I recently did a paper on CSR and Competitive Advantage for Social Responsibility Course, and thought I might share it with you.
CSR and Competitive Advantage
This paper discusses relationship between Corporate social responsibility and competitive advantage. Sustainable competitive advantage is essential to success of any business. Until recently, CSR and competitive advantage were considered largely unconnected and were discussed separately. Recently, however, businesses are increasingly recognizing the need to integrate CSR in their core practices. While two are usually seen as opposites on the different end of spectrum, working against each other, there is a growing body of literature claiming otherwise – that CSR and competitive advantage can go hand in hand and be mutually beneficial. Businesses are mostly accountable for growing scarcity of resources, pollution, growing economic and power inequality, and slew of other issues which plague today and cripple tomorrow. As responsible, it is on businesses pay back to society through responsible practices what they hungrily consume. CSR in essence is, and should be integral part of any business. But, business do not only cause harm; they also provide to economical wealth of society. And as such, their success is essential element to prosperity of our societies.
Societies face the number of challenges: poverty, sustainability, hunger, lack of clean water, pollution, discrimination and the list just keeps growing. This issues are continuously growing. They are affecting and are expected to growingly affect the quality of life in present and future societies. For most of the issues largest blame is placed on businesses. Most often, rightfully so. They use resources, pollute the environment, contribute to poverty, and raise inequality. Therefore, lots of pressure is placed on business to remedy the situation.
Corporate Social Responsibility (CSR) is defined as “actions that appear to further some social good, beyond the interests of the firm and that which is required by law.” (McWilliams and Siegel, 2000). In other words, businesses are expected to sacrifice profit to remedy the increasing challenges societies are facing. Traditional view of CSR states that companies have to look beyond their interest and sacrifice some of their profitability in order to put social good at forefront. Corporate goals should be placed on backburner to more pressing issue of greater societal good. Traditional view does not look at CSR as an integrated part of business strategy, nor does it recognize it as point of differentiation. It is a case of CSR against competitive advantage, if we look at it closely. Because competitive advantage is partially due to financial profits. And if businesses are required to sacrifice part of their profits it certainly raises a questions – how much profit should be given back? Is it enough to make a difference? If we exam most of the businesses we will see some attempts to support charity of choice, or create awareness campaign. While still better than nothing, is it really enough? Most philanthropic donations barely remedy the issue. The CSR efforts are often uncoordinated, on periphery of business strategic making as something that ‘has to be done’. In traditional CSR approach businesses rarely integrate their CSR effort and align them with their business goals. It is usually done by randomly choosing a value or a cause shareholders believe in. Then CSR is done through philanthropic donations, cause support, sponsorships or partnership with non-profit organizations. A great example includes Chick-Fil-A, a fast food chain that supports traditional family values and marriages through their WinShape Marriage Program. While a great cause in itself, it has little, or practically nothing to do with Chick-Fil-A core business, competencies, or use of resources. It is strongly disconnected from their competitive advantage strategy. Upon analysis of Chick-Fil-A and similar examples one wonders that although businesses do have undeniable responsibility toward societies they operate in does solution really lie in sacrificing profit for causes so distant from core business itself?
Traditional view that companies must give back to societies by sacrificing profits has been challenged recently by some of the greatest business minds.
The question Porter and Kramer raise is do these actions really have to be beyond interests of firm? They raise a case which questions pitting CSR and business against each other, proposing instead CSR and competitive advantage working in an integrated framework where two are in synergy, and work for each other. They propose inside-out and outside-in approach – analysis of business and its impact on society, and analysis of society and its impact on business. In intersection lies an opportunity for integrating strategic responsible societal practices and sustainable competitive strategy which can further both societies and businesses. (2006)
The alternative to traditional CSR is strategic CSR which integrates CSR deep into the core of the business, aligning business and societal goals and visions in one. In other words, CSR is regarded as one of the activities that contribute, and can carry the competitive advantage strategy. In strategic CSR case businesses choose goals that align with core competencies of the business itself. Examples include a car manufacturer Toyota focusing on pollution reduction with new eco-friendly electric car model, or an IT business focusing on use of IT technologies for electricity consumption reduction. By doing so, CSR does not only become a side issue – it becomes integral part of businesses, a competitive advantage and a central focus.
Similar to Porter and Kramer, another substantial research by Carrol and Shabana raises the questions if firm can do well by being good, and is there a return on CSR investment, creating a case for business and CSR. (2010). They rely on completely different definition of CSR which states that “social responsibility of business encompasses the economic, legal, ethical, and discretionary [later referred to as philanthropic] expectations that society has of organizations at a given point in time” (Carrol, 1979), with the emphasis on economic responsibility. Carrol and Shabhana in same paper further discuss that businesses can utilize the CSR as part of their cost-reduction, competitive advantage, strengthening reputation, and synergistic value creation through building win-win situations.
Carrol and Shabana case for business and CSR builds up on Porter analysis of competitive advantage. If we examine a definition of competitive advantage by Porter which explains competitive advantage as an ability of the business to do offensive or defensive action to create a defendable position in industry, cope with industrial forces and create a superior profit (1980) can we assume that CSR can be used to achieve the said competitive advantage? Can CSR be a part of the strategically planned offensive and defensive actions to create a defendable position in the industry and achieve profit? Can companies, instead of sacrificing profit for greater good by aligning with causes far removed from their core business itself, achieve higher profit by doing greater good? Both Porter and Kramer, and Carrol and Shabana, as well as handful of other authors think so. To examine even further the Porter widely accepted concept of competitive advantage let’s look at the two generic strategies for achieving competitive advantage – cost reduction and differentiation. By both Carrol and Shabhana, and Porter and Kramer, CSR can be source of cost reduction or differentiation, therefore carrying competitive advantage for the businesses.
While still widely unpracticed by businesses, and under-researched there are few exemplary efforts of strategic CSR. Laudon and Laudon in Nordea goes Green with IT study identify Nordea’s integrated CSR efforts within the core of the business. They went with cost reduction strategy; it included number of actions. Switching off/switching to standby computers at night lead to annual electricity consumption reduction of 3.5 million kKh, which equals to 647 tons of carbon dioxide. Using virtualization software to reduce number of physical machines lead to further reduction in electricity consumption. Also, they shifted computer halls to sea for cooling, instead of using cooling systems which require electricity consumption. However, Nordea decided to go even further by using video conferencing as a replacement for frequent traveling of its agents. Lastly, their effort went to reduction of paper used. By reducing consumption of natural resources Nordea cut costs so significantly they decided to integrate the CSR efforts into the core of their strategy – one of their strategic goals is reduction of electricity consumption by 15% by 2016. (2014). Another great examples include BodyShop and Lush, businesses that differentiate themselves by their CSR strategy. Both businesses are in beauty industry. Often under scrutiny for animal testing, both companies pride themselves in their no – animal testing policy. Both companies practice transparency as their core practice. Both companies maintain that there is no environmental damage done in production of their products. A great example of how strategic CSR works – focus on societal issues that align with business itself. These examples, although rare in business world, make strong case for strategic CSR.
While there is plethora of literature on traditional CSR, the strategic CSR is still under-researched for any definite conclusion. While most of the CSR in larger part of the world is done by traditional philanthropic ways, and disorganized efforts, only handful of the most powerful companies are starting to embrace strategic CSR and build competitive advantage around it. Maybe consequential examples matter too in comparison of traditional vs. strategic CSR. “The collapse of firms such as Enron, Lehman Brothers, and (now largely in public hands) General Motors who all suffered from poor strategic models shows that new business strategy models are essential. And, as argued here, a key message is that CSR is becoming a, if not, the core of business activity. It is fast becoming acknowledged that a strategic stakeholder model of engagement with the business environment means that the potential for avoiding disasters and increasing success and innovation can be increased. CSR is obviously not a panacea for all ills but more and more companies are seeing that it can enhance their competitive advantage.” (Hopkins, 2009).
Businesses are largely responsible for growing scarcity of resources, pollution, growing economic and power inequality, and slew of other issues which plague today and cripple tomorrow. It is only fair that businesses pay back to society through CSR what they greedily consume. CSR is, and should be integral part of any business. However, business do not only cause damage; they also contribute to economical prosperity of society. And as such, their profitability is essential element in supporting the causes relevant to our societies. Although still under-researched, growing examples of strategic CSR indicate that it seems to be the solution both businesses and societies need. After all, traditional CSR does not seem to be working. Therefor, marrying societal needs and businesses visions in strategic unison that benefits both seem to be win-win solution that can make scalable results. Utilizing CSR as a competitive advantage may just be solution we need. There is a definite need of more research on strategic CSR for any definite firm conclusion to be made. It is definitely area to be explored.
I will conclude this paper by a call for more research on strategic CSR. The ability of CSR to become a competitive advantage is a concept that has potential to bring the change businesses and societies need. As it is, CSR is not achieving scale. It is simply not done enough. New approach can be the answer. But key is in research. The second recommendation is that iregardless of which type of CSR is used, businesses must increase their efforts to engage in more responsible behavior.
- Carroll, A.B. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4, pp. 497–505.
- Carroll, A. B., & Shabana, K. M. (2010). The Business Case for CSR: A Review of Concepts, Research and Practice. International Journal of Management Reviews. 12(1): 85–105
- Hopkins, M. (2009). Strategic CSR and Competitive Advantage. MHC International. Retrieved from http://mhcinternational.com/articles/strategic-csr-and-competitive-advantage
- Laudon, K., & Laudon, P. J. (2014). Management Information Systems, Global Edition, 13th Edition. [VitalSource Bookshelf version]. Retrieved from http://online.vitalsource.com/books/9780273789970/page/229
- McWilliams, A., & Siegel, D. (2000). Corporate Social Responsibility and Financial Performance: Correlation or Misspecification?. Strategic Management Journal, 21: 603–9.
- Porter, M.E. (1980) Competitive Strategy, Free Press, New York, 1980.
- Porter, M., & Kramer, M. R. (2006). Strategy and Society: The link between Competitive Advantage and Corporate Social Responsibility. Harvard Business Review. Retrieved 20 October, 2015, from http://sharedvalue.org/sites/default/files/resource-files/Strategy_and_Society.pdf