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Part I
CSR and competitive advantage
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1
An action-based approach for linking CSR with strategy
Framework and cases
Jeremy Galbreath
Graduate School of Business, Curtin University of Technology, Western Australia
Kim Benjamin
Curtin Business School, Curtin University of Technology, Western Australia
Although the call from academics and consultants to integrate CSR with corporate strategy has been established, there is concern that many firms seem to lack direction on how to address CSR in an innovative way and, importantly, strategically. By way of example, while CEOs acknowledge that addressing stakeholder expectations for CSR is an important consideration for competitive success, they appear to be struggling with just how to link CSR with corporate strategy (Hirschland 2005; McKinsey & Company 2006; PricewaterhouseCoopers 2007; IBM 2008). Recent reports reveal that a majority of organisations have no defined strategy for CSR, while many companies are unclear about how to adequately anticipate which social issues will affect their overall strategy (Work Foundation 2002; McKinsey & Company 2006; IBM 2008).
In an effort to explore innovative ways of addressing CSR, this chapter seeks to develop a couple of key themes and insights. First, we seek to identify how to view CSR strategically. To do this, an argument is made that firms need to take an 'issues' perspective of CSR by identifying social issues that are prevalent to stakeholders. According to Aguilera and colleagues (2007), CSR is best defined as actions designed to improve social conditions. By identifying prevailing social issues, firms place themselves in a position to improve social conditions. However, not all social issues are relevant—let alone strategic—across all industries. We develop a means to strategically address the matter. Second, once firms identify social issues that are strategic, action must be taken. Strategy is about tough choices and trade-offs and our framework explains three means of action with respect to CSR. The main objective of the chapter is not to offer a pure theoretical treatment, but rather to discuss a sensible approach to CSR and strategy, and to highlight what the use of the framework might look like pragmatically.
To proceed, the chapter first offers an overview of our framework; we discuss the logic behind the framework, including theoretical and practical aspects. Next, three short cases are elaborated which expound the framework. The companies are Aveda, Herman Miller and Toyota. Lastly, implications and conclusions are offered.
Linking CSR and strategy: an action-based framework
Our research suggests that many firms appear to be struggling with how to create a dynamic linkbetween CSR and strategy. This struggle is exacerbated by the fact that many firms seem to equate CSR with 'cheque-book' philanthropy codes of ethics or public relations efforts, which are too far removed from strategy (Davis 2005). To move beyond such approaches and to view CSR strategically, firms should consider five key aspects: (1) the social issues perspective; (2) strategic issues; (3) industry context; (4) issues prioritisation; and (5) strategic actions (Figure 1.1).
The five aspects are rooted in social issues management (Mahon and Waddock 1992; Lamertz et al. 2003), industrial organisation economics (Bain 1959; Porter 1981), stakeholder theory (Clarkson 1995; Mitchell et al. 1997) and the strategy literature (Ansoff 1980; Porter 1980, 1996). Although there are many potential aspects that could be important to linking CSR and strategy, we make the argument that the five aspects outlined above are most critical.
First, although CSR has been elevated to one of the most widely accepted concepts in business in the last 20 years, multiple definitions and theoretical treatments create confusion regarding precise meaning (Min-Dong 2008). In simplest terms, we believe that CSR is best defined as actions designed to improve social conditions (Wood and Jones 1995; Waddock and Bodwell 2004; Aguilera et al. 2007). What this definition suggests is that, if firms are going to demonstrate CSR through a given set of actions, they need to understand what social 'conditions' need to be improved. Understanding social conditions is perhaps best framed within the
FIGURE 1.1 Proposed framework
'social issues' perspective (Mahon and Waddock 1992; Lamertz et al. 2003). More specifically, a social issue is one deemed problematic to society through the actions of stakeholders capable of influencing governmental or corporate response and policy (Mahon and Waddock 1992). Many social issues exist: IIIV/AIDS, climate change, human rights, terrorism, pollution, obesity, information privacy and so on. However, not all social issues are important to a given firm and, thus, firms need to consider which ones are strategic.
Understanding social issues in light of the strategic issue concept is important. Ansoff (1980: 133) suggests that 'a strategic issue is a forthcoming development, either inside, or outside the organisation, which is likely to have an important impact on the ability of the enterprise to meet its objectives'. What Ansoff suggests is that, while firms might face a variety of issues (including those that are social), only certain ones could be considered significant enough to have an impact on the ability to fulfil corporate objectives. For example, a local symphony orchestra that is under threat of closure because of a lack of funding is not likely to be a social issue that is going to have a major impact on the ability of a given firm to compete effectively. On the other hand, when consumers begin buying a green alternative laundry detergent from a rival because of a growing social issue such as concern for the environment, then a leading firm that does not address environmental quality in its products could be under threat of losing market share and failing to meet its growth objectives. This example raises another closely related factor in our framework: namely, industry context.
Industrial organisation economists and strategy scholars alike argue that industry context is one of the most important considerations for strategy development and for understanding the determinants of firm performance (e.g. Bain 1959; Porter 1980, 1981). Industry sector, for example, comprises many structural characteristics such as intensity of competition and number of competitors, capital requirements, access to distribution channels and the degree to which suppliers or buyers have bargaining power, among others. By taking an issues perspective in relation to strategy, we argue that the importance of some social issues is greater than others in a given industry. For example, in the apparel industry, safe working conditions and fair pay are key social issues. Mining firms must address air and water pollution. Alternatively, producers and retailers in the food industry face intense pressure over the obesity issue. Given industry context and the fact that some issues are more pressing than others, managers should first understand the 'hot button' social issues that are specific to their industry of operation. This requires the ability to understand stakeholder demands and pressures (Clarkson 1995; Mitchell et al. 1997), and to identify which social issues stakeholders view as most critical.
While addressing all known social issues might be a noble goal, strategy is about tough choices and trade-offs (Porter 1996). To address CSR in the context of strategy, firms must prioritise social issues. To do so, we recommend the following approach. First, by studying industry context and asking questions related to stakeholder demands and pressures, several social issues will be identified. These (potentially many) issues can be assessed by placing them within a prioritisation matrix (Figure 1.2). One dimension of this matrix looks at stakeholder salience: the degree to which stakeholders demonstrate power, legitimacy and urgency (Mitchell et al. 1997). Stakeholders have power when they hold a firm responsible for a given social issue and can organise and take action if it is not addressed. They have legitimacy if they have a claim on the firm, such as a legal or contractual obligation, a moral right or an at-risk status.
FIGURE 1.2 Representative prioritisation matrix
Stakeholder urgency refers to the degree to which a stakeholder claim requires immediate attention. Because stakeholder demands can often be varied and conflicting, firms can have trouble identifying the range of relevant social issues they must address. Examining stakeholder salience is a good means to develop sense-making.
The other dimension looks at the degree to which the issue is expected to affect the firm's ability to meet its objectives. That is, in light of stakeholder salience, if a firm does not address a given issue, will its ability to meet corporate objectives be constrained? Studying the impact of social issues on the firm, within industry context and via stakeholder salience, enables issues to be placed into low, medium and high priority (Figure 1.2). The result helps firms to better prioritise those social issues that are strategic, versus those that are non-strategic. Evidence suggests that this type of assessment is critical. For example, Hillman and Keim (2001) found that firms who addressed social issues that were not related to their core strategy were punished financially. Thus, to respond to stakeholder demands for social responsibility and to allocate resources, social issues must be prioritised. After prioritisation, firms can develop their strategic agenda. Specifically, firms need to consider the types of strategic action that need to be taken.
According to one scholar (Galbreath, in press), there are three types of action that firms can take to address CSR strategically: (1) market-based; (2) regulatory or standards-based; and (3) operational-based. Market-based actions include those that are market-driven. Market-based can include actions such as entering a new market or market segment that directly addresses a social issue, introducing new products that are oriented towards social responsibility, or redesigning existing products to offer features or characteristics that address a social issue. For example, McDonald's initially approached the rising concern over obesity (a social issue) mainly by defending its menu as nutritious through PR campaigns—a risk management approach. Now, McDonald's approaches obesity as an opportunity for developing and selling new products, including salads and other types of fresh, healthy food.
Second, governments can require firms to address social issues by enacting laws and regulatory frameworks. In the 1960s, for example, the rights of workers in the US was an unmet social need before it became a social issue, eventually enforced through labour laws (Dobbin and Sutton 1998). On the other hand, in the absence of regulatory mandates, a firm such as Whole Foods Market voluntarily created its own set of standards to meet specifications for certification of organically grown foods—standards that were eventually incorporated by the United States Department of Agriculture (USDA) in 2002 (Greene and Kremen 2003). Therefore, regulatory or standards-based actions include those that bolster reputation, mitigate risk or otherwise give the firm some level of advantage.
Third, according to Porter (1996), operational excellence is necessary for competitive strategy. Operational effectiveness largely refers to the degree to which a firm demonstrates exemplary performance in the way it conducts business. Perhaps the best way to determine operational-based actions is to examine the value chain. Exploring the value chain is a common approach to understanding the activities that firms carry out in day-to-day business. The value chain consists of activities such as finance and accounting, research and development, human resources management, procurement, production, logistics, sales and service. According to Porter and Kramer (2006), virtually all value chain activities can be viewed in light of issues related to social responsibility (Figure 1.3). Thus, operational-based
FIGURE 1.3 Value chain and issues related to social responsibility Source: Porter and Kramer 2006
actions include those that enable the firm to capture or internalise the benefits of operational activities specifically related to a given social issue. For example, food retailers, particularly large retailers, consume considerable amounts of energy and produce significant carbon emissions in the construction of new facilities and in ongoing operations (Royal Institute of Chartered Surveyors 2005), which is directly related to a social issue such as climate change. Whole Foods Market, in its new store construction, addresses many environmental issues by reducing the amount of virgin material used and the toxic waste produced (Porter and Kramer 2006). Construction material includes recycled steel, biodegradable linoleum and tiles made from recycled glass bottles.
In sum, three forms of action are proposed to explore CSR strategy options: (1) market-based; (2) regulatory/standards-based; and (3) operational-based. The reality is there is no consensus, either theoretical or empirical, that implies that one type of action is more important than others or results in higher value benefits to the firm—or society. Research simply does not exist at this point to empirically verify how firms should prioritise their actions, nor what an optimal mix of actions looks like. Practically, firms can probably address all three strategic actions in order to proactively address CSR. However, in certain contexts, in certain industries and under certain conditions, one form of action may be more of a priority than others for a firm at any given point in time. The skill of the strategist, therefore, is required to prioritise response.
Applying the framework: case studies
So far, this chapter has described a framework that can be used to more tightly link CSR with strategy. In this section, we develop three mini case studies to examine how the framework might be applied pragmatically. Three companies are explored: Aveda, Herman Miller and Toyota. These three companies were chosen after reviewing several sources (e.g. 'scorecard CSR lists' such as those produced by the Coalition for Environmentally Responsible Economies and the Dow Jones Sustainability Index; companies listed in the Global Reporting Initiative on sustainability reporting) to identify exemplar and innovative firms—firms that demonstrate social responsibility to their stakeholders. Further, we believe these firms offer a good mix of diversity in terms of industry and products and the social issues they face, making them ideal for comparative purposes. Data were primarily collected through annual reports and supplemental reports (e.g. CSR reports), corporate websites and other published information generated outside the organisations but dealing directly with ...
