Tuesday, August 10, 2010

Michael Porter on Inner City Business

"Billions are wasted on ineffective philanthropy. Philanthropy is decades behind business in applying rigorous thinking to the use of money."
~Michael Porter, Professor at Harvard Business School.

Michael Porter on Inner City Business
Companies can benefit their communities simply by doing more business close to home
By Michael E. Porter

A decade ago, Archie Williams, the founder of a small printer-toner distribution company in the impoverished Boston neighborhood of Roxbury, happened to play a round of golf with Tom Stemberg, the founder and then-chief executive of office supply mega-retailer Staples (SPLS). Through 18 holes, the pair pitched, putted, and chatted—and became fast friends. Soon, Stemberg started buying printer cartridges from Williams' company, Roxbury Technology.

The deal turned out to be a win for both Staples and Roxbury—the company and the neighborhood. The office supply giant found a reliable supplier for an important product and Roxbury got a partner that could distribute its goods nationally. Stemberg soon became a mentor to Williams' company, helping with strategic planning, finance, and legal advice. Roxbury Technology is now a preferred supplier to Staples and has branched out into manufacturing. Last year it hit $16.7 million in revenue, up from $1.2 million in 2001. Even better for the community, almost all of Roxbury's 65 employees live in the neighborhood or nearby.

Staples is one of a handful of large organizations that have found a way to boost their competitiveness while also benefiting their local communities. Hospitals and universities, often located in city centers, do this. But all too often, large companies see corporate social responsibility as something entirely separate from their business goals. As high unemployment, rising poverty, and dismay over corporate greed breed contempt for the capitalist market system, companies would be wise to follow the lead of Staples. Serving the intersecting needs of business and the community is the only path to winning back respect for Corporate America.

Consider this: Nearly 20 percent of large and midcap companies in the Standard & Poor's 900 index are headquartered in disadvantaged urban areas. These companies are huge employers that purchase hundreds of billions of dollars in goods and services annually. But they ignore the impact they can have on the surrounding community and how their neighbors can affect their own productivity, hiring, customer base, and reputation. While almost all big companies have active charitable programs and give to social service organizations, they rarely grasp that helping revitalize their local communities can enhance their competitiveness.

Such strategies should be based on the concept of shared value, practices that increase productivity while benefiting the community. We are seeing many more ways to create shared value, ranging from reducing pollution to improving the productivity (and wages) of low-income workers. Such efforts must be tied closely to a company's core business operations, where it can bring its skills and resources to bear.

Nowhere are the opportunities for creating shared value more apparent than in impoverished urban areas. Economic inequality raises fundamental challenges to capitalism, and inequality will not be solved until we help residents of disadvantaged communities prosper in the market system. Inner-city residents need jobs near their homes that offer good pay and the prospect of long-term employment. These can be created only by business.

Corporations can, in turn, jump-start the real job generators in the inner city: small businesses. Enterprises with fewer than 100 employees create 60 percent of the jobs in the U.S., and the ratio is even higher in disadvantaged communities, according to data from the Initiative for a Competitive Inner City. Small businesses create wealth for both employees and owners, and those in disadvantaged areas hire disproportionately from the local community; 40 percent of the employees of the companies on the 2010 Inner City 100 list reside in nearby neighborhoods. Entrepreneurship is thriving in America's inner cities, but we need many more such businesses to hire residents and revitalize their communities. Major corporations can play a huge role in this process by sourcing from these pioneers.

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

Michael Porter, the Bishop William Lawrence University Professor at Harvard Business School, is a leading authority on competitive strategy and the competitiveness of nations and regions. Professor Porter's work is recognized in governments, corporations, nonprofits, and academic circles around the world.

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