Doing Good and Deriving Benefit: How to Gain Competitive Advantages Through Strategic Corporate Social Responsibility

Friday, 12. October 2012

The concept of corporate social responsibility (CSR) is no longer considered as wishful thinking of left-wing activists and philanthropically inclined entrepreneurs. Media, consumers, citizens’ initiatives, trade unions, and employees but also investors and governments put increasing pressure on businesses to take responsibility for the social and ecological consequences of their economic activities. Today, businesses have little choice but to succumb to the pressure of the society if they want to succeed in the marketplace in the long-term. CSR has become an important factor for a businesses’ ability to compete (Hansen & Schrader, 2005).

In practice, however, many businesses seem to have difficulties to develop and implement effective CSR programmes. Their efforts often consist of uncoordinated and sporadic individual measures to improve the image of the business, which have no lasting impact. The strategic CSR approach (Baron, 2001; Husted & Allen, 2001; Porter & Kramer, 2006; amongst others) tries to overcome these problems by aspiring to integrate social responsibility into strategy and core business operations. The aims is to create “shared value” by making CSR activities beneficial both to society and the business itself, for example in form of efficient production (cost savings), enhanced reputation, greater attractiveness as employers, or increased innovative strength. CSR activities are not dismissed as a costly and selfless act but rather are understood as a “source of competitive advantage” (Porter & Kramer). In order to be able to exploit these competitive advantages successfully, however, a proactive and long-term strategic approach is necessary.

While in recent years a variety of strategic CSR models has been developed, the model conceived by Michael E. Porter and Mark R. Kramer has probably attracted most attention. It is based on two well-known tools which were originally used to analyze competitive position and develop strategy.

  • Value chain (Inside-out Perspective)
    The so-called inside-out perspective states that every activity within the value chain of a business influences society in some way either positively or negatively. Therefore, it is essential to closely examine all activities and identify those which offer the greatest chances of creating shared value for both parties. The scope of possible activities can vary according to industry and size of the business. However, a general distinction can be made between ecological measures, such as avoidance of emissions, the introduction and development of eco-friendly production technology, and environmentally conscious purchasing practices and social measures, such as improving work safety, staff development, supplier management, and support of local universities and neighbouring communities.

    A frequently quoted example for the value chain approach is Nestlé’s milk district model. As the largest milk company globally, Nestlé obtains over half of its annual 12 million tons of milk directly from small farmers, many of whom come from developing and emerging nations. In each milk district, Nestlé builds modern infrastructures to guarantee the health of the animals and the secure transport of the food products. The result is a classic win-win-situation: The small farmers in poor regions benefit by improving their economic situation and nutritional basis, while Nestlé can enjoy a stable and cost-effective supply of high-quality commodities.

  • Competitive environment (Outside-in perspective)
    The outside-in perspective is based on the assumption that entrepreneurial activity not only influences society but that conversely social conditions also impact upon a businesses’ ability to compete. In order to analyze the competitive environment for opportunities for CSR initiatives, the Diamond Model developed by Porter is used, which is based on the four interdependent areas of strategy and competition, production factors, supporting industries, and demand conditions. When choosing issues, businesses should always concentrate on those in which they can use their core competencies and can generate an actual shared value. Microsoft provides a good example of this. The software manufacturer focuses a large part of its CSR activities on helping people, communities, and nations to gain access to information technologies, IT skills, and innovations in order to be able to improve their standards of living. Microsoft, for its part, hopes that these efforts will open up new markets.

    Toyota is often viewed as a prime example for the application of the outside-in perspective. In response to public concerns about increasing car emissions, the Japanese car manufacturer developed the first mass-produced hybrid-engine vehicle. The Prius not only produces significantly less emissions than conventional vehicles, but has also made Toyota the pioneer and market leader in hybrid technology. An environmental investment which has more than paid off!

 

The analytical framework developed by Porter and Kramer helps businesses to select from the overwhelming variety of possible CSR activities those which can bring genuine competitive advantages and are of use to society at the same time. Due to this profit orientation, the strategic CSR approach has been criticized or even rejected entirely by activist groups and researchers (just recently Rangan et al., 2012). However, this can be answered with the argument that CSR creates tangible incentives for businesses, not only to increase their social commitment but also to develop in the long-term. If businesses follow coherent CSR strategies rather than making charitable donations every now and then, society ultimately has more to gain.




Literature

Baron, D. P. (2001). Private politics, corporate social responsibility, and integrated strategy. Journal of Economics & Management Strategy, 10, S. 7-45.

Hansen, U., & Schrader, U. (2005). Corporate Social Responsibility als aktuelles Thema der Betriebswirtschaftslehre. Die Betriebswirtschaft, 65(4), S. 373-395.

Husted, B.W., & Allen, D.B. ( 2001, August). Toward a model of corporate social strategy formulation. Paper presented at the Academy of Management, Washington, DC.

Porter, M., & Kramer, M. R. (2006, December). Strategy & society: The link between competitive advantage and corporate social responsibility. Harvard Business Review, S. 1-15.

Rangan, K., Chase, L.A., Karim, S. (2012). Why every company needs a CSR strategy and how to build it. Working paper. Harvard Business School. http://www.hbs.edu/research/pdf/12-088.pdf