Management And Accounting Web

Porter, M. E. and M. R. Kramer. 2006. Strategy and Society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Social Accounting Main Page | Strategy Main Page

Although many organizations rank companies in terms of their corporate social responsibility (CSR), and many corporations have made significant improvements in this area, these efforts have been much less productive than they could be. The reason for this limited success is that social responsibility initiatives have been viewed as a cost, a constraint, or a charitable deed rather than a source of opportunity, innovation, and competitive advantage. The purpose of this article is to introduce a new framework for looking at the relationship between business and society. This framework involves identifying all the issues where the corporation has an effect on society, and determining which ones to address to achieve a social benefit and a simultaneous economic benefit for the corporation.

The Emergence of Corporate Social Responsibility

Many companies have become aware of the corporate social responsibility movement from public responses to various issues. Examples include the public's response to Nike after media reports of their abusive labor practices, and Shell Oil's decision to sink the Brent Spar oil rig in the North Sea. Government regulations are increasing mandating social responsibility reporting and many stakeholders have put pressure on corporations to become more accountable for social issues. Although businesses are aware of the financial risks of ignoring social issues, the typical response includes public relations, media campaigns, and reports that are cosmetic rather than strategic. For example, sixty-four percent of the 250 largest multinational corporations published CSR reports in 2005, but these reports rarely provided a clear picture of a corporation's relationship to social issues. The self-appointed scorekeepers (e.g., Dow Jones Sustainability Index and FTSE4Good Index) produce a jumble of largely meaningless rankings that does little more than add to the confusion. A new approach is clearly needed to integrate social issues into business operations and strategy.

Four Prevailing Justifications for CSR

There have been four general arguments for corporate social responsibility:

The moral appeal argument: Companies have a duty to do the right thing and be good citizens. Although moral considerations are easy to understand and apply in some areas (e.g., operating within the law), most corporate social choices are about balancing values, interest, and costs.

The sustainability argument: Meeting our present needs without compromising the ability of future generations to meet their needs. Although choices related to sustainability are fairly clear in areas where short-term behavior can be socially detrimental or environmentally wasteful, the notion of sustainability becomes vague in many other areas, e.g., human resources, and philanthropy.

The license to operate argument: Companies need permission from governments, communities and other stakeholders to do business. Using the license to operate approach to social responsibility is a practical way to identify issues that matter to stakeholders, but it essentially allows outsiders without an understanding of the organization's capabilities and competitive position to determine the company's CSR agenda.

The reputation argument: CSR initiatives improve a company's image, brand, and even the value of its stock. The reputation approach to social responsibility, like the license to operate approach, focuses on external audiences, rarely produces a strategic benefit, and tends to confuse public relations with social and business results.

All four arguments for corporate social responsibility share the same weakness in that they focus on the potential conflicts between businesses and society, rather than their interdependences. As a result they do not help a company identify, prioritize and address the social issues that can provide both a social benefit and economic benefit to the company. The result is typically a hodgepodge of uncoordinated CSR activities that have neither a social impact or strengthen the company's competitive advantage.

Integrating Business and Society

Corporations need a healthy society, and a healthy society needs successful corporations. Neither can exist without the other. This mutual dependence means that the underlying basis for business decisions and social policies should be shared value. To put this realization into practice, corporations must integrate a social perspective into their corporate strategy.

Identifying the points of intersection

Corporations affect society through their value chain activities, e.g., hiring practices, emissions and waste disposal. Porter and Kramer refer to these as inside-out linkages. On the other hand, social conditions influence corporations. These are outside-in linkages. Every company operates within a competitive context that can be divided into four areas: The quantity and quality of business inputs, the rules and incentives that influence competition, the size and sophistication of demand, and the local availability of supporting industries.

Choosing which social issues to address

Companies must prioritize and select social issues that intersect with their particular business. The essential test is whether the cause represents an opportunity to create shared value, i.e., a meaningful benefit for society and a valuable benefit for the business. The new framework places social issues into three categories:

Generic social issues: Issues that are not significantly affected by a company's operations or materially affect its long term competitiveness

Value chain social impacts: Issues that are significantly affected by a company's activities in the ordinary course of business.

Social dimensions of competitive context: Issues in the external environment that significantly affect the underlying drivers of a company's competitiveness in the locations where it operates.

Issues may fall into different categories for different firms. For example, carbon emissions may represent a generic social issue for the Bank of America, but a value chain issue for UPS. Even within an industry, an issue may be treated differently in different companies. For example, Volvo emphasizes safety, while Toyota built a competitive advantage from hybrid technology. For some issues applicable to multiple industries, cooperative models can be used effectively, e.g., the extractive industries use of the Transparency Initiative includes 19 major oil, gas and mining companies.

Creating a Corporate Social Agenda

The purpose of categorizing and ranking social issues is to facilitate the development of an explicit and affirmative corporate agenda where social and economic benefits can be achieved simultaneously. This agenda must include both responsive and strategic CSR.

Corporate involvement in Society: A Strategic Approach

Responsive Corporate Social Responsibility

Responsive CSR includes acts of good corporate citizenship as well as actions that mitigate adverse affects on society from the firm's business activities. Good corporate citizenship initiatives should specify clear and measurable goals that are tracked over time. GE's program to adopt underperforming high schools is provided as an example. A starting point for mitigating harm from the firm's value chain activities is the Global Reporting Initiative's list of 141 CSR issues. Each business unit should identify the unit's activities that impact these social issues, and identify best practices for dealing with each issue.

Strategic Corporate Social Responsibility

Strategic CSR involves identifying a small number of initiatives with large and distinctive potential social and business benefits. These initiatives include both inside-out and outside-in dimensions and provide the opportunities for shared value. Toyota's initiative towards limiting automobile emissions is an example. The Prius hybrid vehicle produced a competitive advantage and environmental benefits simultaneously. Microsoft's Working Connections partnership with the American Association of Community Colleges is another example that produced shared value. To help solve the shortage of information technology workers, Microsoft's $50 million five-year initiative improved the community college IT curriculum, improved classroom technology, and provided professional development programs for faculty. This not only benefited many communities, but also provided a significant benefit to the company.

Integrating Inside-out and Outside-in Practices

In some cases value chain activities can be performed to reinforce improvements in society while investments are integrated to reduce constraints on the company's value chain. Marriott's on-the-job training for chronically unemployed job candidates combined with support for local community services to screen and refer candidates provides an example.

Creating a Social Dimension to the Value Proposition

A key element of a company's strategy is a value proposition, i.e., the utility that the company can provide to satisfy the needs of customers less the price they pay for it. Strategic CSR occurs when a social dimension is included in the value proposition. For example, Whole Foods Market's builds its entire value proposition around social issues. Its value proposition is to sell organic, natural, and healthy food that excludes 100 common ingredients considered to be unhealthy or environmentally damaging. Their store design is also environmentally friendly along with their vehicles that run on biofuels. Another example is GE's "ecomagination" initiative that focuses on developing water purification technology and other green businesses. These and other examples in the article illustrate that adding a social dimension to the value proposition offers a new frontier in competitive positioning.

Organizing for Corporate Social Responsibility

Integrating social and business needs requires adjustments in organization, reporting, and incentives to focus on substance rather than image. The preoccupation with measuring stakeholder satisfaction should be replaced with measures of social impact that are included in the performance measures of upper level managers. A number of long-standing prejudices will need to be overcome, e.g., the defensive us-versus-them mind-set towards social issues. Strategic CSR should be selective and viewed in much the same way as research and development, i.e., as long-term investments in the company's future competitiveness.

The Moral Purpose of Business

Initiatives to find shared value between society and businesses have the potential to enhance economic and social development, and to change the way companies and society think about each other, i.e., where the thinking about business and social issues changes from corporate social responsibility to corporate social integration. Companies can facilitate this change by selecting the specific social problems that each is best equipped to resolve and from which it can gain the greatest competitive advantage.

__________________________________________________

Related summaries:

English, D. M. and D. K. Schooley. 2014. The evolution of sustainability reporting. The CPA Journal (March): 26-35. (Summary).

Epstein, M. J. and S. D. Young. 1999. Greening with EVA. Management Accounting (January): 45-49. (Summary).

Esquire. 2015. America: These are your choices. Esquire (December/January): 149-153, 160-161, 164, 168. (Summary - This is a summary of ten questions related to the most critical choices for America based on information from the Brookings Institution).

Estes, R. 1992. Social accounting past and future: Should the profession lead, follow - or just get out of the way? Advances In Management Accounting (1): 97-108. (Note and Summary).

Gleeson-White, J. 2015. Six Capitals, or Can Accountants Save the Planet?: Rethinking Capitalism for the Twenty-First Century. W. W. Norton & Company. (Note).

Goldstein, S. 2015. Six capitals, or can accountants save the planet? Rethinking capitalism for the twenty-first century. The CPA Journal (October): 15-16. (Review of Gleeson-White's Book - Note).

Handy, C. 2002. What's a business for? Harvard Business Review (December): 49-55. (Summary).

Hughes, S. B. and D. M. Willis. 1995. How quality control concepts can reduce environmental expenditures. Journal of Cost Management (Summer): 15-19. (Summary).

Johnson, H. T. 2006. Sustainability and "Lean Operations". Cost Management (March/April): 40-45. (Summary).

Johnson, H. T. 2012. A global system growing itself to death - and what we can do about it. The Systems Thinker (May): 2-6. (Summary).

Jones, A. III. and G. A. Jonas. 2011. Corporate social responsibility reporting: The growing need for input from the accounting profession. The CPA Journal (February): 65-71. (Summary).

Martin, J. R. Not dated. ASCE report cards for America's infrastructure. Management And Accounting Web. http://maaw.info/ASCE2001Infrastructure.htm

McKeon, A. and G. Ranney. 2013. Ongoing Discussion "Thought Piece". Thinking about management from a climate change perspective. Presentation at Aerojet Rocketdyne's InThinking Network. (September): 1-29. (Note).

Neimark, M. and T. Tinker. 1986. The social construction of management control systems. Accounting, Organizations and Society 11(4-5): 369-395. (Summary).

Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).

Porter, M. E. 1987. From competitive advantage to corporate strategy. Harvard Business Review (May-June): 43-59. (Summary).

Porter, M. E. 1996. What is a strategy? Harvard Business Review (November-December): 61-78. (Summary).

Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).

Reinhardt, F. L. 1999. Bringing the environment down to earth. Harvard Business Review (July-August): 149-157. (Summary).

Schooley, D. K. and D. M. English. 2015. SASB: A pathway to sustainability reporting in the United States. The CPA Journal (April): 22-27. (Summary).