Corporate Social Responsibility as a Strategic Tool

Posted in Finance Articles, Total Reads: 2534 , Published on 09 September 2014
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The heightened consumer awareness about environmental issues, coupled with tightening government regulations has ensured that companies look for innovative ways to meet their social responsibilities. As per the provisions of Companies Act 2013, all public as well as private companies with a turnover of over Rs 1,000 crore or net profit of Rs 5 crore are obligated to spend at least 2% of the average net profit for the last three years on CSR activities. In the backdrop of these events, it is essential to understand the importance of CSR and find ways in which it can enhance a firm’s competitiveness. This article aims to examine how CSR can be used as a strategy tool by firms to achieve competitive advantage.


Image Courtesy: freedigitalphotos.net, luigi diamanti


Theoretical Background

The topic of CSR has been explored from different angles such as stakeholder analysis, transaction cost economics, competitive advantage etc. as follows:

1. Shareholder wealth maximization as the only social responsibility of business

2. CSR as combination of economic, ethical, legal and discretionary responsibilities

3. In the long run, CSR increases trust and possibly reduces transaction costs

4. Resource based view of the firm : CSR as a source of competitive advantage


The World Business Council for Sustainable Development defines CSR as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”.


Broadly, CSR can be categorised into three types:

a) Philanthropy (focus on charity, sponsorships, employee voluntarism etc.)

b) Corporate Responsibility Integration(emphasis on conducting business operations more responsibly)

c) Corporate Responsibility Innovation (focus on solving social and environmental problems through new business models)


Husted and Salazar identified three types of social investments: altruistic, coerced (compelled by regulation) and strategic and concluded that strategic investment leads to better results for firms by maximising both profit and social performance.


What is Strategic Corporate Social Responsibility?

Strategy is related to understanding and addressing issues which affect a firm’s ability to achieve its mission with efficient utilization of resources so as to build and sustain a competitive advantage.


According to Porter and Kramer, social and economic goals are integrally connected and not inherently conflicting in the long run. Their work along with that of a few others led to the development of the concept of strategic CSR, i.e., CSR activities which support core business activities and thus provide significant business related benefits to a firm and contribute to its effectiveness.


The contribution of CSR activities to value creation for the firm can be assessed by the following five strategic dimensions:

1. Centrality: Closeness of fit between a CSR policy/ programme and the firm's mission and objectives.

2. Specificity: Firm's ability to internalize the benefits of a CSR programme instead of creating public goods.

3. Proactivity: Manner in which a firm acts in anticipation of emerging technological, economic, political or social trends. Ex: In 1975, 3M Company initiated the Pollution Prevention Pays (3P) programme and by early 1990s its pollutants had been reduced by over 575,000 tons.

4. Voluntarism: Shows the absence of externally imposed compliance requirements depicting the scope of discretionary decision-making by the firm.

5. Visibility: Related to the firm’s ability to engage in observable business activity and obtain recognition from internal as well as external stakeholders. Ex: J&J’s response to Tylenol poisoning cemented its reputation as a caring organization with a strong corporate code of conduct.


Benefits of Strategic CSR

1. Enhancement of firm’s reputation as a socially conscious one; better relations with different stakeholders (government, suppliers, customers, civil society) leading to less stringent regulatory pressures along with increased social license to operate.

2. Generates strategic tangible and intangible firm assets which provide a competitive advantage such as greater purchase likelihood and longer-term loyalty.

3. Helps attract better qualified workforce and aids in employee retention

4. Efficiencies and cost savings in the value chain such as, ITC’s e-Choupal initiative.

5. Creates new product/ market opportunities, such as, HUL’s campaign for washing hands (Lifebuoy)


Since most of these elements are intangible resources of the company, they are capable of producing a competitive advantage if the company can make them rare, irreplaceable, inimitable and valuable (VRIO framework).


Firm Level Implementation Model


In order to effectively use CSR as a strategy tool, a firm must formulate its corporate social strategy, keeping in mind the following parameters:

(a) Market opportunities; to identify the ones with negative social and environmental impact

(b) Company’s existing resources and internal competencies;

(c) Corporate values to ensure alignment;

(d) External environment and structure of the industry;

(e) Different stakeholders and their importance;

(f) Fit/ Alignment of CSR to core business; and

(g) The social impact of corporation competitiveness.


In order to identify worthwhile projects for CSR investments, firms should include CSR planning into its corporate planning function and perform the following analysis:


1. Recognise the critically important stakeholders for achieving the firm's mission using the three attributes of power, legitimacy and urgency. Also identify the CSR policies/programmes that address their needs and interests.

2. Examine the potential strategic benefits of these CSR projects and their fit with the stated vision, mission and objectives of the firm. (Centrality)

3. Determine the extent to which these benefits can be internalized by the firm rather than be freely available for all firms in the industry or the society at large. (Specificity)

4. Proactively anticipate changes to the firm's environment and needs of critical stakeholders and address them through forward looking CSR policies.

5. Create visibility and communicate impact of CSR activities. It is essential to involve senior management to weave CSR into the fabric of corporate culture.

6. Reward involvement and commitment to CSR initiatives through appropriate incentive structures to integrate strategic CSR into organizational culture.

7. Proper measurement metrics need to be developed beyond traditional operational and financial ones to compare the value or potential value expected from various CSR projects.


Conclusion

There is increasing recognition of the fact that CSR can be used as source of competitive advantage through good corporate governance, effective execution of innovative social projects and ethical management. It is essential for firms to smartly communicate their CSR efforts to ensure that consumers view them as driven by intrinsic (genuine) rather than extrinsic (profit led) motivations. A dichotomy between stated objectives and firm actions is likely to be viewed negatively by consumers. The importance of integrating CSR into the culture, governance and strategy development initiatives of the company along with its current management and incentive structure is apparent. This requires considerable corporate commitment, with senior management leading the implementation of strategic CSR efforts to ensure organizational “buy-in”.


It is clear that firms who understand their social responsibilities and explore ways in which CSR can be built into strategy are more likely to reap the rewards of enhanced competitive positions in the future, benefitting not only their shareholders but all stakeholders involved and the society at large.


Table A Examples of strategic CSR

S.No.

Details of CSR Activity

Company

Contribution to Value chain and resource creation

1.

Community work (health care, infrastructure, education literacy ) near the plant and manufacturing facilities

TISCO, NTPC, ABG, L&T, RIL, Bajaj Auto etc.

Reputation in local community, Political Acumen and social license to operate

2.

Project Shakti: Joint Micro finance and marketing scheme with women's SHGs

HUL

Brand Reputation amongst the villagers

3.

Health & Hygiene Education HUL provides the soaps to rural populace and educates them on its benefits

HUL (Lifebuoy)

Marketing & Sales of soaps in rural India; HULs managers learning Skills of rural marketing

4.

Fair & Lovely Foundation and Scholarships

HUL

Advertising of women's toiletries

5.

E- chaupal for Eucalyptus plantation in AP and Soybeans farming in MP

ITC

Generation of tangible resources; ITC also sells to rural populace like Rural Mall adding to sales

6.

Micro Financial Services with rural populace

ICICI, Citibank etc.

Reputation, advertising, more business

7.

Aditya Birla Group Scholarship for professional courses in Indian elite educational institutions

Aditya Birla Group

Reputation, can help in recruitment and help HRM

8.

Networking Academy Program

Cisco

Future recruitment benefit, reputation

9.

Fair Trade Campaign: better trading conditions for farmers in developing countries

Starbucks, Nestle

Reputation, customer loyalty

10.

Design-for disassembly process: As the first mover, it captured the sophisticated German dismantler firms as part of an exclusive recycling infrastructure

BMW

Cost Advantage, Reputation


This article has been authored by Arshita Kapoor from XLRI Jamshedpur


References

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Becker-Olsen , K.L., & Cudmore, A., & Hill , R.P. (2006). The impact of perceived corporate social responsibility on consumer behaviour. Journal of Business Research, 59 (2006), 46– 53.

Bhattacharyya, S.S., & Sahay, A., & Arora, A.P., & Chaturvedi, A. (2008). A toolkit for designing firm level strategic corporate social responsibility (CSR) initiatives. Social Responsibility Journal, 4(3), 265-282.

Burke, L., & Logston, J.M. (1996). How corporate responsibility pays off”. Long Range Planning, 29(4), 495-502.

Du, S., & Bhattacharya, C.B., & Sen, S. (2007). Reaping relational rewards from corporate social responsibility: The role of competitive positioning. International Journal of Research in Marketing, 24 (2007), 224–241.

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Galbreath, J. (2009). Building corporate social responsibility into strategy. European Business Review, 21(2), 109-127.

Husted, B.W., & Allen, D.B. (2007). Strategic Corporate Social Responsibility and Value Creation among Large Firms Lessons from the Spanish Experience. Long Range Planning, 40 (7), 594-610.



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