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October 2009 Monthly Feature
Strategic CSR and Competitive Advantage
A heady mix of greed, overconfidence and the use of poor business models that showed up flawed strategies caused the global financial collapse of one year ago.Banks and other financial institutions are once again in the news for paying huge bonuses on the backs of taxpayers' bail outs.Is the merry go round of greed, overconfidence and flawed strategies about to spin again?
There is another way to look at strategy.
CSR (also commonly referred to as Corporate Responsibility) is a strategic systems approach that examines and influences the behaviour of a company while preserving its competitive advantage.
Let me deconstruct that sentence.
- CSR means treating the main stakeholders of a company in a responsible manner
- Corporate means any group of people that work together in a company or organisation, whether for profit or non-profit
- Social means the social system and includes finance, economy, environment and social issues
- Responsibility is about taking issues that affect the corporate body seriously and about acting within - and even beyond - societal norms
- Strategic means having a strategy that takes an idea into a working model
- A systems approach means including all aspects of the system in the decision making process
- Competitive advantage is the implementation of a value-creating strategy not simultaneously being implemented by any current or potential competitors
Take Michael Porter and Mark Kramer's (P-K) influential Harvard Business Review Article of December 2006.There they argue that ‘while CSR depends on being a good corporate citizen and addressing every social harm the business creates, strategic CSR is far more selective'.The interdependence between business and society takes two forms in P-K's framework: "inside-out linkages" where company operations impact society, and "outside-in linkages" where external societal forces impact companies.They believe that although companies are called on to address hundreds of social issues, ‘only a few represent opportunities to make a real difference to society or to confer a competitive advantage'.I would rather use the word ‘and' rather than ‘or' but readers may feel I am splitting hairs at this point.They give three areas where they think competitive advantage may lie in strategic CSR.
First, identify points of intersection between your company and society.For instance, does the company provide safe working conditions and reasonable wages?Models for this can be found in the work of SA8000 or the Fair Labour Association (FLA).
Second, select specific social issues to address social needs in ways that create shared value - a meaningful benefit for society that also adds to your company's bottom line.For instance, in addressing the AIDS pandemic in Africa, a mining company such as Anglo American would not only improve the standard of living on that continent; it would also improve the productivity of the African labour force on which its success depends.
Third, mount a small number of initiatives that generate large and distinctive benefits for society and your company.Example: The Ecomagination initiative General Electric launched in early 2005 benefits society through environmentally beneficial products (such as compact fluorescent light bulbs) while benefiting the company's bottom line. The initiative boosted revenue on such products from $6.2 billion in 2004, before the initiative began, to $10.1 billion in 2005, over halfway to the goal of $20 billion by 2010.
Strategic CSR transforms "value chain social impacts" into activities that benefit society while simultaneously reinforcing corporate strategy and also advances strategic philanthropy that leverages areas of competitiveness.The P-K framework, argues William Baue, draws its strength from applying corporate strategic thinking to both leverage positive social and environmental benefits and mitigate negative social and environmental impacts in ways that enhance competitive advantage.An obvious example of this is Toyota's development of the hybrid electric/gasoline car Prius.As environmental concerns have increased, Toyota stole a march on major competitors such as General Motors and Ford by creating a series of innovative car models that have both produced competitive advantage and environmental benefits. Hybrid engines emit as little as 10% of the harmful pollutants conventional vehicles produce while consuming only half as much gas.Prius has given Toyota a lead so substantial that Ford and other car companies are licensing the technology. Toyota has created a unique position with customers and is well on its way to establishing its technology as the world standard.Not to everyone's taste, the TV Top Gear team describe it as ‘Hateful lentil-fuelled transport for the insufferably self-righteous. And it's not even all that economical.'
Another reference for thinking about strategic CSR is as a set of questions, the answers to which are constantly evolving as the discipline continues to define itself. According to authors William Werther and David Chandler, questions include: "Who defines the boundaries between private profits and public good?" and "Can the interests of firms, owners, and other stakeholders be aligned, or are they inherently in conflict?".Their book, in the process of being revised, provides a framework within which readers can explore and answer these questions for themselves.
Enough of theory.....
What happens when these ideas are transformed into a strategic framework to enhance the competitive advantage of a company while preserving the values of CSR?
In 2008, MHCInternational Ltd worked out such a strategy for the oil company, Addax Petroleum (AP).The following steps were identified.
- Report on where the key overall CSR trends are heading, including any legal requirements.
- Provide benchmark examples of CSR, and assess CSR trends.To draw upon other oil companies such as Premier Oil Consolidated who have won awards for their CSR approach
- Analyse AP's record in the light of GRI reporting guidelines and act accordingly.
- Identify AP's existing CSR activities and projects to date with a view to identifying competitive advantage.
- Use MHCi's rapid impact sustainable assessment model (RISAM), and judge their sustainability.
- Identify, according to the stakeholder model of CSR, key activities that AP could do, while bearing in mind (and identifying, at least qualitatively) the costs and benefits of additional CSR activities.
- Identify and interview key stakeholders as a pre-cursor to future, fully-fledged stakeholder dialogues.Note that Premier Oil, for instance, has as its stakeholders Owners and investors, Management, Employees, Customers, Suppliers, Government, Joint Venture Partners, Local Community. Also note that the process of stakeholder dialogue is more important for company performance than simply reporting on it.
- Interview only a selection of stakeholders in each category but attach importance to investors, suppliers and employees in the first instance.At this stage a fully-fledged stakeholder dialogue will not be carried out but will be something for the future (see next section).
- Make use of the industry standard KPIs (for social, economic and environmental issues), as suggested by GRI, and suggest which ones are most appropriate for AP.
- Provide data for as many KPIs as possible in the short-term and suggest methodologies for calculating those currently missing over the long-term
- Work out key next steps and alternatives toward establishing a fully-fledged CSR strategy for AP over a period of three years into the future.
In the past decade, CSR has turned into many forms.At one end of the spectrum it is used to emphasise corporate philanthropy where we often hear of ‘CSR projects'.This notion can be found in some developed countries such as the USA but is mainly found in emerging markets across the world and is intended to increase the sustainability of such projects.At the other end of the spectrum among many large corporations there is a much broader view of CSR where the concept is at the core of a company's business strategy.
Moreover, 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.
and Corporate Social Responsibility', Harvard Business Review, Boston, December 2006 pp78-92.
 http://ge.ecoimagination.com/ accessed 21st October 2009
 http://www.socialfunds.com/news/article.cgi/2268.html accessed 20th October 2009
 http://www.topgear.com/uk/toyota/prius accessed 21st Oct 2009