Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility PDF

www.hbrreprints.org HBR SPOTLIGHT Strategy & Society The Link Between Competitive Advantage and Corporate Social Responsibility by Michael E. Porter and Mark R. Kramer Included with this full-text Harvard Business Review article: 1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work 3 Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility 17 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications Reprint R0612D HBR SPOTLIGHT Strategy & Society The Link Between Competitive Advantage and Corporate Social Responsibility The Idea in Brief The Idea in Practice Many firms’ corporate social responsibility To practice strategic CSR: With the trucks went veterinarians, nutri- (CSR) efforts are counterproductive, for tionists, agronomists, and quality assurance 1. Identify points of intersection between two reasons: They pit business against so- experts. Farmers learned that milk quality your company and society. ciety, when the two are actually interde- hinged on adequate feed crop irrigation. pendent. And they pressure companies to In what ways does your organization affect With financing and technical assistance think of CSR in generic ways, instead of society? For example, do you provide safe from Nestlé, farmers dug deep-bore wells. crafting social initiatives appropriate to working conditions and reasonable The consequent improved irrigation re- their individual strategies. wages? Do your operations create envi- duced calves’ death rate 75%, increased ronmental hazards? milk production 50-fold, and allowed Nestlé CSR can be much more than just a cost, to pay higher prices to farmers than those constraint, or charitable deed. Approached How does society affect your competitive- set by the government. strategically, it generates opportunity, in- ness? For instance, do countries where you novation, and competitive advantage for operate protect intellectual property? Sup- With steady revenues, farmers could now corporations—while solving pressing so- ply enough talented workers? Encourage obtain credit. Moga’s standard of living im- cial problems. outside investors? proved: More homes had electricity and telephones; more towns established pri- How to practice strategic CSR? Porter and 2. Select social issues to address. Given your mary, secondary, and high schools; and Kramer advise pioneering innovations in company’s and society’s impact on each Moga had five times the number of doc- your offerings and operations that create other, how might you address social needs in tors as neighboring regions. Meanwhile, distinctive value for your company and so- ways that create shared value—a meaningful Nestlé gained a stable supply of high- ciety. Take Toyota. The company’s early re- benefit for society that also adds to your com- quality commodities—without having to sponse to public concern about auto emis- pany’s bottom line? pay middlemen—and saw demand for its sions gave rise to the hybrid-engine Prius. Example: products increase in India. The Prius has not only significantly reduced By addressing the AIDS pandemic in Africa, pollutants; it’s given Toyota an enviable lead a mining company such as Anglo American over rivals in hybrid technology. would not only improve the standard of liv- COPYRIGHT © 2007 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. ing on that continent; it would also im- prove the productivity of the African labor force on which its success depends. 3. Mount a small number of initiatives that generate large and distinctive benefits for society and your company. Example: To enter the Indian market, Nestlé needed to establish local sources of milk from a large, diversified base of small farmers. It re- ceived government permission to build a dairy in the district of Moga. But in Moga, farmers were impoverished, failed crops led to a high death rate in calves, and lack of re- frigeration prevented farmers from ship- ping milk or keeping it fresh. Nestlé built refrigerated dairies as milk col- lection points in each Moga town and sent its trucks to the dairies to collect the milk. page 1 HBR SPOTLIGHT Strategy & Society The Link Between Competitive Advantage and Corporate Social Responsibility by Michael E. Porter and Mark R. Kramer Governments, activists, and the media have society. If, instead, corporations were to analyze become adept at holding companies to ac- their prospects for social responsibility using the count for the social consequences of their ac- same frameworks that guide their core business COPYRIGHT © 2006 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. tivities. Myriad organizations rank companies choices, they would discover that CSR can be on the performance of their corporate social much more than a cost, a constraint, or a chari- responsibility (CSR), and, despite sometimes table deed—it can be a source of opportunity, questionable methodologies, these rankings innovation, and competitive advantage. attract considerable publicity. As a result, CSR In this article, we propose a new way to look has emerged as an inescapable priority for at the relationship between business and soci- business leaders in every country. ety that does not treat corporate success and Many companies have already done much social welfare as a zero-sum game. We intro- to improve the social and environmental con- duce a framework companies can use to iden- sequences of their activities, yet these efforts tify all of the effects, both positive and negative, have not been nearly as productive as they they have on society; determine which ones to could be—for two reasons. First, they pit busi- address; and suggest effective ways to do so. ness against society, when clearly the two are When looked at strategically, corporate social interdependent. Second, they pressure compa- responsibility can become a source of tremen- nies to think of corporate social responsibility dous social progress, as the business applies its in generic ways instead of in the way most ap- considerable resources, expertise, and insights propriate to each ﬁrm’s strategy. to activities that beneﬁt society. The fact is, the prevailing approaches to CSR are so fragmented and so disconnected from The Emergence of Corporate Social business and strategy as to obscure many of the Responsibility greatest opportunities for companies to beneﬁt Heightened corporate attention to CSR has harvard business review december 2006 page 3 HBR S POTLIGHT Strategy & Society not been entirely voluntary. Many companies about them. In fact, the most common corpo- awoke to it only after being surprised by pub- rate response has been neither strategic nor lic responses to issues they had not previously operational but cosmetic: public relations and thought were part of their business responsi- media campaigns, the centerpieces of which bilities. Nike, for example, faced an extensive are often glossy CSR reports that showcase consumer boycott after the New York Times companies’ social and environmental good and other media outlets reported abusive labor deeds. Of the 250 largest multinational corpo- practices at some of its Indonesian suppliers in rations, 64% published CSR reports in 2005, ei- the early 1990s. Shell Oil’s decision to sink the ther within their annual report or, for most, in Brent Spar, an obsolete oil rig, in the North Sea separate sustainability reports—supporting a led to Greenpeace protests in 1995 and to in- new cottage industry of report writers. ternational headlines. Pharmaceutical compa- Such publications rarely offer a coherent nies discovered that they were expected to re- framework for CSR activities, let alone a strate- spond to the AIDS pandemic in Africa even gic one. Instead, they aggregate anecdotes about though it was far removed from their primary uncoordinated initiatives to demonstrate a com- product lines and markets. Fast-food and pack- pany’s social sensitivity. What these reports aged food companies are now being held re- leave out is often as telling as what they in- sponsible for obesity and poor nutrition. clude. Reductions in pollution, waste, carbon Activist organizations of all kinds, both on emissions, or energy use, for example, may be the right and the left, have grown much more documented for speciﬁc divisions or regions aggressive and effective in bringing public pres- but not for the company as a whole. Philan- sure to bear on corporations. Activists may thropic initiatives are typically described in terms target the most visible or successful companies of dollars or volunteer hours spent but almost merely to draw attention to an issue, even if never in terms of impact. Forward-looking those corporations actually have had little im- commitments to reach explicit performance pact on the problem at hand. Nestlé, for ex- targets are even rarer. ample, the world’s largest purveyor of bottled This proliferation of CSR reports has been water, has become a major target in the glo- paralleled by growth in CSR ratings and rank- bal debate about access to fresh water, despite ings. While rigorous and reliable ratings might the fact that Nestlé’s bottled water sales con- constructively inﬂuence corporate behavior, sume just 0.0008% of the world’s fresh water the existing cacophony of self-appointed score- supply. The inefﬁciency of agricultural irriga- keepers does little more than add to the confu- tion, which uses 70% of the world’s supply sion. (See the sidebar “The Ratings Game.”) annually, is a far more pressing issue, but it In an effort to move beyond this confusion, offers no equally convenient multinational corporate leaders have turned for advice to a corporation to target. growing collection of increasingly sophisti- Michael E. Porter is the Bishop William Debates about CSR have moved all the way cated nonproﬁt organizations, consulting ﬁrms, Lawrence University Professor at Har- into corporate boardrooms. In 2005, 360 dif- and academic experts. A rich literature on CSR vard University; he is based at Harvard ferent CSR-related shareholder resolutions has emerged, though what practical guidance Business School in Boston. He is a fre- were ﬁled on issues ranging from labor condi- it offers corporate leaders is often unclear. Ex- quent contributor to HBR, and his most tions to global warming. Government regula- amining the primary schools of thought about recent article is “Seven Surprises for New tion increasingly mandates social responsi- CSR is an essential starting point in under- CEOs” (October 2004). Mark R. Kramer bility reporting. Pending legislation in the standing why a new approach is needed to in- ([email protected]) is the UK, for example, would require every publicly tegrating social considerations more effectively managing director of FSG Social Impact listed company to disclose ethical, social, into core business operations and strategy. Advisors, an international nonprofit con- and environmental risks in its annual report. sulting firm, and a senior fellow in the These pressures clearly demonstrate the ex- Four Prevailing Justiﬁcations for CSR Initiative at Harvard’s John F. tent to which external stakeholders are seek- CSR Kennedy School of Government in ing to hold companies accountable for social Broadly speaking, proponents of CSR have Cambridge, Massachusetts. Porter and issues and highlight the potentially large ﬁ- used four arguments to make their case: moral Kramer are the cofounders of both FSG nancial risks for any ﬁrm whose conduct is obligation, sustainability, license to operate, Social Impact Advisors and the Center deemed unacceptable. and reputation. The moral appeal—arguing for Effective Philanthropy, a nonprofit re- While businesses have awakened to these that companies have a duty to be good citizens search organization. risks, they are much less clear on what to do and to “do the right thing”—is prominent in page 4 harvard business review december 2006 Strategy & Society HBR S POTLIGHT the goal of Business for Social Responsibility, avoiding short-term behavior that is socially the leading nonproﬁt CSR business associa- detrimental or environmentally wasteful. The tion in the United States. It asks that its mem- principle works best for issues that coincide bers “achieve commercial success in ways that with a company’s economic or regulatory in- honor ethical values and respect people, com- terests. DuPont, for example, has saved over munities, and the natural environment.” Sus- $2 billion from reductions in energy use since tainability emphasizes environmental and 1990. Changes to the materials McDonald’s community stewardship. An excellent deﬁni- uses to wrap its food have reduced its solid tion was developed in the 1980s by Norwegian waste by 30%. These were smart business deci- Prime Minister Gro Harlem Brundtland and sions entirely apart from their environmental used by the World Business Council for Sus- beneﬁts. In other areas, however, the notion of tainable Development: “Meeting the needs of sustainability can become so vague as to be the present without compromising the ability meaningless. Transparency may be said to be of future generations to meet their own more “sustainable” than corruption. Good em- needs.” The notion of license to operate de- ployment practices are more “sustainable” rives from the fact that every company needs than sweatshops. Philanthropy may contribute tacit or explicit permission from governments, to the “sustainability” of a society. However communities, and numerous other stakehold- true these assertions are, they offer little basis ers to do business. Finally, reputation is used for balancing long-term objectives against the by many companies to justify CSR initiatives short-term costs they incur. The sustainability on the grounds that they will improve a com- school raises questions about these trade-offs pany’s image, strengthen its brand, enliven morale, and even raise the value of its stock. These justiﬁcations have advanced thinking in the ﬁeld, but none offers sufﬁcient guidance for the difﬁcult choices corporate leaders must The Ratings Game make. Consider the practical limitations of Measuring and publicizing social perfor- activities. As a result, they tend to use each approach. mance is a potentially powerful way to measures for which data are readily and The CSR ﬁeld remains strongly imbued with inﬂuence corporate behavior—assuming inexpensively available, even though they a moral imperative. In some areas, such as hon- that the ratings are consistently mea- may not be good proxies for the social or esty in ﬁling ﬁnancial statements and operat- sured and accurately reﬂect corporate environmental effects they are intended ing within the law, moral considerations are social impact. Unfortunately, neither to reﬂect. The Dow Jones Sustainability easy to understand and apply. It is the nature condition holds true in the current pro- Index, for example, uses the size of a com- of moral obligations to be absolute mandates, fusion of CSR checklists. pany’s board as a measure of community however, while most corporate social choices The criteria used in the rankings vary involvement, even though size and in- involve balancing competing values, interests, widely. The Dow Jones Sustainability volvement may be entirely unrelated.1 and costs. Google’s recent entry into China, for Index, for example, includes aspects of Finally, even if the measures chosen example, has created an irreconcilable conﬂict economic performance in its evalua- accurately reﬂect social impact, the data between its U.S. customers’ abhorrence of cen- tion. It weights customer service al- are frequently unreliable. Most ratings sorship and the legal constraints imposed by most 50% more heavily than corporate rely on surveys whose response rates are the Chinese government. The moral calculus citizenship. The equally prominent statistically insigniﬁcant, as well as on needed to weigh one social beneﬁt against an- FTSE4Good Index, by contrast, contains self-reported company data that have not other, or against its ﬁnancial costs, has yet to no measures of economic performance been veriﬁed externally. Companies with be developed. Moral principles do not tell a or customer service at all. Even when the most to hide are the least likely to re- pharmaceutical company how to allocate its criteria happen to be the same, they are spond. The result is a jumble of largely revenues among subsidizing care for the indi- invariably weighted differently in the meaningless rankings, allowing almost gent today, developing cures for the future, ﬁnal scoring. any company to boast that it meets some and providing dividends to its investors. Beyond the choice of criteria and their measure of social responsibility—and The principle of sustainability appeals to en- weightings lies the even more perplexing most do. lightened self-interest, often invoking the so- question of how to judge whether the cri- called triple bottom line of economic, social, teria have been met. Most media, non- 1. For a fuller discussion of the problem of CSR and environmental performance. In other ratings, see Aaron Chatterji and David Levine, proﬁts, and investment advisory organi- “Breaking Down the Wall of Codes: Evaluating words, companies should operate in ways that zations have too few resources to audit a Non-Financial Performance Measurement,” Cali- secure long-term economic performance by universe of complicated global corporate fornia Management Review, Winter 2006. harvard business review december 2006 page 5 HBR S POTLIGHT Strategy & Society Mapping Social Opportunities The interdependence of a company and opportunities—mostly operational value: beneﬁt for both society and its society can be analyzed with the same issues—that need to be investigated, own competitiveness. tools used to analyze competitive posi- prioritized, and addressed. In general, tion and develop strategy. In this way, companies should attempt to clear away Looking Inside Out: Mapping the ﬁrm can focus its particular CSR ac- as many negative value-chain social im- the Social Impact of the Value tivities to best effect. Rather than merely pacts as possible. Some company activi- Chain acting on well-intentioned impulses or ties will prove to offer opportunities for The value chain depicts all the activities reacting to outside pressure, the organi- social and strategic distinction. a company engages in while doing zation can set an afﬁrmative CSR In addressing competitive context, business. It can be used as a frame- agenda that produces maximum social companies cannot take on every area work to identify the positive and nega- beneﬁt as well as gains for the business. in the diamond. Therefore, the task is tive social impact of those activities. These two tools should be used in dif- to identify those areas of social context These “inside-out” linkages may range ferent ways. When a company uses the with the greatest strategic value. A from hiring and layoff policies to value chain to chart all the social conse- company should carefully choose from greenhouse gas emissions, as the par- quences of its activities, it has, in effect, this menu one or a few social initia- tial list of examples illustrated here created an inventory of problems and tives that will have the greatest shared demonstrates. Relationships with universities Financial reporting Education & job training Procurement & supply chain practices practices (e.g., bribery, child Ethical research Safe working conditions labor, conflict diamonds, practices (e.g., animal testing, Government Diversity & discrimination pricing to farmers) GMOs) practices Health care & other benefits Uses of particular inputs Product safety Transparency Compensation policies (e.g., animal fur) Conservation of raw materials Use of lobbying Layoff policies Utilization of natural Recycling resources Firm Infrastructure Support Activities (e.g., financing, planning, investor relations) Human Resource Management (e.g., recruiting, training, compensation system) Technology Development (e.g., product design, testing, process design, material research, market research) Procurement (e.g., components, machinery, advertising, & services) Inbound Operations Outbound Marketing & After-Sales Logistics (e.g., Logistics Sales Service Primary Activities (e.g., incoming assembly, (e.g., order (e.g., sales (e.g., installation, material component processing, force, customer support, promotion, complaint resolution, storage, data, fabrication, warehousing, advertising, collection, branch report proposal repair) service, operations) preparation) writing, Web customer site) access) Transportation Emissions & waste Packaging use Marketing & advertising Disposal impacts (e.g., Biodiversity & and disposal (e.g., truthful advertising, of obsolete emissions, con- ecological impacts (McDonald’s advertising to children) products gestion, logging clamshell) Pricing practices (e.g., Handling of roads) Energy & water Transportation price discrimination consumables usage impacts among customers, (e.g., motor Worker safety & anticompetitive pricing oil, printing labor relations practices, pricing policy ink) Hazardous materials to the poor) Customer Consumer information privacy Privacy Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1985 page 6 harvard business review december 2006 Strategy & Society HBR S POTLIGHT without offering a framework to answer them. as those in mining and other highly regulated Managers without a strategic understanding and extractive industries. That is also why the of CSR are prone to postpone these costs, approach is common at companies that rely on which can lead to far greater costs when the the forbearance of their neighbors, such as company is later judged to have violated its those, like chemical manufacturing, whose op- social obligation. erations are noxious or environmentally haz- The license-to-operate approach, by con- ardous. By seeking to satisfy stakeholders, how- trast, is far more pragmatic. It offers a concrete ever, companies cede primary control of their way for a business to identify social issues that CSR agendas to outsiders. Stakeholders’ views matter to its stakeholders and make decisions are obviously important, but these groups can about them. This approach also fosters con- never fully understand a corporation’s capabili- structive dialogue with regulators, the local cit- ties, competitive positioning, or the trade-offs izenry, and activists—one reason, perhaps, it must make. Nor does the vehemence of a that it is especially prevalent among compa- stakeholder group necessarily signify the im- nies that depend on government consent, such portance of an issue—either to the company Looking Outside In: Social Inﬂuences mensions of the company’s competitive how the conditions at a company’s locations on Competitiveness context—the “outside-in” linkages that af- (such as transportation infrastructure and In addition to understanding the social ram- fect its ability to improve productivity and honestly enforced regulatory policy) affect iﬁcations of the value chain, effective CSR execute strategy. These can be understood its ability to compete. requires an understanding of the social di- using the diamond framework, which shows Availability of human resources (Marriott’s job Fair and open local competition training) (e.g., the absence of trade barriers, fair regulations) Access to research institutions and universities (Microsoft’s Working Connections) Intellectual property protection Efficient physical infrastructure Transparency (e.g., financial report- Efficient administrative infrastructure ing, corruption: Extractive Industries Transparency Initiative) Availability of scientific and technological Context for Rule of law (e.g., security, protection infrastructure (Nestlé’s knowledge Firm Strategy of property, legal system) transfer to milk farmers) and Rivalry Meritocratic incentive systems Sustainable natural resources (GrupoNueva’s water The rules and (e.g., antidiscrimination) conservation) incentives that govern competition Efficient access to capital Factor (Input) Local Demand Conditions Conditions Presence of high- The nature and quality, specialized sophistication of inputs available local customer to firms needs Availability of local suppliers Related and Sophistication of local demand (e.g. (Sysco’s locally grown produce; Supporting appeal of social value propositions: Nestlé’s milk collection dairies) Industries Whole Foods’ customers) Access to firms in related fields The local availability Demanding regulatory standards of supporting (California auto emissions & Presence of clusters instead of isolated industries industries mileage standards) Unusual local needs that can be served nationally and globally (Urbi’s housing financing, Unilever’s “bottom of the pyramid” strategy) Source: Michael E. Porter, The Competitive Advantage of Nations, 1990 harvard business review december 2006 page 7 HBR S POTLIGHT Strategy & Society or to the world. A ﬁrm that views CSR as a way atives are often isolated from operating units— to placate pressure groups often ﬁnds that its and even separated from corporate philan- approach devolves into a series of short-term thropy. Externally, the company’s social impact defensive reactions—a never-ending public re- becomes diffused among numerous unrelated lations palliative with minimal value to society efforts, each responding to a different stake- and no strategic beneﬁt for the business. holder group or corporate pressure point. Finally, the reputation argument seeks that The consequence of this fragmentation is a strategic beneﬁt but rarely ﬁnds it. Concerns tremendous lost opportunity. The power of about reputation, like license to operate, focus corporations to create social beneﬁt is dissi- on satisfying external audiences. In consumer- pated, and so is the potential of companies to oriented companies, it often leads to high- take actions that would support both their proﬁle cause-related marketing campaigns. In communities and their business goals. stigmatized industries, such as chemicals and energy, a company may instead pursue social Integrating Business and Society responsibility initiatives as a form of insurance, To advance CSR, we must root it in a broad in the hope that its reputation for social con- understanding of the interrelationship be- sciousness will temper public criticism in the tween a corporation and society while at the event of a crisis. This rationale once again risks same time anchoring it in the strategies and confusing public relations with social and busi- activities of speciﬁc companies. To say broadly ness results. that business and society need each other A few corporations, such as Ben & Jerry’s, might seem like a cliché, but it is also the basic Newman’s Own, Patagonia, and the Body truth that will pull companies out of the mud- Shop, have distinguished themselves through dle that their current corporate-responsibility The prevailing an extraordinary long-term commitment to so- thinking has created. cial responsibility. But even for these compa- Successful corporations need a healthy soci- approaches to CSR are so nies, the social impact achieved, much less the ety. Education, health care, and equal opportu- business beneﬁt, is hard to determine. Studies nity are essential to a productive workforce. disconnected from of the effect of a company’s social reputation Safe products and working conditions not only business as to obscure on consumer purchasing preferences or on attract customers but lower the internal costs stock market performance have been inconclu- of accidents. Efﬁcient utilization of land, water, many of the greatest sive at best. As for the concept of CSR as insur- energy, and other natural resources makes opportunities for ance, the connection between the good deeds business more productive. Good government, and consumer attitudes is so indirect as to be the rule of law, and property rights are essen- companies to benefit impossible to measure. Having no way to tial for efﬁciency and innovation. Strong regu- quantify the beneﬁts of these investments puts latory standards protect both consumers and society. such CSR programs on shaky ground, liable to competitive companies from exploitation. Ulti- be dislodged by a change of management or a mately, a healthy society creates expanding de- swing in the business cycle. mand for business, as more human needs are All four schools of thought share the same met and aspirations grow. Any business that weakness: They focus on the tension between pursues its ends at the expense of the society in business and society rather than on their inter- which it operates will ﬁnd its success to be illu- dependence. Each creates a generic rationale sory and ultimately temporary. that is not tied to the strategy and operations At the same time, a healthy society needs suc- of any speciﬁc company or the places in which cessful companies. No social program can rival it operates. Consequently, none of them is suf- the business sector when it comes to creating the ﬁcient to help a company identify, prioritize, jobs, wealth, and innovation that improve stan- and address the social issues that matter most dards of living and social conditions over time. or the ones on which it can make the biggest If governments, NGOs, and other participants impact. The result is oftentimes a hodgepodge in civil society weaken the ability of business to of uncoordinated CSR and philanthropic activ- operate productively, they may win battles but ities disconnected from the company’s strategy will lose the war, as corporate and regional that neither make any meaningful social im- competitiveness fade, wages stagnate, jobs dis- pact nor strengthen the ﬁrm’s long-term com- appear, and the wealth that pays taxes and sup- petitiveness. Internally, CSR practices and initi- ports nonproﬁt contributions evaporates. page 8 harvard business review december 2006 Strategy & Society HBR S POTLIGHT Leaders in both business and civil society ent social consequences in China than in the have focused too much on the friction be- United States. tween them and not enough on the points of A company’s impact on society also changes intersection. The mutual dependence of cor- over time, as social standards evolve and sci- porations and society implies that both busi- ence progresses. Asbestos, now understood as ness decisions and social policies must follow a serious health risk, was thought to be safe in the principle of shared value. That is, choices the early 1900s, given the scientiﬁc knowledge must beneﬁt both sides. If either a business or then available. Evidence of its risks gradually a society pursues policies that beneﬁt its in- mounted for more than 50 years before any terests at the expense of the other, it will ﬁnd company was held liable for the harms it can itself on a dangerous path. A temporary gain cause. Many ﬁrms that failed to anticipate the to one will undermine the long-term prosper- consequences of this evolving body of research ity of both.1 have been bankrupted by the results. No To put these broad principles into practice, longer can companies be content to monitor a company must integrate a social perspective only the obvious social impacts of today. With- into the core frameworks it already uses to out a careful process for identifying evolving understand competition and guide its busi- social effects of tomorrow, ﬁrms may risk their ness strategy. very survival. Identifying the points of intersection. Not only does corporate activity affect soci- The interdependence between a company and ety, but external social conditions also inﬂu- society takes two forms. First, a company im- ence corporations, for better and for worse. pinges upon society through its operations These are outside-in linkages. in the normal course of business: These are Every company operates within a competi- inside-out linkages. tive context, which signiﬁcantly affects its Virtually every activity in a company’s value ability to carry out its strategy, especially in the chain touches on the communities in which long run. Social conditions form a key part of the ﬁrm operates, creating either positive or this context. Competitive context garners far negative social consequences. (For an example less attention than value chain impacts but can of this process, see the exhibit “Looking Inside have far greater strategic importance for both Out: Mapping the Social Impact of the Value companies and societies. Ensuring the health Chain.”) While companies are increasingly of the competitive context beneﬁts both the aware of the social impact of their activities company and the community. (such as hiring practices, emissions, and waste Competitive context can be divided into four disposal), these impacts can be more subtle broad areas: ﬁrst, the quantity and quality of and variable than many managers realize. For available business inputs—human resources, one thing, they depend on location. The same for example, or transportation infrastructure; manufacturing operation will have very differ- second, the rules and incentives that govern 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 significantly are significantly external environment affected by a affected by a that significantly affect company’s company’s the underlying drivers operations nor activities in the of a company’s materially affect ordinary course competitiveness in its long-term of business. the locations where competitiveness. it operates. harvard business review december 2006 page 9 HBR S POTLIGHT Strategy & Society competition—such as policies that protect in- Our framework suggests that the social is- tellectual property, ensure transparency, safe- sues affecting a company fall into three catego- guard against corruption, and encourage in- ries, which distinguish between the many vestment; third, the size and sophistication of worthy causes and the narrower set of social local demand, inﬂuenced by such things as issues that are both important and strategic for standards for product quality and safety, con- the business. sumer rights, and fairness in government pur- Generic social issues may be important to so- chasing; fourth, the local availability of sup- ciety but are neither signiﬁcantly affected by porting industries, such as service providers the company’s operations nor inﬂuence the and machinery producers. Any and all of these company’s long-term competitiveness. Value aspects of context can be opportunities for chain social impacts are those that are signiﬁ- CSR initiatives. (See the exhibit “Looking Out- cantly affected by the company’s activities in side In: Social Inﬂuences on Competitiveness.”) the ordinary course of business. Social dimen- The ability to recruit appropriate human re- sions of competitive context are factors in the ex- sources, for example, may depend on a num- ternal environment that signiﬁcantly affect the ber of social factors that companies can inﬂu- underlying drivers of competitiveness in those ence, such as the local educational system, the places where the company operates. (See the availability of housing, the existence of dis- exhibit “Prioritizing Social Issues.”) crimination (which limits the pool of work- Every company will need to sort social issues ers), and the adequacy of the public health into these three categories for each of its busi- infrastructure.2 ness units and primary locations, then rank Choosing which social issues to address. them in terms of potential impact. Into which No business can solve all of society’s problems category a given social issue falls will vary from or bear the cost of doing so. Instead, each com- business unit to business unit, industry to in- pany must select issues that intersect with its dustry, and place to place. particular business. Other social agendas are Supporting a dance company may be a ge- best left to those companies in other indus- neric social issue for a utility like Southern tries, NGOs, or government institutions that California Edison but an important part of are better positioned to address them. The es- the competitive context for a corporation like sential test that should guide CSR is not American Express, which depends on the whether a cause is worthy but whether it pre- high-end entertainment, hospitality, and tour- sents an opportunity to create shared value— ism cluster. Carbon emissions may be a ge- that is, a meaningful beneﬁt for society that is neric social issue for a ﬁnancial services ﬁrm also valuable to the business. like Bank of America, a negative value chain Corporate Involvement in Society: A Strategic Approach Generic Social Value Chain Social Dimensions Impacts Social Impacts of Competitive Context Good citizenship Mitigate harm Strategic philanthropy from value chain that leverages capa- activities bilities to improve salient areas of competitive context Transform value- chain activities to Responsive benefit society Strategic CSR while reinforcing CSR strategy page 10 harvard business review december 2006 Strategy & Society HBR S POTLIGHT impact for a transportation-based company munity expectations to opportunities to achieve like UPS, or both a value chain impact and a social and economic beneﬁts simultaneously. competitive context issue for a car manufac- It moves from mitigating harm to ﬁnding ways turer like Toyota. The AIDS pandemic in Af- to reinforce corporate strategy by advancing rica may be a generic social issue for a U.S. re- social conditions. tailer like Home Depot, a value chain impact Such a social agenda must be responsive to for a pharmaceutical company like Glaxo- stakeholders, but it cannot stop there. A sub- SmithKline, and a competitive context issue stantial portion of corporate resources and at- for a mining company like Anglo American tention must migrate to truly strategic CSR. that depends on local labor in Africa for its (See the exhibit “Corporate Involvement in operations. Society: A Strategic Approach.”) It is through Even issues that apply widely in the econ- strategic CSR that the company will make the omy, such as diversity in hiring or conserva- most signiﬁcant social impact and reap the tion of energy, can have greater signiﬁcance greatest business beneﬁts. for some industries than for others. Health Responsive CSR. Responsive CSR comprises care beneﬁts, for example, will present fewer two elements: acting as a good corporate citi- challenges for software development or bio- zen, attuned to the evolving social concerns of technology ﬁrms, where workforces tend to stakeholders, and mitigating existing or antici- be small and well compensated, than for pated adverse effects from business activities. companies in a ﬁeld like retailing, which is Good citizenship is a sine qua non of CSR, heavily dependent on large numbers of lower- and companies need to do it well. Many wor- wage workers. thy local organizations rely on corporate con- Within an industry, a given social issue may tributions, while employees derive justiﬁable cut differently for different companies, owing pride from their company’s positive involve- The vehemence of a to differences in competitive positioning. In ment in the community. the auto industry, for example, Volvo has cho- The best corporate citizenship initiatives in- stakeholder group does sen to make safety a central element of its com- volve far more than writing a check: They spec- petitive positioning, while Toyota has built a ify clear, measurable goals and track results not necessarily signify the competitive advantage from the environmen- over time. A good example is GE’s program to importance of an issue— tal beneﬁts of its hybrid technology. For an adopt underperforming public high schools individual company, some issues will prove to near several of its major U.S. facilities. The either to the company or be important for many of its business units company contributes between $250,000 and to the world. and locations, offering opportunities for strate- $1 million over a ﬁve-year period to each gic corporatewide CSR initiatives. school and makes in-kind donations as well. Where a social issue is salient for many GE managers and employees take an active companies across multiple industries, it can role by working with school administrators often be addressed most effectively through to assess needs and mentor or tutor students. cooperative models. The Extractive Industries In an independent study of ten schools in the Transparency Initiative, for example, includes program between 1989 and 1999, nearly all 19 major oil, gas, and mining companies that showed signiﬁcant improvement, while the have agreed to discourage corruption through graduation rate in four of the ﬁve worst- full public disclosure and veriﬁcation of all performing schools doubled from an average corporate payments to governments in the of 30% to 60%. countries in which they operate. Collective Effective corporate citizenship initiatives action by all major corporations in these in- such as this one create goodwill and improve dustries prevents corrupt governments from relations with local governments and other im- undermining social beneﬁt by simply choos- portant constituencies. What’s more, GE’s em- ing not to deal with the ﬁrms that disclose ployees feel great pride in their participation. their payments. Their effect is inherently limited, however. Creating a corporate social agenda. No matter how beneﬁcial the program is, it re- Categorizing and ranking social issues is just mains incidental to the company’s business, the means to an end, which is to create an ex- and the direct effect on GE’s recruiting and re- plicit and afﬁrmative corporate social agenda. tention is modest. A corporate social agenda looks beyond com- The second part of responsive CSR— harvard business review december 2006 page 11 HBR S POTLIGHT Strategy & Society mitigating the harm arising from a ﬁrm’s value and distinctive. Strategic CSR involves both chain activities—is essentially an operational inside-out and outside-in dimensions working challenge. Because there are a myriad of possi- in tandem. It is here that the opportunities for ble value chain impacts for each business unit, shared value truly lie. many companies have adopted a checklist ap- Many opportunities to pioneer innovations proach to CSR, using standardized sets of so- to beneﬁt both society and a company’s own cial and environmental risks. The Global Re- competitiveness can arise in the product offer- porting Initiative, which is rapidly becoming a ing and the value chain. Toyota’s response to con- standard for CSR reporting, has enumerated a cerns over automobile emissions is an example. list of 141 CSR issues, supplemented by auxil- Toyota’s Prius, the hybrid electric/gasoline ve- iary lists for different industries. hicle, is the ﬁrst in a series of innovative car mod- These lists make for an excellent starting els that have produced competitive advantage point, but companies need a more proactive and environmental beneﬁts. Hybrid engines and tailored internal process. Managers at emit as little as 10% of the harmful pollutants each business unit can use the value chain as a conventional vehicles produce while consum- tool to identify systematically the social im- ing only half as much gas. Voted 2004 Car of pacts of the unit’s activities in each location. the Year by Motor Trend magazine, Prius has Here operating management, which is closest given Toyota a lead so substantial that Ford and to the work actually being done, is particularly other car companies are licensing the technol- helpful. Most challenging is to anticipate im- ogy. Toyota has created a unique position with pacts that are not yet well recognized. Con- customers and is well on its way to establishing sider B&Q, an international chain of home its technology as the world standard. supply centers based in England. The company Urbi, a Mexican construction company, has An affirmative corporate has begun to analyze systematically tens of prospered by building housing for disadvan- thousands of products in its hundreds of stores taged buyers using novel ﬁnancing vehicles such social agenda moves against a list of a dozen social issues—from cli- as ﬂexible mortgage payments made through mate change to working conditions at its sup- payroll deductions. Crédit Agricole, France’s from mitigating harm to pliers’ factories—to determine which products largest bank, has differentiated itself by offer- reinforcing corporate pose potential social responsibility risks and ing specialized ﬁnancial products related to how the company might take action before the environment, such as ﬁnancing packages strategy through social any external pressure is brought to bear. for energy-saving home improvements and for progress. For most value chain impacts, there is no audits to certify farms as organic. need to reinvent the wheel. The company Strategic CSR also unlocks shared value by should identify best practices for dealing with investing in social aspects of context that each one, with an eye toward how those prac- strengthen company competitiveness. A symbi- tices are changing. Some companies will be otic relationship develops: The success of the more proactive and effective in mitigating the company and the success of the community be- wide array of social problems that the value come mutually reinforcing. Typically, the more chain can create. These companies will gain an closely tied a social issue is to the company’s edge, but—just as for procurement and other business, the greater the opportunity to lever- operational improvements—any advantage is age the ﬁrm’s resources and capabilities, and likely to be temporary. beneﬁt society. Strategic CSR. For any company, strategy Microsoft’s Working Connections partner- must go beyond best practices. It is about ship with the American Association of Commu- choosing a unique position—doing things dif- nity Colleges (AACC) is a good example of a ferently from competitors in a way that lowers shared-value opportunity arising from invest- costs or better serves a particular set of cus- ments in context. The shortage of information tomer needs. These principles apply to a com- technology workers is a signiﬁcant constraint pany’s relationship to society as readily as to on Microsoft’s growth; currently, there are its relationship to its customers and rivals. more than 450,000 unﬁlled IT positions in the Strategic CSR moves beyond good corporate United States alone. Community colleges, with citizenship and mitigating harmful value chain an enrollment of 11.6 million students, repre- impacts to mount a small number of initiatives senting 45% of all U.S. undergraduates, could whose social and business beneﬁts are large be a major solution. Microsoft recognizes, how- page 12 harvard business review december 2006 Strategy & Society HBR S POTLIGHT ever, that community colleges face special chal- addressing social constraints to competitive- lenges: IT curricula are not standardized, tech- ness are each powerful tools for creating eco- nology used in classrooms is often outdated, nomic and social value. However, as our exam- and there are no systematic professional devel- ples illustrate, the impact is even greater if opment programs to keep faculty up to date. they work together. Activities in the value Microsoft’s $50 million ﬁve-year initiative chain can be performed in ways that reinforce was aimed at all three problems. In addition to improvements in the social dimensions of con- contributing money and products, Microsoft text. At the same time, investments in compet- sent employee volunteers to colleges to assess itive context have the potential to reduce con- needs, contribute to curriculum development, straints on a company’s value chain activities. and create faculty development institutes. Marriott, for example, provides 180 hours of Note that in this case, volunteers and assigned paid classroom and on-the-job training to staff were able to use their core professional chronically unemployed job candidates. The skills to address a social need, a far cry from company has combined this with support for typical volunteer programs. Microsoft has local community service organizations, which achieved results that have beneﬁted many identify, screen, and refer the candidates to communities while having a direct—and po- Marriott. The net result is both a major bene- tentially signiﬁcant—impact on the company. ﬁt to communities and a reduction in Marri- Integrating inside-out and outside-in prac- ott’s cost of recruiting entry-level employees. tices. Pioneering value chain innovations and Ninety percent of those in the training pro- Integrating Company Practice and Context: Nestlé’s Milk District Nestlé’s approach to working with small of small farmers. Establishing that value chain prices to farmers than those set by the govern- farmers exempliﬁes the symbiotic relation- in Moga required Nestlé to transform the ment, and its steady biweekly payments have ship between social progress and competitive competitive context in ways that created tre- enabled farmers to obtain credit. Competing advantage. Ironically, while the company’s mendous shared value for both the company dairies and milk factories have opened, and an reputation remains marred by a 30-year-old and the region. industry cluster is beginning to develop. controversy surrounding sales of infant for- Nestlé built refrigerated dairies as collec- Today, Moga has a signiﬁcantly higher stan- mula in Africa, the corporation’s impact in tion points for milk in each town and sent its dard of living than other regions in the vicin- developing countries has often been pro- trucks out to the dairies to collect the milk. ity. Ninety percent of the homes have electric- foundly positive. With the trucks went veterinarians, nutrition- ity, and most have telephones; all villages Consider the history of Nestlé’s milk busi- ists, agronomists, and quality assurance ex- have primary schools, and many have second- ness in India. In 1962, the company wanted to perts. Medicines and nutritional supplements ary schools. Moga has ﬁve times the number enter the Indian market, and it received gov- were provided for sick animals, and monthly of doctors as neighboring regions. The in- ernment permission to build a dairy in the training sessions were held for local farmers. creased purchasing power of local farmers has northern district of Moga. Poverty in the re- Farmers learned that the milk quality de- also greatly expanded the market for Nestlé’s gion was severe; people were without elec- pended on the cows’ diet, which in turn de- products, further supporting the ﬁrm’s eco- tricity, transportation, telephones, or medical pended on adequate feed crop irrigation. With nomic success. care. A farmer typically owned less than ﬁve ﬁnancing and technical assistance from Nestlé’s commitment to working with small acres of poorly irrigated and infertile soil. Nestlé, farmers began to dig previously unaf- farmers is central to its strategy. It enables the Many kept a single buffalo cow that produced fordable deep-bore wells. Improved irrigation company to obtain a stable supply of high- just enough milk for their own consumption. not only fed cows but increased crop yields, quality commodities without paying middle- Sixty percent of calves died newborn. Because producing surplus wheat and rice and raising men. The corporation’s other core products— farmers lacked refrigeration, transportation, the standard of living. coffee and cocoa—are often grown by small or any way to test for quality, milk could not When Nestlé’s milk factory ﬁrst opened, farmers in developing countries under similar travel far and was frequently contaminated only 180 local farmers supplied milk. Today, conditions. Nestlé’s experience in setting up or diluted. Nestlé buys milk from more than 75,000 farm- collection points, training farmers, and intro- Nestlé came to Moga to build a business, ers in the region, collecting it twice daily from ducing better technology in Moga has been not to engage in CSR. But Nestlé’s value more than 650 village dairies. The death rate repeated in Brazil, Thailand, and a dozen chain, derived from the company’s origins in of calves has dropped by 75%. Milk production other countries, including, most recently, Switzerland, depended on establishing local has increased 50-fold. As the quality has im- China. In each case, as Nestlé has prospered, sources of milk from a large, diversiﬁed base proved, Nestlé has been able to pay higher so has the community. harvard business review december 2006 page 13 HBR S POTLIGHT Strategy & Society gram take jobs with Marriott. One year later, tricity consumption entirely. Spoiled produce more than 65% are still in their jobs, a substan- and biodegradable waste are trucked to re- tially higher retention rate than the norm. gional centers for composting. Whole Foods’ When value chain practices and investments vehicles are being converted to run on biofu- in competitive context are fully integrated, els. Even the cleaning products used in its stores CSR becomes hard to distinguish from the day- are environmentally friendly. And through its to-day business of the company. Nestlé, for ex- philanthropy, the company has created the An- ample, works directly with small farmers in imal Compassion Foundation to develop more developing countries to source the basic com- natural and humane ways of raising farm ani- modities, such as milk, coffee, and cocoa, on mals. In short, nearly every aspect of the com- which much of its global business depends. pany’s value chain reinforces the social dimen- (See the sidebar “Integrating Company Prac- sions of its value proposition, distinguishing tice and Context: Nestlé’s Milk District.”) The Whole Foods from its competitors. company’s investment in local infrastructure Not every company can build its entire and its transfer of world-class knowledge and value proposition around social issues as Whole technology over decades has produced enor- Foods does, but adding a social dimension to mous social beneﬁts through improved health the value proposition offers a new frontier in care, better education, and economic develop- competitive positioning. Government regula- ment, while giving Nestlé direct and reliable tion, exposure to criticism and liability, and access to the commodities it needs to maintain consumers’ attention to social issues are all a proﬁtable global business. Nestlé’s distinctive persistently increasing. As a result, the num- strategy is inseparable from its social impact. ber of industries and companies whose com- Creating a social dimension to the value petitive advantage can involve social value Typically the more closely proposition. At the heart of any strategy is a propositions is constantly growing. Sysco, for unique value proposition: a set of needs a example, the largest distributor of food prod- tied a social issue is to a company can meet for its chosen customers ucts to restaurants and institutions in North that others cannot. The most strategic CSR oc- America, has begun an initiative to preserve company’s business, the curs when a company adds a social dimension small, family-owned farms and offer locally greater the opportunity to its value proposition, making social impact grown produce to its customers as a source of integral to the overall strategy. competitive differentiation. Even large global to leverage the firm’s Consider Whole Foods Market, whose value multinationals—such as General Electric, with resources—and benefit proposition is to sell organic, natural, and its “ecomagination” initiative that focuses on healthy food products to customers who are developing water puriﬁcation technology and society. passionate about food and the environment. other “green” businesses, and Unilever, through Social issues are fundamental to what makes its efforts to pioneer new products, packag- Whole Foods unique in food retailing and to ing, and distribution systems to meet the its ability to command premium prices. The needs of the poorest populations—have de- company’s sourcing emphasizes purchases cided that major business opportunities lie in from local farmers through each store’s pro- integrating business and society. curement process. Buyers screen out foods containing any of nearly 100 common ingredi- Organizing for CSR ents that the company considers unhealthy or Integrating business and social needs takes environmentally damaging. The same stan- more than good intentions and strong leader- dards apply to products made internally. Whole ship. It requires adjustments in organization, Foods’ baked goods, for example, use only un- reporting relationships, and incentives. Few bleached and unbromated ﬂour. companies have engaged operating manage- Whole Foods’ commitment to natural and ment in processes that identify and prioritize environmentally friendly operating practices social issues based on their salience to business extends well beyond sourcing. Stores are con- operations and their importance to the com- structed using a minimum of virgin raw mate- pany’s competitive context. Even fewer have rials. Recently, the company purchased renew- uniﬁed their philanthropy with the manage- able wind energy credits equal to 100% of its ment of their CSR efforts, much less sought to electricity use in all of its stores and facilities, embed a social dimension into their core value the only Fortune 500 company to offset its elec- proposition. Doing these things requires a far page 14 harvard business review december 2006 Strategy & Society HBR S POTLIGHT different approach to both CSR and philan- The Moral Purpose of Business thropy than the one prevalent today. Compa- By providing jobs, investing capital, purchas- nies must shift from a fragmented, defensive ing goods, and doing business every day, cor- posture to an integrated, afﬁrmative approach. porations have a profound and positive inﬂu- The focus must move away from an emphasis ence on society. The most important thing a on image to an emphasis on substance. corporation can do for society, and for any The current preoccupation with measuring community, is contribute to a prosperous stakeholder satisfaction has it backwards. What economy. Governments and NGOs often for- needs to be measured is social impact. Operat- get this basic truth. When developing coun- ing managers must understand the importance tries distort rules and incentives for business, of the outside-in inﬂuence of competitive con- for example, they penalize productive compa- text, while people with responsibility for CSR nies. Such countries are doomed to poverty, initiatives must have a granular unders

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