identify all the societal needs, benefits, and harms that are or could be embodied in the
firm’s products. The opportunities are not static; they change constantly as technology evolves, economies develop, and societal priorities shift. An ongoing exploration of societal needs will lead companies to discover new opportunities for
differentiation and repositioning in traditional markets, and to recognize the potential of new markets they previously overlooked.
Meeting needs in underserved markets often requires redesigned products or different distribution methods. These requirements can trigger fundamental innovations that also have application in traditional markets. Microfinance, for example,
was invented to serve unmet financing needs in developing countries. Now it is
growing rapidly in the United States, where it is filling an important gap that was
unrecognized.
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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 in the
absence of regulation or resource taxes. Excess packaging of products and greenhouse gases are not just costly to the environment but costly to the business. Wal-­
Mart, for example, was able to address both issues by reducing its packaging and
rerouting its trucks to cut 100 million miles from its delivery routes in 2009, saving
$200 million even as it shipped more products. Innovation in disposing of plastic
used in stores has saved millions in lower disposal costs to landfills.
By reducing its packaging and cutting 100 million miles from the delivery routes of its
trucks, Wal-Mart lowered carbon emissions and saved $200 million in costs.
The new thinking reveals that the congruence between societal progress and productivity in the value chain is far greater than traditionally believed (see the exhibit
“The Connection Between Competitive Advantage and Social Issues”). The synergy increases when firms approach societal issues from a shared value perspective
and invent new ways of operating to address them. So far, however, few companies
have reaped the full productivity benefits in areas such as health, safety, environmental performance, and employee retention and capability.
But there are unmistakable signs of change. Efforts to minimize pollution were
once thought to inevitably increase business costs—and to occur only because of
regulation and taxes. Today there is a growing consensus that major improvements
in environmental performance can often be achieved with better technology at nominal incremental cost and can even yield net cost savings through enhanced resource
utilization, process efficiency, and quality.
In each of the areas in the exhibit, 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. The
following are some of the most important ways in which shared value thinking is
transforming the value chain, which are not independent but often mutually reinforcing. Efforts in these and other areas are still works in process, whose implications will be felt for years to come.
Energy Use and Logistics The use of energy throughout the value chain is being
reexamined, whether it be in processes, transportation, buildings, supply chains,
distribution channels, or support services. Triggered by energy price spikes and a
new awareness of opportunities for energy efficiency, this reexamination was under
way even before carbon emissions became a global focus. The result has been striking improvements in energy utilization through better technology, recycling, cogeneration, and numerous other practices—all of which create shared value.
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We are learning that shipping is expensive, not just because of energy costs and
emissions but because it adds time, complexity, inventory costs, and management
costs. Logistical systems are beginning to be redesigned to reduce shipping distances, streamline handling, improve vehicle routing, and the like. All of these steps
create shared value. The British retailer Marks & Spencer’s ambitious overhaul of
its supply chain, for example, which involves steps as simple as stopping the purchase of supplies from one hemisphere to ship to another, is expected to save the
retailer £175 million annually by fiscal 2016, while hugely reducing carbon emissions. In the process of reexamining logistics, thinking about outsourcing and location will also be revised (as we will discuss below).
Resource Use Heightened environmental awareness and advances in technology
are catalyzing new approaches in areas such as utilization of water, raw materials,
and packaging, as well as expanding recycling and reuse. The opportunities apply to
all resources, not just those that have been identified by environmentalists. Better
resource utilization—enabled by improving technology—will permeate all parts of
the value chain and will spread to suppliers and channels. Landfills will fill more
slowly.
For example, Coca-Cola has already reduced its worldwide water consumption
by 9% from a 2004 baseline—nearly halfway to its goal of a 20% reduction by
2012. Dow Chemical managed to reduce consumption of fresh water at its largest
production site by one billion gallons—enough water to supply nearly 40,000 people in the U.S. for a year—resulting in savings of $4 million. The demand for watersaving technology has allowed India’s Jain Irrigation, a leading global manufacturer
of complete drip irrigation systems for water conservation, to achieve a 41% compound annual growth rate in revenue over the past five years.
Procurement The traditional playbook calls for companies to commoditize and
exert maximum bargaining power on suppliers to drive down prices— even when
purchasing from small businesses or subsistence-level farmers. More recently, firms
have been rapidly outsourcing to suppliers in lower-wage locations.
Today some companies are beginning to understand that marginalized suppliers
cannot remain productive or sustain, much less improve, their quality. By increasing
access to inputs, sharing technology, and providing financing, companies can
improve supplier quality and productivity while ensuring access to growing volume.
Improving productivity will often trump lower prices. As suppliers get stronger,
their environmental impact often falls dramatically, which further improves their
efficiency. Shared value is created.
A good example of such new procurement thinking can be found at Nespresso,
one of Nestlé’s fastest- growing divisions, which has enjoyed annual growth of 30%
since 2000. Nespresso combines a sophisticated espresso machine with single-cup
aluminum capsules containing ground coffees from around the world. Offering
quality and convenience, Nespresso has expanded the market for premium coffee.
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The Role of Social Entrepreneurs
Businesses are not the only players in finding profitable solutions to social problems. A whole generation of social entrepreneurs is pioneering new product concepts that meet social needs using viable business models. Because they are not
locked into narrow traditional business thinking, social entrepreneurs are often well
ahead of established corporations in discovering these opportunities. Social enterprises that create shared value can scale up far more rapidly than purely social programs, which often suffer from an inability to grow and become self-sustaining.
Real social entrepreneurship should be measured by its ability to create
shared value, not just social benefit.
Obtaining a reliable supply of specialized coffees is extremely challenging, however. Most coffees are grown by small farmers in impoverished rural areas of Africa
and Latin America, who are trapped in a cycle of low productivity, poor quality, and
environmental degradation that limits production volume. To address these issues,
Nestlé redesigned procurement. It worked intensively with its growers, providing
advice on farming practices, guaranteeing bank loans, and helping secure inputs
such as plant stock, pesticides, and fertilizers. Nestlé established local facilities to
measure the quality of the coffee at the point of purchase, which allowed it to pay a
premium for better beans directly to the growers and thus improve their incentives.
Greater yield per hectare and higher production quality increased growers’ incomes,
and the environmental impact of farms shrank. Meanwhile, Nestlé’s reliable supply
of good coffee grew significantly. Shared value was created.
Embedded in the Nestlé example is a far broader insight, which is the advantage
of buying from capable local suppliers. Outsourcing to other locations and countries
creates transaction costs and inefficiencies that can offset lower wage and input
costs. Capable local suppliers help firms avoid these costs and can reduce cycle
time, increase flexibility, foster faster learning, and enable innovation. Buying local
includes not only local companies but also local units of national or international
companies. When firms buy locally, their suppliers can get stronger, increase their
profits, hire more people, and pay better wages—all of which will benefit other
businesses in the community. Shared value is created.
Distribution Companies are beginning to re-examine distribution practices from a
shared value perspective. As iTunes, Kindle, and Google Scholar (which offers texts
of scholarly literature online) demonstrate, profitable new distribution models can
also dramatically reduce paper and plastic usage. Similarly, microfinance has created a cost-efficient new model of distributing financial services to small
businesses.
Opportunities for new distribution models can be even greater in nontraditional
markets. For example, Hindustan Unilever is creating a new direct- to-home distribution system, run by underprivileged female entrepreneurs, in Indian villages of fewer
than 2,000 people. Unilever provides micro- credit and training and now has more
than 45,000 entrepreneurs covering some 100,000 villages across 15 Indian states.
Project Shakti, as this distribution system is called, benefits communities not only by
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giving women skills that often double their household income but also by reducing
the spread of communicable diseases through increased access to hygiene products.
This is a good example of how the unique ability of business to market to hard- toreach consumers can benefit society by getting life-altering products into the hands
of people that need them. Project Shakti now accounts for 5% of Unilever’s total
revenues in India and has extended the company’s reach into rural areas and built its
brand in media-dark regions, creating major economic value for the company.
By investing in employee wellness programs, Johnson & Johnson has saved $250 million
on health care costs.
Employee Productivity The focus on holding down wage levels, reducing benefits, and offshoring is beginning to give way to an awareness of the positive effects
that a living wage, safety, wellness, training, and opportunities for advancement for
employees have on productivity. Many companies, for example, traditionally sought
to minimize the cost of “expensive” employee health care coverage or even eliminate health coverage altogether. Today leading companies have learned that because
of lost workdays and diminished employee productivity, poor health costs them
more than health benefits do. Take Johnson & Johnson. By helping employees stop
smoking (a two-thirds reduction in the past 15 years) and implementing numerous
other wellness programs, the company has saved $250 million on health care costs,
a return of $2.71 for every dollar spent on wellness from 2002 to 2008. Moreover,
Johnson & Johnson has benefited from a more present and productive workforce. If
labor unions focused more on shared value, too, these kinds of employee approaches
would spread even faster.
Location Business thinking has embraced the myth that location no longer matters, because logistics are inexpensive, information flows rapidly, and markets are
global. The cheaper the location, then, the better. Concern about the local communities in which a company operates has faded.
That oversimplified thinking is now being challenged, partly by the rising costs
of energy and carbon emissions but also by a greater recognition of the productivity
cost of highly dispersed production systems and the hidden costs of distant procurement discussed earlier. Wal-Mart, for example, is increasingly sourcing produce for
its food sections from local farms near its warehouses. It has discovered that the
savings on transportation costs and the ability to restock in smaller quantities more
than offset the lower prices of industrial farms farther away. Nestlé is establishing
smaller plants closer to its markets and stepping up efforts to maximize the use of
locally available materials.
The calculus of locating activities in developing countries is also changing. Olam
International, a leading cashew producer, traditionally shipped its nuts from Africa
to Asia for processing at facilities staffed by productive Asian workers. But by opening local processing plants and training workers in Tanzania, Mozambique, Nigeria,
and Côte d’Ivoire, Olam has cut processing and shipping costs by as much as
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25%—not to mention, greatly reduced carbon emissions. In making this move,
Olam also built preferred relationships with local farmers. And it has provided
direct employment to 17,000 people—95% of whom are women—and indirect
employment to an equal number of people, in rural areas where jobs otherwise were
not available.
These trends may well lead companies to remake their value chains by moving
some activities closer to home and having fewer major production locations. Until
now, many companies have thought that being global meant moving production to
locations with the lowest labor costs and designing their supply chains to achieve the
most immediate impact on expenses. In reality, the strongest international competitors will often be those that can establish deeper roots in important communities.
Companies that can embrace this new locational thinking will create shared value.
AS THESE examples illustrate, reimagining value chains from the perspective
of shared value will offer significant new ways to innovate and unlock new economic value that most businesses have missed.
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Enabling Local Cluster Development
No company is self-contained. The success of every company is affected by the supporting companies and infrastructure around it. Productivity and innovation are
strongly influenced by “clusters,” or geographic concentrations of firms, related
businesses, suppliers, service providers, and logistical infrastructure in a particular
field—such as IT in Silicon Valley, cut flowers in Kenya, and diamond cutting in
Surat, India.
Clusters include not only businesses but institutions such as academic programs,
trade associations, and standards organizations. They also draw on the broader public assets in the surrounding community, such as schools and universities, clean
water, fair- competition laws, quality standards, and market transparency.
Clusters are prominent in all successful and growing regional economies and
play a crucial role in driving productivity, innovation, and competitiveness. Capable
local suppliers foster greater logistical efficiency and ease of collaboration, as we
have discussed. 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. Poverty
limits the demand for products and leads to environmental degradation, unhealthy
workers, and high security costs. As companies have increasingly become disconnected from their communities, however, their influence in solving these problems
has waned even as their costs have grown.
Firms create shared value by building clusters to improve company productivity
while addressing gaps or failures in the framework conditions surrounding the cluster. Efforts to develop or attract capable suppliers, for example, enable the procurement benefits we discussed earlier. A focus on clusters and location has been all but
absent in management thinking. Cluster thinking has also been missing in many
economic development initiatives, which have failed because they involved isolated
interventions and overlooked critical complementary investments.
A key aspect of cluster building in developing and developed countries alike is
the formation of open and transparent markets. In inefficient or monopolized markets where workers are exploited, where suppliers do not receive fair prices, and
where price transparency is lacking, productivity suffers. Enabling fair and open
markets, which is often best done in conjunction with partners, can allow a company
to secure reliable supplies and give suppliers better incentives for quality and efficiency while also substantially improving the incomes and purchasing power of
local citizens. A positive cycle of economic and social development results.
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
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conditions for the cluster spill over to other participants and the local economy.
Workforce development initiatives, for example, increase the supply of skilled
employees for many other firms as well.
At Nespresso, Nestlé also worked to build clusters, which made its new procurement practices far more effective. It set out to build agricultural, technical, financial,
and logistical firms and capabilities in each coffee region, to further support efficiency and high-quality local production. Nestlé led efforts to increase access to
Creating Shared Value: Implications for Government and Civil Society
While our focus here is primarily on companies, the principles of shared
value apply equally to governments and nonprofit organizations.
Governments and NGOs will be most effective if they think in value
terms— considering benefits relative to costs—and focus on the results
achieved rather than the funds and effort expended. Activists have tended to
approach social improvement from an ideological or absolutist perspective, as
if social benefits should be pursued at any cost. Governments and NGOs often
assume that trade-offs between economic and social benefits are inevitable,
exacerbating these trade-offs through their approaches. For example, much
environmental regulation still takes the form of command-and-control mandates and enforcement actions designed to embarrass and punish companies.
Regulators would accomplish much more by focusing on measuring environmental performance and introducing standards, phase-in periods, and support for technology that would promote innovation, improve the environment,
and increase competitiveness simultaneously.
The principle of shared value creation cuts across the traditional
divide between the responsibilities of business and those of government
or civil society. From society’s perspective, it does not matter what types
of organizations created the value. What matters is that benefits are
delivered by those organizations—or combinations of organizations—
that are best positioned to achieve the most impact for the least cost.
Finding ways to boost productivity is equally valuable whether in the service
of commercial or societal objectives. In short, the principle of value creation
should guide the use of resources across all areas of societal concern.
Fortunately, a new type of NGO has emerged that understands the importance of productivity and value creation. Such organizations have often had a
remarkable impact. One example is TechnoServe, which has partnered with
both regional and global corporations to promote the development of competitive agricultural clusters in more than 30 countries. Root capital accomplishes a similar objective by providing financing to farmers and businesses
that are too large for micro- finance but too small for normal bank financing.
Since 2000, Root capital has lent more than $200 million to 282 businesses
through which it has reached 400,000 farmers and artisans. It has financed the
cultivation of 1.4 million acres of organic agriculture in Latin America and
(continued)
16 Creating Shared Value
339
Africa. Root capital regularly works with corporations, utilizing future purchase orders as collateral for its loans to farmers and helping to strengthen
corporate supply chains and improve the quality of purchased inputs.
Some private foundations have begun to see the power of working with
businesses to create shared value. The Bill & Melinda Gates Foundation, for
example, has formed partnerships with leading global corporations to foster
agricultural clusters in developing countries. The foundation carefully focuses
on commodities where climate and soil conditions give a particular region a
true competitive advantage. The partnerships bring in NGOs like TechnoServe
and Root capital, as well as government officials, to work on precompetitive
issues that improve the cluster and upgrade the value chain for all participants.
This approach recognizes that helping small farmers increase their yields will
not create any lasting benefits unless there are ready buyers for their crops,
other enterprises that can process the crops once they are harvested, and a
local cluster that includes efficient logistical infrastructure, input availability,
and the like. The active engagement of corporations is essential to mobilizing
these elements.
Forward-thinking foundations can also serve as honest brokers and allay
fears by mitigating power imbalances between small local enterprises, NGOs,
governments, and companies. Such efforts will require a new assumption that
shared value can come only as a result of effective collaboration among all
parties.
(continued)
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M. E. Porter and M. R. Kramer
Government Regulation and Shared Value
The right kind of government regulation can encourage companies to
pursue shared value; the wrong kind works against it and even makes
trade-offs between economic and social goals inevitable.
Regulation is necessary for well-functioning markets, something that
became abundantly clear during the became abundantly clear during the
recent financial crisis. However, the ways in which regulations are designed
and implemented determine whether they benefit society or work against it.
Regulations that enhance shared value set goals and stimulate innovation.
They highlight a societal objective and create societal objective and create a
level playing field to encourage companies to invest in shared value rather
than maximize short-term profit. Such regulations have a number of
characteristics:
First, they set clear and measurable social goals, whether they involve
energy use, health matters, or safety. Where appropriate, they set prices for
resources (such as water) that reflect true costs. Second, they set performance
standards but do not prescribe the methods to achieve them—those are left to
companies. Third, they define phase-in periods for meeting standards, which
reflect the investment or new-product cycle in the industry. Phase-in periods
give companies time to develop and introduce new products and processes in
a way consistent with the economics of their business. Fourth, they put in
place universal measurement and performance reporting systems, with government investing in infrastructure for collecting reliable benchmarking data
(such as nutritional deficiencies in each community). This motivates and
enables continual improvement beyond current targets. Finally, appropriate
regulations require efficient and timely reporting of results, which can then be
audited by the government as necessary, rather than impose detailed and
expensive compliance processes on everyone.
Regulation that discourages shared value looks very different. It forces
compliance with particular practices, rather than focusing on measurable
social improvement. It mandates a particular approach to meeting a standard—blocking innovation and almost always inflicting cost on companies.
When governments fall into the trap of this sort of regulation, they undermine
the very progress that they seek while triggering fierce resistance from business that slows progress further and blocks shared value that would improve
competitiveness.
To be sure, companies locked into the old mind-set will resist even well-­
constructed regulation. As shared value principles become more widely
accepted, however, business and government will become more aligned on
regulation in many areas. Companies will come to understand that the right
kind of regulation can actually foster economic value creation.
Finally, regulation will be needed to limit the pursuit of exploitative, unfair,
or deceptive practices in which companies deceptive practices in which
(continued)
16 Creating Shared Value
341
companies antitrust policy, for example, is essential to ensure that the benefits
of company success flow to customers, suppliers, and workers.
essential agricultural inputs such as plant stock, fertilizers, and irrigation equipment; strengthen regional farmer co-ops by helping them finance shared wet-­milling
facilities for producing higher-quality beans; and support an extension program to
advise all farmers on growing techniques. It also worked in partnership with the
Rainforest Alliance, a leading international NGO, to teach farmers more-­sustainable
practices that make production volumes more reliable.
In the process, Nestlé’s productivity improved.
A good example of a company working to improve framework conditions in its
cluster is Yara, the world’s largest mineral fertilizer company. Yara realized that the
lack of logistical infrastructure in many parts of Africa was preventing farmers from
gaining efficient access to fertilizers and other essential agricultural inputs, and
from transporting their crops efficiently to market. Yara is tackling this problem
through a $60 million investment in a program to improve ports and roads, which is
designed to create agricultural growth corridors in Mozambique and Tanzania. The
company is working on this initiative with local governments and support from the
Norwegian government. In Mozambique alone, the corridor is expected to benefit
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more than 200,000 small farmers and create 350,000 new jobs. The improvements
will help Yara grow its business but will support the whole agricultural cluster, creating huge multiplier effects.
The benefits of cluster building apply not only in emerging economies but also in
advanced countries. North Carolina’s Research Triangle is a notable example of
public and private collaboration that has created shared value by developing clusters
in such areas as information technology and life sciences. That region, which has
benefited from continued investment from both the private sector and local government, has experienced huge growth in employment, incomes, and company performance, and has fared better than most during the downturn.
To support cluster development in the communities in which they operate, companies need to identify gaps and deficiencies in areas such as logistics, suppliers,
distribution channels, training, market organization, and educational institutions.
Then the task is to focus on the weaknesses that represent the greatest constraints to
the company’s own productivity and growth, and distinguish those areas that the
company is best equipped to influence directly from those in which collaboration is
more cost effective. Here is where the shared value opportunities will be greatest.
Initiatives that address cluster weaknesses that constrain companies will be much
more effective than community-focused corporate social responsibility programs,
which often have ternal influences on corporate success. It highlights the immense
human needs to be met, the large new markets to serve, and the internal costs of
social and community deficits—as well as the competitive advantages available
from addressing them. Until recently, companies have simply not approached their
businesses this way.
Creating shared value will be more effective and far more sustainable than the
majority of today’s corporate efforts in the social arena. Companies will make real
strides on the environment, for example, when they treat it as a productivity driver
rather than a feel-good response to external pressure. Or consider limited impact
because they take on too many areas without focusing on value.
But efforts to enhance infrastructure and institutions in a region often require
collective action, as the Nestlé, Yara, and Research Triangle examples show.
Companies should try to enlist partners to share the cost, win support, and assemble
the right skills. The most successful cluster development programs are ones that
involve collaboration within the private sector, as well as trade associations, government agencies, and NGOs.
Not all profit is equal. Profits involving a social purpose represent a higher form of capitalism, one that creates a positive cycle of company and community prosperity.
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 in much management thinking. Profits involving a social purpose represent a higher form of capitalism—one that will enable society to advance
16 Creating Shared Value
343
more rapidly while allowing companies to grow even more. The result is a positive
cycle of company and community prosperity, which leads to profits that endure.
Creating shared value presumes compliance with the law and ethical standards,
as well as 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. This
was recognized by the Mexican construction company Urbi, which pioneered a
mortgage-financing “rent-to-own” plan. Major U.S. banks, in contrast, promoted
unsustainable financing vehicles that turned out to be socially and economically
devastating, while claiming they were socially responsible because they had charitable contribution programs.
Inevitably, the most fertile opportunities for creating shared value will be closely
related to a company’s particular business, and in areas most important to the business. Here a company can benefit the most economically and hence sustain its commitment over time. Here is also where a company brings the most resources to bear,
and where its scale and market presence equip it to have a meaningful impact on a
societal problem.
Ironically, many of the shared value pioneers have been those with more-limited
resources—social entrepreneurs and companies in developing countries. These outsiders have been able to see the opportunities more clearly. In the process, the distinction between for-profits and nonprofits is blurring.
How Shared Value Differs from Corporate Social Responsibility
Creating shared value (csv) should supersede corporate social responsibility
(CSR) in guiding the investments of companies in their communities. CSR
programs focus mostly on reputation and have only a limited connection to
the business, making them hard to justify and maintain over the long run. In
contrast, CSV is integral to a company’s profitability and competitive position. It leverages the unique resources and expertise of the company to create
economic value by creating social value.
CSR
> values: Doing good
Citizenship, philanthropy, sustainability
> discretionary or in response
to external pressure
> separate from profit maximization
CSV
> value: Economic and societal benefits
relative to cost
> joint company and community
value creation
> integral to competing
> integral to profit maximization
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M. E. Porter and M. R. Kramer
CSR
> agenda is determined by external
reporting and personal preferences
> impact limited by corporate footprint
and CSR budget
Example: Fair trade purchasing
CSV
> agenda is company specific and
internally generated
> realigns the entire company budget
Example: Transforming procurement
to increase quality and yield
In both cases, compliance with laws and ethical standards and reducing
harm from corporate activities are assumed
Shared value is defining a whole new set of best practices that all companies
must embrace. It will also become an integral part of strategy. The essence of strategy is choosing a unique positioning and a distinctive value chain to deliver on it.
Shared value opens up many new needs to meet, new products to offer, new customers to serve, and new ways to configure the value chain. And the competitive advantages that arise from creating shared value will often be more sustainable than
conventional cost and quality improvements. The cycle of imitation and zero-sum
competition can be broken.
The opportunities to create shared value are widespread and growing. Not every
company will have them in every area, but our experience has been that companies
discover more and more opportunities over time as their line operating units grasp
this concept. It has taken a decade, but GE’s Ecomagination initiative, for example,
is now producing a stream of fast-growing products and services across the
company.
A shared value lens can be applied to every major company decision. Could our
product design incorporate greater social benefits? Are we serving all the communities that would benefit from our products? Do our processes and logistical approaches
maximize efficiencies in energy and water use? Could our new plant be constructed
in a way that achieves greater community impact? How are gaps in our cluster holding back our efficiency and speed of innovation? How could we enhance our community as a business location? If sites are comparable economically, at which one
will the local community benefit the most? If a company can improve societal conditions, it will often improve business conditions and thereby trigger positive feedback loops
The three avenues for creating shared value are mutually reinforcing. Enhancing
the cluster, for example, will enable more local procurement and less dispersed supply chains. New products and services that meet social needs or serve overlooked
markets will require new value chain choices in areas such as production, marketing, and distribution. And new value chain configurations will create demand for
equipment and technology that save energy, conserve resources, and support
employees.
Creating shared value will require concrete and tailored metrics for each business unit in each of the three areas. While some companies have begun to track
16 Creating Shared Value
345
various social impacts, few have yet tied them to their economic interests at the
business level.
Shared value creation will involve new and heightened forms of collaboration.
While some shared value opportunities are possible for a company to seize on its
own, others will benefit from insights, skills, and resources that cut across profit/
nonprofit and private/public boundaries. Here, companies will be less successful if
they attempt to tackle societal problems on their own, especially those involving
cluster development. Major competitors may also need to work together on precompetitive framework conditions, something that has not been common in reputation-­
driven CSR initiatives. Successful collaboration will be data driven, clearly linked
to defined outcomes, well connected to the goals of all stakeholders, and tracked
with clear metrics.
Governments and NGOs can enable and reinforce shared value or work against
it. (For more on this topic, see the sidebar “Government Regulation and Shared
Value.”)
The Next Evolution in Capitalism
Shared value holds the key to unlocking the next wave of business innovation and
growth. It will also reconnect company success and community success in ways that
have been lost in an age of narrow management approaches, short-term thinking,
and deepening divides among society’s institutions.
Shared value focuses companies on the right kind of profits—profits that create
societal benefits rather than diminish them. Capital markets will undoubtedly continue to pressure companies to generate short-term profits, and some companies will
surely continue to reap profits at the expense of societal needs. But such profits will
often prove to be short- lived, and far greater opportunities will be missed.
The moment for an expanded view of value creation has come. A host of factors,
such as the growing social awareness of employees and citizens and the increased
scarcity of natural resources, will drive unprecedented opportunities to create shared
value.
We need a more sophisticated form of capitalism, one imbued with a social purpose. But that purpose should arise not out of charity but out of a deeper understanding of competition and economic value creation. This next evolution in the capitalist
model recognizes new and better ways to develop products, serve markets, and build
productive enterprises.
Creating shared value represents a broader conception of Adam Smith’s invisible
hand. It opens the doors of the pin factory to a wider set of influences. It is not philanthropy but self-interested behavior to create economic value by creating societal
value. If all companies individually pursued shared value connected to their particular businesses, society’s overall interests would be served. And companies would
acquire legitimacy in the eyes of the communities in which they operated, which
would allow democracy to work as governments set policies that fostered and
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M. E. Porter and M. R. Kramer
supported business. Survival of the fittest would still prevail, but market competition
would benefit society in ways we have lost.
Creating shared value represents a new approach to managing that cuts across
disciplines. Because of the traditional divide between economic concerns and social
ones, people in the public and private sectors have often followed very different
educational and career paths. As a result, few managers have the understanding of
social and environmental issues required to move beyond today’s CSR approaches,
and few social sector leaders have the managerial training and entrepreneurial mind-­
set needed to design and implement shared value models. Most business schools
still teach the narrow view of capitalism, even though more and more of their graduates hunger for a greater sense of purpose and a growing number are drawn to social
entrepreneurship. The results have been missed opportunity and public cynicism.
Business school curricula will need to broaden in a number of areas. For example, the efficient use and stewardship of all forms of resources will define the next-­
generation thinking on value chains. Customer behavior and marketing courses will
have to move beyond persuasion and demand creation to the study of deeper human
needs and how to serve nontraditional customer groups. Clusters, and the broader
locational influences on company productivity and innovation, will form a new core
discipline in business schools; economic development will no longer be left only to
public policy and economics departments. Business and government courses will
examine the economic impact of societal factors on enterprises, moving beyond the
effects of regulation and macroeconomics. And finance will need to rethink how
capital markets can actually support true value creation in companies—their fundamental purpose—not just benefit financial market participants.
There is nothing soft about the concept of shared value. These proposed changes
in business school curricula are not qualitative and do not depart from economic
value creation. Instead, they represent the next stage in our understanding of markets, competition, and business management.
NOT ALL societal problems can be solved through shared value solutions. But
shared value offers corporations the opportunity to utilize their skills, resources, and
management capability to lead social progress in ways that even the best-­intentioned
governmental and social sector organizations can rarely match. In the process, businesses can earn the respect of society again.
Michael E. Porter is the Bishop William Lawrence University Professor at Harvard University.
He is a frequent contributor to Harvard Business Review and a six-time McKinsey award winner.
Mark R. Kramer cofounded FSG, a global social impact consulting firm, with Professor Porter
and is its managing director. He is also a senior fellow of the CSR initiative at Harvard’s Kennedy
school of Government.
Today, your manager told you she read “Creating Shared Value” recently in the Harvard
Business Review. She
asked that you read the article and give her your thoughts on it (in writing) and its relevance
to your company.
She’s particularly interested in specific ways your company/industry might connect
economic, social and
environmental benefits in order to create value for your company/industry as well as for
society and the
environment. Your recommendations must be actionable. For example, if your manager
reads your work and says,
“Great ideas! Get started on them”, it must be clear from your recommendations what
actions you need to take.
This is the first written deliverable your manager has assigned to you. She is interested in
your analysis and critical
thinking skills as well as the quality of your written communication.
You are to choose an industry or company you are working in. Pick one that you know. For
example, you should
know its business model and product(s). If you want to pick a large company, choose a
specific division or product
line. For example, rather than saying you work for Proctor & Gamble, be specific about the
product you work on,
e.g., Pampers diapers.
Make it clear early in your paper what industry or company you have chosen. For example,
you might say
• “Here in the fashion industry,…”, or
• “Since I started working in the Diet Coke division of Coca Cola, I have noticed…”, or
• “We and other dry cleaners…”
350 – 450 words (excluding information in the upper left of the page and citations; the limit
applies only to the body of the Paper)
• 1” margins on all sides of the page
• 1.5 line spacing in the body of the paper
• Indent paragraphs
• Black text
• Microsoft Word 11-point Ariel or Calibri font or the equivalent
• Provide the word count in parenthesis at the end of your Paper. (Use the word count
function in your software.)

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