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Strategy & Society

The Link Between


Competitive Advantage
and
Corporate Social Responsibility
Michael E. Porter
And
Mark R. kramer
EDP 2 Group 6
Harvard Business review December 2006 P78-92
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Main Themes of The Article
• Propose a fundamentally new way to look at the
relationship between business and society
• Does not treat corporate growth and social
welfare as a zero – game
• Introduce a framework that individual companies
can use
– to identify the social consequences of their actions
• To discover opportunities to benefit society and
themselves by strengthening the competitive
context which they generate
– to determine which CSR they should address
– to find the most effective ways of doing so
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Main Themes of The Article

• Perceiving CSR as an opportunity


rather than as damage control or PR
campaign

• Warning that CSR become increasingly


important to competitive success

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Content
• The Emergence of Corporate Social Responsibility
(CSR)

• Four Prevailing Justifications for CSR


– The Moral Obligation
– Sustainability
– License to Operate and
– Reputation

• Mapping Social Opportunity: Two Tools


– Look Inside Out: Mapping The Social Impact of the Value
Chain
– Looking Outside In: Social Influences on Competitiveness

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Content

• Integrating Business and Society


– Identifying the points of Intersection
– Choosing which social issues to address
– Creating a corporate social agenda
– Creating a social dimension to the value
proposition
• Organizing for CSR
• The Moral Purpose for Business

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preface
• Governments, activists, and the media have become
adept at holding companies to account for the social
consequences of their activities

• Myriad organization rank companies on the performance


of the corporate social responsibility (CSR).

• CSR has emerged as an inescapable priority for


business leaders in every country.

• Prevailing approaches to CSR are so fragments and so


disconnected from business and strategy as to obscure
many of the greatest opportunities for companies to
benefit society.

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The Emergence of Corporate Social
Responsibility (CSR)
• Awoke after being surprised by public
responses to issues they had not previously
thought
• Nike
• Shell
• Pharmaceutical companies
• Fast-food
• Nestle’ bottled water
• Debates about CSR have moved all the way
into corporate boardrooms. (Issues ranging
from labor conditions to global warming).
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The Emergence of Corporate Social
Responsibility (CSR)
• Government regulation increasing mandates CSR.
• UK. Require every listed company to disclose ethical,
social and environmental risk in their annual report.
• Business have awakened to these risk
• Less clear on What to do
• Most common corporate responses: neither
strategic nor operational but cosmetic.
• 64% of 250 largest MNC published CSR reports in
2005.
• Rarely offer a coherent framework for CSR
activities.
• Typically described in terms of dollars or volunteer hours
spent but never in terms of impact.
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Four Prevailing Justifications for CSR

– The Moral Obligation

– Sustainability

– License to Operate and

– Reputation

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Moral obligation
• duty to be good citizens and to ‘do the
right thing’
• “achieve commercial success in ways
that honor ethical values and respect
people communities, and the natural
environment”
• eg. filing financial statement, operating within
the law.
• case google

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Sustainability
• Emphasizes environmental and community
stewardship

• Companies should operate in the ways that


secure long term behavior that is socially
detrimental or environmentally wasteful

• Works best for issues that coincide with a


company’s economic or regulatory interests.
– Case McDonald, DuPont

• Postpone these costs can lead to far greater


costs.
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The License to operate
• Offers a concrete way for a business to identify
social issues that matters to stakeholders.
• Constructive dialogue with regulators, local
citizen and advises
• CSR depends on outsiders
• Stakeholders are important but never
understand corporation’s capabilities,
competition positioning or the trade-off
• Use short-term defensive actions, minimum
value to society and no strategic benefit for the
business
– eg. chemical manufacturing
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Reputation

• Seeks strategic benefit but rarely finds it


• Concerns about reputation, like license to
operate, focus on satisfying external
audience
• Hope that it reputation for social
consciousness will temper public criticism in
the event of crises
– Case Ben & Jerry, Body Shop
• Social Impact achieved but much less
business benefit
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Integrating Business and Society

Need
Healthy
Successful Society
create
corporation

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Create jobs
ate Wealth and innovation
cr e

Improve standard of living


And social conditions
Successful
create
companies Healthy society

needs
Education Productive workforce
Health care
Equal opportunity Customers
Safe products
Working condition
Lower accident

Efficient utilization of
Land/ water/ energy More production
/natural resources
good government
Protect customer
Rule of law
And company
Property right
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innovation
Identifying the point of intersection

• Inside-out linkage: mapping the Social


Impact of the Value chain
• Outside-in linkage: Completive context

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-Relationship with -Financial reporting
university practices -Education and job training -Procurement & supply
-Ethics research practices -Government -Safe working condition chain
practices -Diversity & discrimination
-Product safety -Uses of particular inputs
-Health care & other benefit
-Transparency -Compensation policies -Utilization of natural
-Conservation of raw mat.
-Use of lobbying -Layoff policies resources
-Recycling

Primary Activities Support Activities


Firm Infrastructure
--------------------------------------------
Looking Inside
Human Resource Management
Out : --------------------------------------------
Mapping the Technology Development
Social --------------------------------------------
Impact of Procurement
The Value
Chain Inbound Out bound Marketing & After-Sales
Logistics Operations Services
Logistics Sales
_______________ ____________________ ________________ _______________ ___________________
-Transportation -Emission & waste
-Packaging use -Marketing & -Disposal of obsolete
impacts -Biodiversity &
and disposal advertising products
ecological impacts
-Energy & water usage -Transportation -Pricing practice -Handling of
-Work safety & impacts consumables
-Consumer
Labour relations
information -Customer Privacy
-Hazardous materials
-Privacy 17
Looking Outside in: Social Influences on Competitiveness

-Availability of human resources -Fair and open local


-Access to research institutions and competition
universities -Intellectual property protection
Context for
-Efficient physical infrastructure -Transparency
-Availability of scientific and Firm Strategy -Rule of Law
technological and Rivalry The -Meritocratic incentive systems
infrastructure rules and Incentives
that govern
-Sustainable natural resources competition
-Efficient access to capital

Factor (input) Local Demand


Conditions Conditions
Presence of high The nature and
quality, Specialized sophistication
inputs available of
to firms local customer
needs

-Sophistication of
Related and Local demand
-Availability of local suppliers Supporting -Demanding regulatory
-Access to firms in related fields Industries standards
-Presence of clusters instead of The local availability -Unusual needs that
Isolated industries Of supporting can be served
industries nationally
and globally

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Choosing which social issues to address

• No business can solve all of society’s problems


or bear the cost of doing so…
– 1) Select issues that interest with business
(meaningful benefit for society, also valuable to the
business)
– 2) Sort social issues into three categories for each BU
and primary location
– 3) Rank in terms of potential impact
• Within an industry, a given social issue may cut
differently for different companies owing to
differences in competitive positioning
– case Volvo. Toyota
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Prioritizing Social Issues

Generic Social Value Chain Social Dimensions


Issues Social Impacts Of Competitive
Context

Social issues that Social issues that Social issues in the


are not are significantly external environment
significantly affected by a that significantly
affected by a company’s affect the underlying
company’s activities in the drivers of a
operations nor ordinary course of company’s
materially business competitiveness in
affect its the locations where it
long term operates
Competitiveness

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Creating a corporate social agenda

Mitigating Advancing
• CSR moves from harm Social
condition

• Corporate involvement in Society


• Response CSR
• Strategic CSR

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Corporate Involvement in Society :
A Strategic Approach

Generic Social Value Chain Social Dimensions


Impacts Social Impacts Of Competitive
Context

Strategic
Good Mitigate harm philanthropy
Citizenship from value Chain that leverages
activities capabilities to
improve
Salient areas of
Competitive
Transform value Context
Responsive Chain activities to
CSR benefit society while Strategic
reinforcing strategy CSR
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Responsive CSR : two elements
• 1) Acting as a good corporate citizen,
attuned to the evolving social concerns of
stakeholder
– case GE
• Good citizenship initiatives goodwill, improve
relations with local governments and other
constituencies, employees feel great pride in
participation
• Effect on GE’s recruiting and retention is modest

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Responsive CSR : two elements

• 2) Mitigating the harm arising from a firm’s


value chain activities is essentially an
operational challenge
– Adopt checklist to CSR
– using standard set of social and environment
risks(141 CSR issues)
– Mgrs each BU can use the value chains as a tool
to identify systematically the social impacts of the
unit’s activities in each location
(case B & Q)

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Strategic CSR

• go beyond best practices


• choosing a unique position
• doing things differently from competitors
• social and business benefits are large
and distinctive
• involves both inside-out and outside-in

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Strategic CSR
• The more closely tied a social issue is to the
company’s business, the greater the
opportunity to leverage the firm’s resources
and capabilities, and benefit society
– Case Toyota - hybrid car
– Urbi construction - flexible mortgage to
disadvantage buyers
– Credit Agricole - finance package for energy-
saving home improvement and for audits to certify
farms as organic
– Microsoft
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Integrating Inside-out
and Outside-in practices

• Activities in the value chain reinforce


improvements in the social dimensions of
context.

• Investment in the completive context have the


potential to reduce constraints on company’s
value chain activities
– Case Marriott
– Case Nestle’
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Creating a social dimension to the value
proposition

• Unique value proposition: a set of needs


a company can meet for its chose
customers that other cannot
• The most strategic CSR occurs:
• When a company adds a social dimension to its
value proposition
• Making social impact integral to the overall
strategy

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Case
• Whole Foods Market: nearly every aspect of the
company’s value chain reinforces the social
dimensions of its value proposition
distinguishing whole foods from its competitor
• Sysco: initiative to preserve small, family-owned
farms and offer locally grown produce to its
customers as a source of competitive
differentiation
• GE: “ecomagination” initiative that focus on
developing water purification technology and
other “green” businesses
• Unilever: pioneer new product, packaging to
meet the needs of the poorest
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Organizing for CSR
1. Integrating business and social requires adjustments in
organization, reporting relationships and incentives
2. Operating Mgrs must understand the importance of the
outside-in
3. People with responsibility for CSR imitation must have a
granular understanding of every activity in the value chain
4. Incorporate CSR into performance measure of managers
with P&L responsibility
5. Organizations that make the right choices and build
focused, proactive, and integrated social initiative in
concert with their core strategies will increasingly distance
themselves from the pack

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The Moral purpose of Business

• Corporate can do for society and community


is contribute to a prosperous economy
• Effort to find shared value in operating
practices and in the social dimensions of
competition context not only foster economic
but to change the way companies and
society think about each other
• NGOs, Governments and companies must
stop thinking “Corporate Social
Responsibility” but start thinking “Corporate
Social Integration”

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The Moral purpose of Business

• Corporation are not responsible for all the


world’s problems. Nor do they have the
resources to solve them all
• Creating shared value will lead to self-
sustaining solutions that do not depend on
private or government subsidies
• Well-run business applies its vast resources,
expertise, and management talent to
problems that it understands, has a stake, it
can have a greater impact on social good
than other

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