This Wednesday’s meeting is on corporate social responsibility (CSR) and competitive advantage.

I will be giving a short presentation based on the famous paper by Porter and Kramer (2006) in the Harvard Business Review on the subject. We will then discuss the actual paper.

 

Competition and competitive advantage: introduction

“Corporations are not responsible for all the world’s problems, nor do they have the resources to solve them all. Each company can identify the particular set of societal problems that it is best equipped to help resolve and from which it can gain the greatest competitive benefit.” (Porter and Kramer, 2006)

 

Overview

In 2005, 360 different CSR-related shareholder resolutions were filed on issues ranging from labour conditions to global warming.

Government regulation increasingly mandates CSR reporting.

Pending legislation in the UK, for example, requires every publicly listed company to disclose ethical, social, and environmental risks in its annual report.

These pressures  highlight the potentially large financial risks for any firm whose conduct is deemed unacceptable.

 

The case for CSR

Broadly speaking, proponents of CSR have used four arguments to make their case: moral obligation, sustainability, license to operate, and reputation.

The principle of sustainability appeals to enlightened self-interest, often invoking the so-called triple bottom line of ‘people, planet, profit’.

The principle works best for issues that coincide with a company’s economic or regulatory interests.

Examples

DuPont, for example, has saved over $2 billion from reductions in energy use since 1990.

Changes to the materials McDonald’s uses to wrap its food have reduced its solid waste by 30%.

These were smart business decisions entirely apart from their environmental benefits.

“In other areas, however, the notion of sustainability can become so vague as to be meaningless.”

License-to-operate

The license-to-operate approach, by contrast, is far more pragmatic.

It offers a concrete way for a business to identify social issues that matter to its stakeholders and make decisions about them.

This approach also fosters constructive dialogue with regulators, the local citizens, and activists – one reason, perhaps, that it is especially prevalent among companies that depend on government consent, such as those in mining and other highly regulated and extractive industries.

Corporations and society

Safe products and working conditions not only attract customers but lower the internal costs of accidents.

Efficient utilization of land, water, energy, and other natural resources makes business more productive.

Good government, the rule of law, and property rights are essential for efficiency and innovation.

Strong regulatory standards protect both consumers and competitive companies from exploitation.

Ultimately, a healthy society creates expanding demand for business, as more human needs are met and aspirations grow.

At the same time, a healthy society needs successful companies. No social program can rival the business sector when it comes to creating the jobs, wealth, and innovation that improve standards of living and social conditions over time.

Porter’s notion of ‘competitive advantage’

The competitive advantage and CSR

Value chain social impacts are those that are significantly affected by the company’s activities in the ordinary course of business.

Social dimensions of competitive context are factors in the external environment that significantly affect the underlying drivers of competitiveness in those places where the company operates.

Within an industry, a given social issue may cut differently for different companies, owing to differences in competitive positioning.

The car industry

“In the auto industry, for example, Volvo has chosen to make safety a central element of its competitive positioning, while Toyota has built a competitive advantage from the environmental benefits of its hybrid technology.

For an individual company, some issues will prove to be important for many of its business units and locations, offering opportunities for strategic corporate-wide CSR initiatives.”

Strategic CSR

For any company, Porter and Kramer (2006) argue that strategy must go beyond best practices. It is about choosing a unique position. They say, however, that their effect is inherently limited, however.

“No matter how beneficial the program is, it remains incidental to the company’s business.”

Mitigating the harm arising from a firm’s value chain activities–is essentially an operational challenge.

The Global Reporting Initiative, which is rapidly becoming a standard for CSR reporting, has enumerated a list of 141 CSR issues, supplemented by auxiliary lists for different industries assessing their ‘value chains’.

Competition and competitive advantage: conclusion

“Corporations are not responsible for all the world’s problems, nor do they have the resources to solve them all. Each company can identify the particular set of societal problems that it is best equipped to help resolve and from which it can gain the greatest competitive benefit.” (Porter and Kramer, 2006)