How Big Business Can Regain Legitimacy

Harvard Business School competitiveness guru Michael E. Porter urges large organizations to invest in small businesses in inner cities
Porter addresses the winners at the Inner City 100 awards event on May 5, 2010

High unemployment, rising poverty, and the public's dismay over corporate greed continue to challenge the market system and the legitimacy of business itself. Feeling the heat even amid talk of recovery, many large organizations are increasing their focus on corporate social responsibility. The problem is that their efforts have not made much of a dent in the challenges they were meant to address—or in the negative perception of big business.

Business must find a way to engage positively in society, but this will not happen as long as it sees its social agenda as separate from its core business agenda. Instead of pushing through further CSR initiatives, business leaders must create shared value at the local level. By this, I mean competing in ways that enhance competitiveness while simultaneously advancing economic and social conditions in the communities where companies operate. It's time to take advantage of the intersecting needs of business and the community while minimizing the differences.

Opportunities to create shared value must be tied closely to a company's core business operations, which can bring skills, resources, and new operating practices to improve productivity while simultaneously benefiting the community. We are seeing more ways to create shared value, ranging from reducing pollution to improving the productivity (and wages) of low income workers. It is the transformation of core business operations, rather than charitable donations, that will restore the legitimacy of business.

Nowhere are the opportunities, and the urgency, to create shared value more apparent than in our nation's disadvantaged urban communities, where U.S. poverty is concentrated. Economic inequality raises fundamental challenges to capitalism. Inequality will not be solved until we enable residents of disadvantaged communities to prosper in the market system. The only way that this can happen is through the efforts of business. Inner city residents need accessible jobs that offer paths to good incomes near their homes. These can be created only by business.

big business in inner cities

More than jobs, however, inner city communities need small businesses. Enterprises with fewer than 100 employees created 60 percent of the jobs in the U.S. from 1998 to 2007 and the proportion is even higher in disadvantaged communities. Not only do small businesses create wealth for employees and owners, but those located in disadvantaged areas hire disproportionately from the local community. (For example, 40 percent of 2010 Inner City 100 employees reside in the inner city.) Contrary to some perceptions, there are thousands of growth businesses in inner city areas. The capacity for entrepreneurship in the U.S. is thriving in inner cities. We need many more such businesses to not only hire residents but revitalize whole communities.

One of the most effective ways to do this is for major corporations and other large institutions that anchor inner city economies across the country to step up. Nearly 20 percent of the Standard & Poor's 900 index of large and midcap companies is headquartered in disadvantaged urban areas, as are hundreds of major hospitals and universities. These organizations are huge employers. They purchase hundreds of billions of dollars in goods and services and impact inner city economies in numerous other ways.

Almost all such organizations have active charitable programs and the trend has been for donors to sponsor studies documenting their economic impact as a way to improve their image. Despite the fact that the economic health of the surrounding community has a major impact on their own productivity, hiring, customer base, and reputation, too many big organizations lack a strategy to drive community revitalization as a tool to enhance their competitiveness.

Fortunately, some leading corporations are beginning to get it. AT&T (T), for example, has understood the benefits of growing and mentoring local suppliers to enhance the efficiency of its supply chain, leading to local benefits in terms of employment, career ladders, and community revitalization. The University of Pennsylvania has been a pioneer in sustained efforts to revitalize its West Philadelphia neighborhood, nurturing local vendors and using real estate development to spur growth of local business. Hospitals such as Henry Ford in Detroit and the Cleveland Clinic in Cleveland are pursuing local vendor development to improve efficiency, while transforming the inner city communities in which they are based. Efforts like these will spawn the Inner City 100 of the future and cause ripple effects to transform inner city economies.

Businesses acting as businesses, not as charitable givers, are arguably the most powerful U.S. forces for addressing the pressing issues facing our society. These efforts by companies, if animated by the principle of shared value, are what I believe will drive the next wave of innovation and productivity in the U.S. economy. Such efforts will also give purpose to capitalism and represent our best chance to legitimize business again.

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