Creating Shared Value: the way to reimagine social change. How to make social problems a profitable business solution.

Dipartimento di Economia e Management

Corso di Laurea in

Economia Aziendale (Classe EAZ-L)

Tesi di Laurea

“Creating Shared Value: the way to reimagine social change.

How to make social problems a profitable business solution”

Relatore: Candidato:

Prof. Alessandra Rigolini Veronica Cundari

Table of Contents

Introduction………... 2

1. CSR becomes CSV 1.1 The evolution of Corporate Social Responsibility………... 4

1.2 Failure of CSR approach………. 8

1.3 The Big Idea: Creating Shared Value……… 12

2. Novartis case study: reimagining medicine 2.1 Company overview………... 16

2.2A Shared value initiative to democratize health care………. 20

2.3 Pestle Analysis………... 25

2.4 Strategic SWOT matrix………. 30

3. Connecting business success with social progress 3.1 Discussion………... 31

3.2 The future of businesses………. 34

Conclusion………. 37

INTRODUCTION

In the midst of a global health emergency, social issues have never been so pressing. But who is to blame? In the wake of the outbreak of a human pandemic, several different theories have tried to give an explanation, most of which have to do with a punishment of God for the greediness of a capitalistic world, as it is magnificently enclosed in the historical quotation from Pope Francis: “We thought we would stay healthy in a world that was sick”. Once again, as often happens in the face of a crisis, the general tendency is to point the finger at the business world. I believe though that, regardless of whether the world’s corporations are the real root cause of most societal issues of today or not, we can only rely on what is certain: the world’s population is calling for a change where businesses have the opportunity to play a significant role and be the engine of social progress. Therefore, it is the current historical moment, where the sudden urge to solve global issues is growing, that fostered my interest in this theme and prompted me to make it the core of my study.

The purpose of the present work is to widen the debate and encourage future research about the contribution that companies can make to alleviate social problems in a much more efficient way than any other kind of institution, fostered solely by philanthropic motifs. This will be the way to finally build models of production and consumption that are sustainable and non-detrimental to economic competitiveness.

My research has been divided into three chapters. The first one is about how Creating Shared Value (CSV) represents a new and flawless approach overcoming all the various limitations of Corporate Social Responsibility (CSR). More precisely, it starts with a short historical excursus of CSR, going through the major contributors to the evolution

of this concept, from its origins to recent times. Next, I will discuss one of the fiercest critical papers that have ever been published on CSR, i.e. “Strategy and Society: The Link between Competitive Advantage and CSR” written by Michael Porter and Mark Kramer (2006). These authors are themselves who, 5 years later, will be working on another article which will represent the cornerstone of the idea of CSV. However, in the aforementioned article, they limit themselves to reject every positive aspect of CSR and disclose them as inconsistent, erroneous and not based on reality. In the end, the chapter will conclude with the illustration of CSV, focus of my study, along with its main features, what sets it apart from ‘social responsibility’ and how it can allow companies’ choice of operating sustainably to become the source of their competitive advantage.

The second chapter is entirely dedicated to the Novartis case study to describe a practical application of the CSV model within a large corporation. Specifically, I will analyse the project that Novartis embarked upon, called Arogya Parivar, a social program that offers effective, low-cost medications against infectious and chronic diseases that are prevalent in rural India. Further, an audit of the external environment will be conducted within the Indian scenario, which is the market that Novartis is going to enter with the project, and then a SWOT matrix will sum up the most relevant aspects resulting from the analysis.

In the third chapter, I will make a discussion about all the results of the strategic tools in a comprehensive manner so as to weigh up the pros and the cons. Ultimately, I will conclude with a forward-looking vision on the future of businesses, which in my view is based on the democratization of commerce through creating a Shared Value.

CHAPTER 1

CSR becomes CSV

1.1 The evolution of Corporate Social Responsibility

“Globalization at the advent of the 21st century has thrust business to the high ground in our society where new roles, responsibilities and expectations are reshaping the face and nature of business.” 1

(Googins,2008) Corporate Social Responsibility (CSR) is about rethinking the role of businesses in the world of today. In an increasingly complex world we currently live in, where a globalized competitive market has redefined the way of doing business, firms can no longer neglect the importance of social responsibility (Berger-Walliser and Scott, 2018). In the midst of an historical era in which social issues are jeopardizing the well-being of future generations, businesses are being ascribed a significance that has never been as topical as today. In this regard, CSR has made its journey in parallel with the evolution of society, morphing from a right thing to do as a ‘good corporate citizen’ to a necessity for long-term business success. It is during this long and diverse path that a new and ground-breaking gist has been taking hold: firms can do well financially by doing social good (Ahmad et al., 2010). But this is no longer just acceptable. It is expected.

Before going any further with our analysis, we should take a step back by explaining how CSR evolved over the last 70 years reimagining its purpose within the firm and in our broader society, in order to get a comprehensive understanding of how we get this far.

The roots of the concept of CSR date back to the 50s, when Howard R. Bowen (1953), an American economist, published his landmark “Social responsibilities of the Businessman”, in which he coined the term ‘Corporate Social Responsibility’ being defined as: “the obligations of businessmen to pursue those policies which are desirable in terms of the objectives and values of our society”. In other words, Bowen set forth the idea that large corporations, as vital centres of power and decision-making, have a long-lasting and significant impact on the quality of life of society as a whole. Interestingly, all economic agents are claimed to be “servants of society”, and as such, they should assume their own responsibilities by voluntarily taking action in a social sense. Along these lines, Bowen has to be credited not only for providing a significant contribution to the definition of social responsibility, but also for having opened a vast debate on such matter that would have spanned over the entire coming decades, making Bowen the “Father of modern CSR”(Carroll, 1999).

Later on, a growing body of research on this subject was developed. An increasing number of scholars started a number of research studies which helped defining the context of CSR more accurately. Among these, Keith Davis (1960) was an influential contributor of the 60s, who came up with a famous theory known as “the Iron Law of Responsibility”. Stating that “the social responsibilities of businessmen need to be commensurate with their social power”, the basic idea is that the greater is the firm and its business power, the more it has to adopt the expected social behaviours in order to maintain this power. Accordingly, by looking beyond the economic and technical interests of a company, the relationship between corporations and society is acknowledged to be increasingly tighter.

Moving on, the 70s was a century in which conflicting views on this topic arose. Notably, Milton Friedman (1970), a renowned economist and Nobel laureate in Economics, was particularly sceptical of the notion of CSR, which he considers as “fundamentally subversive” to the capitalist system. In this view, Friedman famously argued that those who believe that firms have social responsibilities beyond serving the interests of their stakeholders have misunderstood the fundamental nature of free economy. The only responsibility of business is to maximise profits and that, as a result, any spending of money for social interests represents a waste of company’s resources.

Conversely, during the same period, another thinking of a famous American literate, Archie B. Carroll (1979), developed in a trajectory quite contrary to what Friedman advocated. In particular, he proposed the “Three-dimensional conceptual model of corporate performance” which he would have further explained 12 years later with the famous “Pyramid of CSR”. By means of a graphical representation, the position of an organization can be summarized into 4 layers which hierarchically represent the main responsibilities of any company: economic, legal, ethical and philanthropic responsibilities. Put in more pragmatic terms, any firm that is socially responsible should strive to be profitable, obey the law, avoid harm and be a “good corporate citizen”. In this view, companies are encouraged to engage on activities that improve the social context within which they operate, on the basis of philanthropic perspective that is discretionary, but still important.

Ten years later, corporate behaviour began to make CSR a fundamental part to its decision-making process, when it faced new burning societal concerns of the time, such as environmental pollution, deterioration of urban life, employee health and safety. This

translated into the creation of a new area of debate around CSR that gave way to its “operationalization” (Carroll, 2008). A notable example of this new approach to the concept stems from Edward Freeman (1984) who popularized the famous “Stakeholder Theory”, widely regarded as a milestone in the evolution of corporate social responsibility. The sense of Freeman’s studies is embedded in the following quote: “The true purpose of the firm is to serve as a vehicle for coordinating stakeholder interests”. That is to say, corporations have a responsibility towards a number of parts involved, i.e. suppliers, consumers, employees and the local community, and therefore should be managed accordingly. What lies behind the stakeholder theory is a thick grid of relations based on mutual trust that binds the business towards its real owners, i.e. the shareholders.

It was not until the 20th _{century that CSR gained international appeal, due to the}

globalization process occurring at the time coupled with the global approach to sustainable development. While so far companies had been solely concerned with detecting socially responsible behaviours, during the 90s they started making them integral to their business operations, by disclosing their ‘non-financial information’. The company KPMG (1999) showed data proving that an increasing number of firms started publishing their ‘health, safety and environmental reports’, thereby enhancing their degree of transparency and internal accountability. As a result, implementing CSR activities shift from being regarded as something up to the moral conscience of businesses to proper tools to gain competitive advantage. This is the greatest turning point over the journey of Corporate Social Responsibility.

A key contribution to this crucial phase is represented by the “The Triple Bottom Line” conceived in 1999 by John Elkington, who posits the idea that in order to generate

positive results, companies must set their business goals, by mixing the so-called 3Ps: People, Planet and Profit. Therefore, a socially responsible firm should not only act for the purpose of making a profit, but also of fulfilling society’s expectations so as to embrace a sustainable development.

The paramount shift in the vision of CSR is finalized in 2001 when the European Commission (2001, p.5) presents the Green Paper, in which it is claimed:” Corporate Social responsibility opens a way of managing change and of reconciling social development with improved competitiveness”. Clearly, companies are assigned a new leading role in developing an inclusive sustainable economy, in which they establish themselves as social actors who should act for the benefit of the entire society.

1.2 Failure of CSR approach

CSR has failed. A number of scholars advocate it, and a number of firms are the proof. Broadly speaking, the problem with CSR essentially comes down to the fact that it tacitly put business at odds with society, when they actually need each other. The prevailing approaches to CSR are so fragmented and disconnected from the strategy at the core of every business that they end up obscuring some of the greatest opportunities of enhancing world welfare. The result is reducing these acclaimed socially responsible activities to mere philanthropy that neither makes any meaningful social impact nor boosts the firm’s long-term success. This inner fragmentation coupled with utterly adrift efforts of the business do nothing other than dissipate the ultimate essence of CSR as a tremendous source of innovation and social progress.

Porter and Kramer (2006) are two renowned academics for shedding light on the CSR failure in a very famous article published in the Harvard Business Review, in which they reject all the positive arguments of this approach.

Argument number one: moral obligation. Businesses have a sense of duty that calls them to drive their commercial actions in such a way that they honour ethical values and respect people, the community and the natural environment. A very worthy principle that falls when it comes to understanding the way in which it has to be actually applied. Indeed, moral considerations are rather easy to be put into practice when filling financial statements or abiding by the law, but quite ambiguous when companies have to make concrete choices about allocating revenues or making investment decisions. The consequence is that accounting for morality not only does not help, but also disorientates.

Number two: sustainability. Operating for the sake of securing a sustainable performance prompts the business to incur short-term costs that may fail to offset with long-term objectives. These trade-offs are difficult to manage by the firms, thus making the notion of sustainability vague and meaningless. This is made even worse by the fact that businesses are expected to commit their economic resources to social goals. Such expectations force them to do so in order to avoid far greater costs that would otherwise be incurred if they actually violated their social obligations. But this is totally out of scope of CSR having as one of its premises a voluntary basis.

Further area of discussion relates to the fact the businesses need a sort of “license to operate”, which stands for the approval to act from the government, the citizenry and all the rest of the stakeholders involved. One the one hand, this approach, which hinges upon a direct dialogue with the stakeholder group, certainly allows to identify the social

issues that more significantly affect the context within which the firm operates. On the other hand, struggling to please stakeholders’ interests, however important may be, pushes the firm to prioritize them, drifting away from CSR agendas. The result is that stakeholders, outsiders to the business, are themselves who are given control. Thus, by being limited to take action in accordance with the pressure exerted from the outside, the CSR approach unfolds in a series of defensive short-term reactions that aim to strengthen public relations with stakeholders, adding no strategic value to the business.

Finally, it is claimed that engaging in CSR activities enhances the public image of the firm, so as to gain a broader customers base and more highly skilled employees. But what it may appear as a tool to safeguard against reputational damage is nothing other than a mere marketing exercise known as “greenwashing”. Put differently, some cultivate the image of a socially responsible organization simply for the marketing benefits, by spinning their advertising to make it seem as if they are doing a good deed, rather than actually engaging in social or environmental improvements (Alves, 2009).

A case in point is the Volkswagen case. The world’s largest car maker turned out to be an absolute failure in terms of Corporate Social Responsibility when supposedly environmentally friendly cars were revealed to actually poison the planet emitting 40 times the legal limit of nitrogen oxide. Volkswagen has been the protagonist of an actual scandal, of whom all its clients were unconsciously accomplices. This was made possible thanks to a powerful marketing communication that was meant to catalyse a positive corporate reputation, when it was actually circumventing the law. The company simply had decided to set out the best strategy that would have allowed to keep its leading

position in the automobile market, whose customers call for faster and better cars. No matter how environmentally detrimental can be.

From the Volkswagen case, we can acknowledge what it is sadly an actual fact: the sole objective of every company is to maximise profits, by any means. There is no theory on earth that will ever be able to deny it. This is exactly where the CSR failure comes in: it asks companies to choose between either being profitable or socially responsible, either caring about the sustainability of the business or that of the planet, either serving shareholders or the society. But the answer is very straightforward: the business, by its very nature, will always choose the profit motive, and, once again, by any means. This is what the failure of the CSR approach is all about.

However, the worth of its purpose should not be disregarded: make a positive impact on the world. Therefore, CSR simply needs to be reinvented, taking on a different guise in such a way that companies will not face any trade-off in which they have to prioritize either social performance or the economic one. There will not either/or, but both/hand; in other words, business will serve a social purpose and, only by doing so, they will generate profit in the long run. This will mean to implement a more strategic approach, because it is only by thinking strategically that companies will make the most significant social impact and simultaneously reap the greatest business benefits. Strategic CSR involves the business and the community working in tandem by rediscovering social issues no longer as constraints or costs, but as real opportunities for the business. In so doing, companies will turn out to be the most powerful force of all times.

1.3 The Big Idea: Creating Shared Value

If Porter and Kramer criticized the CSR approach at such a great length, they also put forward a concrete solution to it. Hence, it is in 2011 at the very moment when businesses were perceived to be prospering at the expense of the broader community and corporate social responsibility efforts were failing to effect real change that Michael Porter and Mark Kramer coined the concept of Creating Shared Value (CSV). Published in the category “the Big Idea” of the Harvard Business Review, this revolutionary article sparked a global movement to redefine the role of business in society around a simple but powerful idea: business success and social progress are interdependent.2

Before explaining how to actually engage in corporate behaviour that creates shared value, the two aforementioned authors introduce the concept with a considerable warning: “the capitalist system is under siege”. In other words, the context of financial crisis and the growing awareness to social issues have brought about a huge distrust to businesses that are accused to be their cause. Companies have been viewed as a major cause of all the social, environmental and economic problems that currently affect the world. In this belief, firms’ operations are led by the trade-off between social benefits and economic success, in accordance with the view that the former undermines the latter and vice versa. As a result of this, companies themselves remain trapped in a very narrow and short-term approach that only creates value to shareholders, completely ignoring the broader customer needs. Contextually, the burden of solving social issues is left to NGOs and the Government; but the reason why they did not successfully handle this difficult task so far, and hence social concerns have become increasingly burdensome, is that they do not have enough financial resources to deal with such matters. The problem solely and exclusively stems from the shortage of resources.

So, the question is: where are these resources that we need in order to deal with societal challenges? The answer is very clear: they are in business. This is the only institution in which all wealth in society is created. And businesses create wealth when they are able to meet needs at a profit. It is only that profit which allows whatever problem is being trying to be solved to be infinitely scalable. In such a way, the solution becomes self-sustaining. The error would be to consider this as an external activity from the core of the business, as it may generate additional costs that prevent the return of capital to investors. On the contrary, if companies adopted a long-term view, they would finally realize that it is by doing social harms that they will incur further internal costs- for instance, just think of wasted materials or costly accidents- whereas, it is by addressing them that firms would innovate, differentiate, improve their efficiency, expand their markets and discover new opportunities, so as to recognize the potential of capitalism as an unrivalled vehicle for serving human needs and generating wealth.

This is exactly what this Big Idea of Creating Shared Value is all about. Defined as “the set of 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” (Porter and Kramer 2011), it basically prompts the business to approach societal issues from a value perspective, by identifying the deep connection between societal and economic progress. The idea that underlies the concept of CSV is that “not all profit is equal”, because profit, which seemingly has a mere financial focus, may actually involve a social purpose. It represents a new and higher form of capitalism, as it allows businesses to grow more rapidly and durably by generating long-term profits and enables the society to prosper by solving the many various issues that plague the earth. Shared value is the key to unleash an extraordinary wave of innovation and growth

in the global economy, but most importantly it represents the best chance for companies to acquire again the legitimacy that has fallen over the last years in the eyes of the communities, by redefining the ultimate purpose of corporation as, no longer just profit per se, but as creating value which is shared by businesses and society simultaneously.

Interestingly, CSV is fundamentally different from CSR activities. The substantial distinction is that CSR is about mere responsibility, whereas CSV is about creating value. The original idea of corporate social responsibility was basically a redistribution approach: companies were solely devolving their profits in favour of social causes, by means of some sort of philanthropic initiatives in order to alleviate issues such as poverty, hunger or water shortage in the world. A good example may be fair trade which guarantees poor farmers an adequate price for the same crop, so as to increase the proportion of their revenues. Though this may be a noble gesture, it does not represent a sustainable solution; it is merely passing income from one party to another by paying producers more in the short-term. But this is not going to ultimately succeed because at some point that motivation to donations will inevitably reach an impasse.

Therefore, what if companies reengineer the way they do their business in a smart way? The CSV approach itself would actually mean addressing social problems through a business model that it still profitable, rather than charitably redistributing income. This goes beyond the philanthropy that underpins CSR because it finally allows businesses to act as businesses and not as charitable givers. It would be a win-win relationship for both companies and society. In sum, Shared Value consists of making social agenda integral to profit maximization so as to consider societal issues no longer as peripheral, but as actual business opportunities.

On a practical level, there are three ways whereby companies can create Shared Value: • By reconceiving products and markets: rather than incrementally competing on trivial functional differences of products and services, companies should redesign their offerings by identifying the societal needs of the customers base that can be embodied in the products (Pfitzer et al., 2013). This implies directing companies’ attention to underserved markets, whose opportunities would allow firms to reposition themselves in traditional markets or to discover new potential ones. • By redefining productivity in the value chain: the way companies conduct their

business, which has to do with logistics, procurement and so forth, should be reengineered in the light of criteria such as efficiency and efficacy. In so doing, firms will internalize the negative externalities so as to enhance the social and environmental impact of their operations, while reducing internal costs.

• By enabling local cluster development: this level focuses on the key role that companies have in catalysing constructive change in the economic area within with they operate (Porter, 2008). Hence, if firms make an active contribution to the socio-economic development of the “cluster” they belong to, this will in turn increase company productivity, innovation and competitiveness.

In conclusion, it would be extraordinary if the largest companies in the world really embraced this idea of Creating Shared Value because its power to solve social problems around environment, hunger, poverty, education, nutrition is tremendous. And the way we have been trying to do it over the last decades- whether through charity, NGOs, the government- has not worked. But if the business world figured out how to profitably meet social needs and serve the population, I firmly believe we will see enormous social improvements in the coming decades that we have never seen before.

CHAPTER 2

Novartis Case Study: reimagining medicine.

2.1 Company Overview

Novartis is one of the world’s leading pharmaceutical companies, which provides healthcare solutions in order to fulfil its mission: improve and extend people’s lives. Founded in 1996 through the merger of two Swiss companies Ciba-Geigy and Sandoz, today this company is one of the top 10 global pharmaceutical players, in terms of market capitalization, along with its main competitors (see figure below): Pfizer, Merck, Johnson & Johnson, Roche and Sanofi. Novartis currently serves nearly 800 million people throughout 155 countries worldwide, where it manages a wide product portfolio that includes innovative pharmaceuticals, generics medicines, biosimilars and eye care devices (Novartis, 2019). Working as a leading focused medicines company, it is powered by data science and advanced therapy platforms, since it is by accessing the full range of technologies that the Group strives to deliver its purpose to ensure people’s health and safety.

With regard to a performance analysis, Novartis reported revenues of US$53,166 million for the FY2018, an increase of 6% over FY2017 (Market screener, 2019). The operating margin- operating profit over net sales- experienced an upward trend over the last 3 years, growing from nearly 25% in 2017 to surge at just under 30% in 2019. It also seems likely to grow even more over the next years, reaching a peak in 2022 at approximately 32%, a very positive indicator of profitability meaning that for every 1$ in sales, Novartis is going to make $0.32 in operating earnings. Ultimately, the company reported a net margin- net income over revenues- of 15% in FY2017 which sharply raised to 27% over the following year, and then fell back at a low percentage. However, experts are predicting a marked increase over the years to come, averaging around 20% in 2022. This gives investors and shareholders a very clear indication about how profitable Novartis is today and is likely to be over the next period.

Until 2019, the corporate structure of Novartis used to be divided into three business segments:

• Innovative Medicines, organized into two units (Pharmaceuticals and Oncology), and focused on patent-protected prescription medicines.

As of 2019, Novartis’ business model underwent a change, due to the spin-off of its eye care division Alcon. In the aftermath, the company experienced a significant decrease in total revenue compared to the previous year (see figure below), but still totalling an excessive amount of USD 47.4 billion (Statista, 2019). Nevertheless, this bold operation enabled the two companies to capitalize on significant growth opportunities and to focus their resources on their respective businesses and strategic priorities. Since then, Novartis made some significant restructuring measures, so that today there are only two major core businesses left.

Today, Novartis’ business units are supported by a number of organizational units: the Novartis Institutes for Biomedical Research, Global Drug Development, Novartis Technical Operations and Novartis Business Services. They all operate with a specific focus on Research and Development, the engine of Novartis’ business model, which

reflects the company’s strong commitment to a steady and ever-growing innovation process that is constantly dedicated to the challenging practice of finding new medicines. Indeed, more than nine billion U.S. dollars – almost 19% of Novartis’ total revenue – was spent on R&D in 2019 (Statista, 2019).

With regard to Novartis’ governance structure, it includes a General Meeting of Shareholders who approves Group consolidated financial statements, elects the various Board members and decides about Board and Executive Committee compensation; then an independent Board of Directors has to set strategic direction of Novartis and oversee major transactions and investments, and finally an Executive Committee is in charge of operational management of Novartis. This corporate governance framework is intended to support the objective of creating long-term value for the company, its shareholders and the society at whole, through open and transparent communication, a strong compliance with the laws and regular monitoring of their processes and disclosures.

Furthermore, corporate responsibility is ingrained at the highest level of Novartis. This is evident from one of its strategic priorities, i.e. the company commitment to build trust with society, as it is asserted in the Annual Review 2019: “If Novartis is to be a trusted leader in changing the practice of medicine, we need to be an institution that holds the respect and confidence of society”. Novartis acknowledges that the company itself, as well as the whole pharmaceutical industry, plays a significant role in society, and accordingly it is highly committed to consistently meet its legitimate expectations. Therefore, in the belief that society’s trust is essential to accomplish company goals, Novartis’ strategy operates across four key areas that are deeply embedded in their business model: holding themselves to the highest ethical standards, increasing access

to medicines, tackling complex global health challenges and being a responsible citizen (Novartis, 2019). In so doing, Novartis, as a purpose-driven organization, has been making a significant global impact, reaching 16 million of patients through their access-to-healthcare programs and 10 million people through their training and education programs worldwide.

Remarkably, this socially responsible approach of Novartis is not viewed as something that is on the side, but it is at the core of who they are. This stems from a concept that drives the business in every single operation it undertakes: that, as the CEO stated, “in the very end, the company will not be measured by the level of profit or loss did it gain, but actually on the ability of “bending the curve of life”, by transforming human health”(Narasimhan, 2018). It is in this view that Novartis is a starling example of a company that meaningfully and staggeringly creates Shared Value, and in the next paragraph I will be discussing about how it has been doing it.

2.2 A Shared Value initiative to democratize healthcare

Before diving into the way Novartis has been creating a Shared Value, we need first to put the company in a specific historical time frame that highlights the remarkable impact that the pharmaceutical industry has had on the world over the last 450 years, in order to have a better understanding of how this firm came up with its unique CSV approach.

With regard to the history of human health, the graph below shows the trend of life expectancy that occurred starting from 1500 up to the present day. Clearly, for most of the two million years that hominids have been on the planet, life was brutally short, being between 30 and 40 years of age. Over the following centuries, during which civilization

believed that health had much more to do with humour and spirits than it did with science, the trend did not move. It was only in 1900 that Novartis and other companies started the march of modern medicine, so that suddenly the life expectancies of most of the Western world started to increasingly climb until today when people expect to live from 80 up to 100 years of age. These incredible improvements in health have been universal, involving even underserved places like Tanzania or India, where finally communities are healthier that they used to be. In this regard, Stephen Radelet (2015), a development economist at Georgetown University, claimed that “the improvements of health and life expectancies in the poorer parts of the world have been one of the greatest accomplishments in modern history, and almost no one knows about it”.

These extraordinary breakthroughs that the world has witnessed over the last centuries represent for Novartis a very big opportunity: to continue improving human health in dramatic ways. But what sets Novartis apart from its competitors is the way it faces a greater challenge, i.e. serving the medical needs of a number of populations that still lack access to healthcare and medicines. This is a fact: despite the widespread strides in health occurred so far, one-third of the world’s population does not have access to essential medicines. Those numbers in the US are around 28% of Americans under the age of 65, and nearly one in 10 patients in developed countries forego the healthcare it needs

(WHO, 2020). Ensuring broad access is a critical issue and a challenge that Novartis takes particularly seriously, lying at the core of their business.

In this view, expanding access to medicines in innovative ways is essentially the way Novartis creates its Shared Value. Precisely, the CSV approach of the company goes by the name of Novartis social business, focusing on patients who struggle to access good-quality healthcare in least-developed and lower middle-income countries across the globe. This can be regarded as the first commercial operation, over the whole history of the pharmaceutical industry, to be enacted for the first time in rural areas, which have always been overlooked because of the limited purchasing power of these populations. Apparently, it may seem a very praiseworthy philanthropic gesture, but it actually takes action through two innovative business programs that are scalable and profitable: Novartis Access and Healthy Family. Though the activities implemented by these models act on different areas respectively, they all share a common purpose: bridge the divide between those with access to healthcare and medicines and those without.

The Novartis Healthy Family programs consist of innovative business models that are expanding access to healthcare for people living in rural communities through health education, improved infrastructure and affordable products, in a sustainable way for their business. It started out in India in 2007 and it has been since replicated to Kenya, Vietnam and Uganda, adapting to the specific disease burden and healthcare needs of each country. Over ten years, such initiative brought health education to more than 50 million people, and direct health benefits to over 3 million patients through diagnosis and treatment. Remarkably, these programs are successful operations that allow the

company to make a self-sustaining profit, by meeting the needs of underserved populations with a low disposable income.

Launched by such program, Arogya Parivar, meaning ‘healthy family’ in Hindi, has been the first social business model to be implemented by Novartis, with the goal of addressing health issues in India, where two-thirds of Indians live in rural areas, earning less than 2$ a day. This initiative acts in response to critical problems affecting those populations, such as poor sanitation, limited availability of medicines and trained professionals, lack of awareness of basic health issues among villagers. On this basis, Arogya Parivar uses an innovative direct approach that aims to improve access to healthcare to the 740 million of Indians who live in poor conditions, by creating awareness, enhancing local availability, and designing affordable health solutions.

Specifically, Arogya Parivar’s business model is organized into 239 cells, each covering a radius of approximately 35-40 km, corresponding to 60-70 villages per cell with around 200.000 inhabitants. Each cell is managed by a team of health educators and sales supervisors who represent the two separate, yet mutual, driving forces of such program. On the one hand, health professionals are local villagers, usually women, whose role is to host community meetings, where they explain the importance of prevention and disseminate information about diseases and preventive measures. This creates

seeking behaviours since villagers are made aware of prevalent diseases and encouraged to seek treatment when they recognize symptoms. The importance of health educators is key; as it is claimed, “they are true agents of change, using storytelling to get important health messages across, with the aim of changing people’s behaviour” (Novartis, 2017). On the other hand, sales supervisors directly interact with NGOs, pharmacy chains and local doctors to organize ‘health camps’, i.e a sort of mobile clinics where patients can access to screening, diagnoses and therapies. Most importantly, their strong linkages with doctors and pharmacists ensure that medicines are available in local pharmacies through an extended supply chain that reaches even the most remote locations. Furthermore, products are made simpler to use and packaged in smaller units so as to be tailored to the most prevalent conditions in rural India, ranging from tuberculosis and respiratory infections to child malnutrition and digestive problems.

Arogya Parivar has been consistently recognized over the years as a “social business” that has been fully able to meet both commercial and social targets. Indeed, within only 30 months, the program began returning profit and sales have increased 25-fold. Since its launch, it has become an essential public health tool operating in 15 states across India and covering 33.000 villages. The socio-economic impact of the initiative has been overwhelming, reaching 42 million people, with more than 398.000 participating in 9.200 health camps. Beyond delivering healthcare, these social business models also provide the people who work on the programs with jobs, income, and skills enhancement – opportunities that might not otherwise exist in rural communities. As a matter of fact, data show that this initiative created nearly 500 indirect jobs, provided technical training to over 50.000 doctors and pharmacies in rural areas, and contributed to the skills development of hundreds of business partners, suppliers and customers.

2.3 PESTLE Analysis

Pestle Analysis is needed for a comprehensive analysis of the external environment in which Arogya Parivar, the focus of my study, takes action. Using this strategic tool is an important step for categorizing all the factors that are not in control of the company directly and that, as such, may put it to serious operating challenges. Therefore, an understanding of the overall competitive landscape will allow me to evaluate whether Novartis social business proactively responds to the macro-environment, whose conditions may be suitable or not for undertaking state-of-the-art initiatives, like Arogya Parivar.

Political

Being one of the largest democracies in the world, India enjoys a rather stable political situation. This is primarily due to the fact that the ideologies of several political parties are perfectly consistent with the democratic will of the citizens, thereby creating a political climate of tolerance which is a very important factor to attract foreign direct investment. Furthermore, it is essential to consider the extent to which political decisions affect the economy. Regarded as one of the country’s priorities, the business sector is highly supported by the government, through the provision of a number of subsidies for purposes of growth, innovation, improvement of employees’ education and of the quality of the infrastructures (Kochanek, 1974). Thus, the strong level of interference of the policymakers in the business surroundings would signify for Arogya Parivar a high reliance on government assistance, but, on the other hand, a forced compliance with the laws that may potentially dictate what a social business is and is not allowed to do.

A major area of concern is corruption, which seriously affects India’s political environment (Euromonitor International, 2011). This problem takes a toll on the general economy by reducing competition and efficiency, raising the cost of doing business, and also significantly bringing about a regulatory uncertainty, which may prevent investors from partaking in risky ventures. Hence, pervasive corruption has undermined the integrity of the politicians, which may ultimately result in possible impeachments or resignations in high level government members.

Economic

India’s economy is one of the world’s fastest-growing economies. It is the fifth-largest economy by nominal GDP and the third one by purchasing power parity. However, over the last six years, the country has been experiencing a severe slowdown, causing investment to weaken and unemployment to rise. In 2019, India’s GDP growth dramatically fell to around 4.5%, a growth rate that is still much higher than that of developed economies like the US, but way below the necessary level to ensure that there are enough jobs to the 12 millions Indians that every year enter the workforce (Trading Economics, 2020). In this regard, the unemployment rate has been on an overall upward trend since July 2017, rising to 7.7% (CMIE, 2020)- a very negative economic indicator indicating that consumers are buying less, which leads to the unfortunate cycle of slower manufacturing, investment and job creation.

On this basis, it can be claimed that the current economic instability makes the general outlook of Indian economy not utterly favourable to the development of new social initiatives that, as such, are likely to incur some losses.

Social

Over the past decades, India, as the second most populous country in the world, has witnessed significant social changes, paving the way for both unprecedent challenges and opportunities in the sphere of public health. In this sector itself, great strides have been made towards significantly reducing poverty, combating certain diseases and improving the living conditions of the rural population. According to the World Bank, since World War II, average life expectancy has risen by more than 25 years, and the mortality rate along with the rate of disease incidence dramatically declined across the country(Encyclopaedia Britannica, 2020). Yet, in spite of this progress, there is strong evidence to suggest that health problems in India continue to persist, posing a threat to the national security. For instance, the country at question still accounts for a substantial part of the global burden of disease with 18% of global deaths (WHO, 2020). Also of significant concern are the growing disparities between the rich and the poor. In this regard, the World Health Organization (2020) has shown that only 41% of births take place in a health facility and that still thousands of women die every year in childbirth.

Clearly, the country still faces serious health challenges that the public system, which is underfunded and overstretched, is not able to efficiently manage. In this view, both redressing equity in healthcare and helping communities tackle health issues can be considered as opportunities to be seized by social businesses like Arogya Parivar.

Technological

Today, India faces a severe digital divide. This refers to the huge discrepancy between those who have access to digital technologies and those who do not (Parsheera, 2019). As per data released by Internet and Mobile Association of India, India is the world’s

second-largest internet user base with nearly 450 million people monthly active internet users at the end of the year 2019. This number comprises 192 million people living in urban areas, nearly as much as the number of users in rural India (IAMAI, 2019). However, if we recall that nearly two-thirds of the population live in rural areas, we can acknowledge the significantly higher urban net penetration in terms of relative numbers, and consequently the huge disparity in accessing technology between the rich and the poor. Put it simple, for every Indian who has access to the Internet, there is at least one who does not and that person is most likely living in a rural area.

It is important to claim that bridging this digital divide is beyond the scope of Arogya Parivar. Such initiative does not aim to bring an enhanced healthcare to the villages by means of technology, notwithstanding its potential to narrow the gap; it rather resorts to local tools, focusing for instance on the importance of communities and the strong sense of belongingness of villagers to them, being regarded as the most powerful way to spread out important health-related messages. In so doing, the business fully adapts to the local context in order to better serve the specific needs of rural India, unleashing a wave of innovation that needs to be “local” to be long-lasting.

Environmental

While urban areas have always received much attention from the general public with regard to environmental problems, it is important not to neglect from this area of concern the rural areas, which live next to the natural environment and, as such, see more easily the damages that human activities may do to the essential resources to villagers (Tripathi, 2003). Particularly, a major environmental issue affecting rural India is air pollution, which poses a serious threat to the survival of these communities. In 2019, a report of

the European Parliament (2020) showed that nearly 790 million people still rely on biomass (wood, charcoal or animal dung) for cooking, releasing tons of noxious fumes which directly threaten people’s health and child mortality.

In this regard, Novartis is highly conscious of all the environmental challenges faced by rural areas in India. Therefore, every single operation is enacted making efficient use of natural resources and minimizing the environmental footprint of their activities and their products. Particularly, to help addressing the environmental issues among India’s rural poor, Arogya Parivar is partnering with a number of non-pharmaceutical companies, such as Tata, Mahindra and Hindustan Unilever collaborating on the distribution channels, or Levi’s and its supplier Aquarelle, whose workers are appointed and trained as health educators. It is important to note that the selection of such partners stems from the highly environmentally conscious approach of all of them, being then a tool for Novartis to be a catalyst for a positive environmental impact.

Legal

Last but not least, Novartis should be mindful of the legal environment which highly influences the way in which companies operate. Within the business framework, the Government of India has enacted a number of regulatory reforms over the years: most importantly, the Indian Trade Unions Act (1926) which gives corporate status to registered trade unions and seeks to protect them from civil and criminal prosecution; the Competition Act (2002) which prohibits anti-competitive business practices and the abuse of dominance by an enterprise; the Consumer Protection Act (1986) which protects the interests of consumers by providing a simple judicial resolution system with respect to unfair trade practices (Vir Singh, 2008).

The various laws strongly protect the rights of consumers as well as ensure a healthy and fair competition, yet they do not seem to be homogenous across sectors (Satar 2016). Indeed, the social sector is characterised by the total absence of a regulatory framework which leaves social ventures with no supporting policy, as they are associated with blended value creation (Kummitha, 2016). This would imply for Arogya Parivar substantial challenges with regard to operating without any formal recognition by the country, which foster its commitment to pursue its goals, breaking down common misconceptions and showing its great potential to the Indian economy.

2.4 Strategic SWOT matrix

SWOT analysis is a simple but powerful framework to evaluate Novartis social business within the Indian scenario. For the purpose of my study, it is used primarily to map out all the relevant aspects inferred from previous considerations, categorised into internal, controllable factors (Strengths and Weaknesses) and external, uncontrollable ones (Opportunities and Threats) that need to be leveraged or overcome (Dyson, 2004), so as to compare the various perspectives of the project in the final discussion and ultimately make a comprehensive judgement about its potential.

CHAPTER 3

Connecting business success with social progress

3.1 Discussion

The purpose of this discussion is to interpret and describe the significance of my findings resulting from the Novartis case study. Offsetting the drawbacks against the silver linings that ensue from the implementation of the CSV model, I will be diving into all the fresh insights from whom entrepreneurs and businesspeople of the next millennium can draw inspiration to rediscover a new way of doing business and rethink capitalism.

First, Novartis is recognizing the potential of a new market where to expand, envisaging opportunities that have never been tapped before. The rural areas of India offer Novartis the prospect of reaching millions of new customers “at the bottom of the pyramid” - a notion persuasively articulated by C.K. Prahalad (2002) that will be thoroughly discussed in the next paragraph- thus delivering profound societal benefits to lower-income and disadvantaged communities, while making a reasonable profit that cannot certainly be compared to the rest of the business of Novartis but that is self-sustaining in the long-run. In light of this, Arogya Parivar is not merely a social venture, but in all respects a commercially-viable program that delivers its bottom-line results and that, as such, can be replicated to other developing countries such as Kenya, Indonesia or Vietnam.

Interestingly, the way Novartis has been steeping into this new market is rather strategic. The global pharmaceutical leader knew that, in order to have a truly relevant presence in there, it could not simply mobilize its business activities from their operating traditional markets to rural India, but it needed to fully adapt to the local context, integrating itself with

by means of ‘health camps’ where villagers are informed and educated about the importance of prevention and the importance of good health from local doctors and partners who can establish good relationships with both stakeholders and patients, thus gaining widespread social impact. These sort of community meetings leverage on personal beliefs and habits ingrained in the culture of poor areas where the sense of community is a source of education and information. In addition, the product portfolio is tailored to the needs of these underserved rural populations, being simple to use and relevant to patients and fully adapted to the local disease burden. On this basis, cultural adaptation turns out to be the key to the success of this social business.

In contrast, some may argue that this expansion in the rural Indian market can be undermined by the current economic situation of the country that certainly does not make the business scenario very flourishing. But this is the point: any Shared Value initiative does not target thriving markets, but rather new and unexplored ones where to serve wider needs, create differentiation and trigger fundamental innovations that can also be applied in traditional markets. It is in those areas that there are big challenges, hence the greatest opportunities, as the saying goes. Among these, there is the provision of jobs, skills enhancement and technical training to thousands of local doctors, which could be regarded as the seeds for an economic recovery that is even more valuable when coupled with the expansion of access to a good-quality healthcare system over the two-thirds of Indians who lack of it. This does not simply stand for the willingness to support the development of a country in a philanthropic way, but actually for the purpose of delivering value to both the people in need and to Novartis in search of new opportunities.

Another important aspect that can be inferred from the PESTLE analysis is the strong linkage between the political parties and the business world in India. This would certainly come out in favour of general companies that can count on relevant financial support from the government, but this does not apply to social businesses like Arogya Parivar which lack a proper legitimacy among the public opinion, and, as a result, are not even considered as businesses. This is the case because it is commonly believed that who is meant to aid people living in poor conditions are no one but NGOs or charitable organisations, because this is what has occurred in years. However, I believe that Novartis, by means of a new business approach called CSV, has the great potential to break the conventional wisdom and prove how profitable a social program can be when addressing pressing social issues, no matter how complex the organizational structure of the model might result or how difficult the results measurement can be.

In light of this, Arogya Parivar truly represents a winning concept, by proving that the business and society can benefit together, in a much bigger way, if their processes are integrated. The competitive advantage of such business model, in terms of Creating Shared Value, stems from the fact that it makes every actor win. Families are health-educated and ensured that their well-being is enhanced, benefiting from chronic disease prevention and treatment. Local doctors receive extensive training and reach a wider population. Villagers are empowered and recruited as health educators in order to effectively communicate health-related information, thereby building trust and gaining widespread acceptance and adherence among communities. Ultimately, as for Novartis, they are changing the lives of people in need, in a profitable, scalable and self-sustaining way.

3.1 The future of businesses

In the end, we should ask ourselves: what is the future of businesses? Arguably, to my view the answer is about democratizing commerce. This is the challenge for the next century. What it really means is to ensure that everyone has the right to have access to the benefits of the global economy. Making globalization work for the benefit of all is the spirit of the “Fortune at the Bottom of the Pyramid” (BOP), a revolutionary concept originally presented by C.K. Prahalad and Stuart L. Heart (2002) who aim to eliminate inequality between the rich and the poor, paving the way for a new age of innovation.

The starting point is the fact that on this planet there are more than 7 billion people but only the 3 billion richer and middle-class people are served by most of today’s global companies (see figure below). The rest of the individuals at the base of the pyramid, who make up more than half of the world’s population, are largely ignored, being left without even the most basic products or services like electricity, water or sanitation connections. It is in this regard that the idea of the fortune at the BOP reverses the pyramid to meet the needs of the world’s poorest who will no longer be seen as an intractable problem of capitalism, but as both entrepreneurs able to work in difficult circumstances and value-driven consumers. This is not only a new theory, but an attempt to fight poverty with profitability in the light of a new form of capitalism called “inclusive capitalism” (Prahalad and Hammond, 2002).

Contrary to popular assumptions, the poor represent a very profitable market. This has always been an invisible opportunity, due to false conventional assumptions such as low brand consciousness among the poor, lack of access to distribution channels or the absence of communication networks in those rural areas. Prahalad proved that these are but pure myths which are not rooted in the realities of the market, because it has been shown that also the poor prefer branded goods as they too hanker for quality and a higher standard of living, they are better networked than before because of the rapid expansion of the internet and, above all, in terms of market size, they represent a market worth trillion of dollars.

One may ask here: how is money made with a business model that targets the poorest? Logic says that there are no revenues to be made in the developing countries but in reality, there are. The base of the pyramid is not a market that allows for the traditional pursuit of high margins; instead, profits are driven by volume and capital efficiency. Therefore, companies would shift to lower cost production models with smaller margins and mass adoption. Take India with 1.2 billion people and GDP per capita of around 1000 dollars. The market opportunity is 1.2 trillion dollars but if one considers that a dollar can buy up to 4 times more in India, then the market opportunity will become closer to 4 trillion dollars.

In this view, democratizing commerce has the inclusion of 4 billion people underserved in the market economy as “micro consumers” and “micro producers” (Prahalad, 2009). In other words, they need to be offered affordable purchasing choices so as to be ascribed the deprived dignity and self-esteem that will come from exercising those choices; besides, the poor -whether they work in a factory or are independent entrepreneurs- should be treated and compensated fairly. A case in point would be the Novartis case study itself, previously discussed. Indeed, this multinational is doing nothing other than providing rural villages,

where poverty fundamentally stems from lack of information, with the tools to solve their own social problems, raising awareness about diseases and preventive health measures amongst communities and partnering with local workers who effectively communicate important messages and build trust. As a result, the poor will move away to be seen from pure victims to co-creators of their own destiny.

However, serving this tier of pyramid is not the same as serving existing markets, since it requires innovation and entrepreneurship. Managers must first come up with an organizational structure that is tailored to the needs and challenges of this world’s population, and where the network of relationships is fundamental. On this basis, multiple players are involved including governmental authorities, NGOs, communities, financial institution and other companies which can leverage their local knowledge to build mutual trust and deliver local responsiveness. As a result, civil society and companies will no longer have adversarial relationships, but the convergence of their interests will be the cornerstone of the recognition of each other to finally develop long-lasting cocreation relationships.

In conclusion, the future of business is fundamentally orientated towards realizing that not all innovations come from the top of the pyramid, but that some of them can come from the bottom right to the top. This is a new route of where the new age of innovations will travel, representing only one of the endless facets of Creating Shared Value. Therefore, we need to start democratizing commerce through an inclusive capitalism that makes sure that globalization will benefit all. The private sector cannot ignore the poor as they are a viable market, a source of innovation and significant market capitalization. But this is all about imagination. We have to believe in a different world where social equity and profitable growth are possible for all people, not just for a few.

CONCLUSION

Creating Shared Value is nothing but only one of the numerous phenomena in response to the growing awareness of the big impact of the economic organisations on the future of the whole ecosystem. Although being at the dawn of its development, a number of enterprises have demonstrated that the benefits of this new thinking can be real and substantial. In the light of this, my thesis has shown that CSV can represent the key to the business’ success of the new age. This is the case because the growing global sensitivity to the theme of sustainability brings those companies that operate at the expense of society to face an increasing number of obstacles. A sustainable profit is not only morally better but, above all, long-lasting. And in an environment that is extremely dynamic, hence unstable, like the one in which we live today- the current health emergency is a proof- there is no other way but to pursue a success that is able to endure over time.

To summarize, my work has started with a brief literature review about the long and diverse history of CSR, the primordial notion from which CSV started, progressively analysing the various fascinating theories that have initially drawn companies’ attention to their moral duty to society. However, CSR falls foul of an intrinsic philanthropic motif that is conventionally at odds with the generation of profit or any financial gain. Therefore, in order to overcome this strong criticism, Creating Shared Value is presented as the fundamental driver of a new and necessary evolution of the traditional view of CSR, in which finally social issues represent business opportunities, not as costly problems to solve.

Further, I have presented Novartis as a starling example of a business implementing a CSV strategy that has been successfully co-creating sustainable financial and social value in India. The case study teaches that societal needs, not just conventional economic needs, can define

new markets to serve, where opportunities can be far greater respect to traditional ones. The social program could result quite arguable as it targets a market that is going through a critical economic juncture and that is affected by political instability, as shown in the Pestle analysis. However, it turns out to be a very strategic move when it comes to ‘democratizing healthcare’ at a profit, an objective that could significantly contribute to the prosperity of that social context and, at the same time, lead the entire company to obtain a sustained competitive advantage.

The reality is that the poor demand breakthrough innovations and it results to be very lucrative to do so if we ‘break the code’, as firms can have an advantage leveraging innovations globally and create a new customers segment across the world. In this view, there is an incredible value lying right at ‘the bottom of the pyramid’, which requires though a paradigm shift in the thinking process of the private sector. Therefore, if we can all acknowledge that the poor can represent a market opportunity, the net result will be inclusion, global competitiveness and national security.

In conclusion, to my view, Creating Shared Value represents the only opportunity to bring on the same track the success of a business and the welfare of the community. A company is a such a systemic entity in the context in which it takes action that pursuing adversarial objectives is something that does not benefit any of the parts involved. The business world does not only represent a source of labour supply or of provision of products and services, but also the fundamental engine for innovation and economic development that will unleash an enormous wave of growth for the entire planet.

I firmly believe that the opportunity of generating economic value through the creation of social value will be the major force driving the future of the global economy.

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