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HBR S
POTLIGHT
Strategy & Society
The Link Between Competitive Advantage and Corporate Social Responsibility
by Michael E. Porter and Mark R. Kramer
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The Idea in Brief—the core idea The Idea in Practice—putting the idea to work
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Article Summary
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Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility
A list of related materials, with annotations to guide further exploration of the article’s ideas and applications
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Further Reading
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H B R S
P O T L I G H T
Strategy & Society
The Link Between Competitive Advantage and Corporate Social Responsibility
page 1
The Idea in Brief The Idea in Practice
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Many firms’ corporate social responsibility (CSR) efforts are counterproductive, for two reasons: They pit business against so- ciety, when the two are actually interde- pendent. And they pressure companies to think of CSR in generic ways, instead of crafting social initiatives appropriate to their individual strategies.
CSR can be much more than just a cost, constraint, or charitable deed. Approached strategically, it generates opportunity, in- novation, and competitive advantage for corporations—while solving pressing so- cial problems.
How to practice strategic CSR? Porter and Kramer advise pioneering innovations in your offerings and operations that create distinctive value for your company
and
so- ciety. Take Toyota. The company’s early re- sponse to public concern about auto emis- sions gave rise to the hybrid-engine Prius. The Prius has not only significantly reduced pollutants; it’s given Toyota an enviable lead over rivals in hybrid technology.
To practice strategic CSR:
1. Identify points of intersection between your company and society.
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In what ways does your organization affect society? For example, do you provide safe working conditions and reasonable wages? Do your operations create envi- ronmental hazards?
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How does society affect your competitive- ness? For instance, do countries where you operate protect intellectual property? Sup- ply enough talented workers? Encourage outside investors?
2. Select social issues to address.
Given your company’s and society’s impact on each other, how might you address social needs in ways that create shared value—a meaningful benefit for society that also adds to your com- pany’s bottom line?
Example:
By addressing the AIDS pandemic in Africa, a mining company such as Anglo American would not only improve the standard of liv- 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.
With the trucks went veterinarians, nutri- tionists, agronomists, and quality assurance experts. Farmers learned that milk quality hinged on adequate feed crop irrigation. With financing and technical assistance from Nestlé, farmers dug deep-bore wells. The consequent improved irrigation re- duced calves’ death rate 75%, increased milk production 50-fold, and allowed Nestlé to pay higher prices to farmers than those set by the government.
With steady revenues, farmers could now obtain credit. Moga’s standard of living im- proved: More homes had electricity and telephones; more towns established pri- mary, secondary, and high schools; and Moga had five times the number of doc- tors as neighboring regions. Meanwhile, Nestlé gained a stable supply of high- quality commodities—without having to pay middlemen—and saw demand for its products increase in India.
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HBR S
POTLIGHT
Strategy & Society
The Link Between Competitive Advantage and Corporate Social Responsibility
by Michael E. Porter and Mark R. Kramer
harvard business review • december 2006 page 2
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Governments, activists, and the media have become adept at holding companies to ac- count for the social consequences of their ac- tivities. Myriad organizations rank companies on the performance of their corporate social responsibility (CSR), and, despite sometimes questionable methodologies, these rankings attract considerable publicity. As a result, CSR has emerged as an inescapable priority for business leaders in every country.
Many companies have already done much to improve the social and environmental con- sequences of their activities, yet these efforts have not been nearly as productive as they could be—for two reasons. First, they pit busi- ness against society, when clearly the two are interdependent. Second, they pressure compa- nies to think of corporate social responsibility in generic ways instead of in the way most ap- propriate to each firm’s strategy.
The fact is, the prevailing approaches to CSR are so fragmented and so disconnected from business and strategy as to obscure many of the greatest opportunities for companies to benefit
society. If, instead, corporations were to analyze their prospects for social responsibility using the same frameworks that guide their core business choices, they would discover that CSR can be much more than a cost, a constraint, or a chari- table deed—it can be a source of opportunity, innovation, and competitive advantage.
In this article, we propose a new way to look at the relationship between business and soci- ety that does not treat corporate success and social welfare as a zero-sum game. We intro- duce a framework companies can use to iden- tify all of the effects, both positive and negative, they have on society; determine which ones to address; and suggest effective ways to do so. When looked at strategically, corporate social responsibility can become a source of tremen- dous social progress, as the business applies its considerable resources, expertise, and insights to activities that benefit society.
The Emergence of Corporate Social Responsibility
Heightened corporate attention to CSR has
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Strategy & Society
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POTLIGHT
harvard business review • december 2006 page 3
not been entirely voluntary. Many companies awoke to it only after being surprised by pub- lic responses to issues they had not previously thought were part of their business responsi- bilities. Nike, for example, faced an extensive consumer boycott after the
New York Times
and other media outlets reported abusive labor practices at some of its Indonesian suppliers in the early 1990s. Shell Oil’s decision to sink the
Brent Spar,
an obsolete oil rig, in the North Sea led to Greenpeace protests in 1995 and to in- ternational headlines. Pharmaceutical compa- nies discovered that they were expected to re- spond to the AIDS pandemic in Africa even though it was far removed from their primary product lines and markets. Fast-food and pack- aged food companies are now being held re- sponsible for obesity and poor nutrition.
Activist organizations of all kinds, both on the right and the left, have grown much more aggressive and effective in bringing public pres- sure to bear on corporations. Activists may target the most visible or successful companies merely to draw attention to an issue, even if those corporations actually have had little im- pact on the problem at hand. Nestlé, for ex- ample, the world’s largest purveyor of bottled water, has become a major target in the glo- bal debate about access to fresh water, despite the fact that Nestlé’s bottled water sales con- sume just 0.0008% of the world’s fresh water supply. The inefficiency of agricultural irriga- tion, which uses 70% of the world’s supply annually, is a far more pressing issue, but it offers no equally convenient multinational corporation to target.
Debates about CSR have moved all the way into corporate boardrooms. In 2005, 360 dif- ferent CSR-related shareholder resolutions were filed on issues ranging from labor condi- tions to global warming. Government regula- tion increasingly mandates social responsi- bility reporting. Pending legislation in the UK, for example, would require every publicly listed company to disclose ethical, social, and environmental risks in its annual report. These pressures clearly demonstrate the ex- tent to which external stakeholders are seek- ing to hold companies accountable for social issues and highlight the potentially large fi- nancial risks for any firm whose conduct is deemed unacceptable.
While businesses have awakened to these risks, they are much less clear on what to do
about them. In fact, the most common corpo- rate response has been neither strategic nor operational but cosmetic: public relations and media campaigns, the centerpieces of which are often glossy CSR reports that showcase companies’ social and environmental good deeds. Of the 250 largest multinational corpo- rations, 64% published CSR reports in 2005, ei- ther within their annual report or, for most, in separate sustainability reports—supporting a new cottage industry of report writers.
Such publications rarely offer a coherent framework for CSR activities, let alone a strate- gic one. Instead, they aggregate anecdotes about uncoordinated initiatives to demonstrate a com- pany’s social sensitivity. What these reports leave out is often as telling as what they in- clude. Reductions in pollution, waste, carbon emissions, or energy use, for example, may be documented for specific divisions or regions but not for the company as a whole. Philan- thropic initiatives are typically described in terms of dollars or volunteer hours spent but almost never in terms of impact. Forward-looking commitments to reach explicit performance targets are even rarer.
This proliferation of CSR reports has been paralleled by growth in CSR ratings and rank- ings. While rigorous and reliable ratings might constructively influence corporate behavior, the existing cacophony of self-appointed score- keepers does little more than add to the confu- sion. (See the sidebar “The Ratings Game.”)
In an effort to move beyond this confusion, corporate leaders have turned for advice to a growing collection of increasingly sophisti- cated nonprofit organizations, consulting firms, and academic experts. A rich literature on CSR has emerged, though what practical guidance it offers corporate leaders is often unclear. Ex- amining the primary schools of thought about CSR is an essential starting point in under- standing why a new approach is needed to in- tegrating social considerations more effectively into core business operations and strategy.
Four Prevailing Justifications for CSR
Broadly speaking, proponents of CSR have used four arguments to make their case: moral obligation, sustainability, license to operate, and reputation. The moral appeal—arguing that companies have a duty to be good citizens and to “do the right thing”—is prominent in
Michael E. Porter
is the Bishop William Lawrence University Professor at Har- vard University; he is based at Harvard Business School in Boston. He is a fre- quent contributor to HBR, and his most recent article is “Seven Surprises for New CEOs” (October 2004).
Mark R. Kramer
([email protected]) is the managing director of FSG Social Impact Advisors, an international nonprofit con- sulting firm, and a senior fellow in the CSR Initiative at Harvard’s John F. Kennedy School of Government in Cambridge, Massachusetts. Porter and Kramer are the cofounders of both FSG Social Impact Advisors and the Center for Effective Philanthropy, a nonprofit re- search organization.
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harvard business review • december 2006 page 4
the goal of Business for Social Responsibility, the leading nonprofit CSR business associa- tion in the United States. It asks that its mem- bers “achieve commercial success in ways that honor ethical values and respect people, com- munities, and the natural environment.” Sus- tainability emphasizes environmental and community stewardship. An excellent defini- tion was developed in the 1980s by Norwegian Prime Minister Gro Harlem Brundtland and used by the World Business Council for Sus- tainable Development: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.” The notion of license to operate de- rives from the fact that every company needs tacit or explicit permission from governments, communities, and numerous other stakehold- ers to do business. Finally, reputation is used by many companies to justify CSR initiatives on the grounds that they will improve a com-
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 make. Consider the practical limitations of each approach.
The CSR field remains strongly imbued with a moral imperative. In some areas, such as hon- esty in filing financial statements and operat- ing within the law, moral considerations are easy to understand and apply. It is the nature of moral obligations to be absolute mandates, however, while most corporate social choices involve balancing competing values, interests, and costs. Google’s recent entry into China, for example, has created an irreconcilable conflict between its U.S. customers’ abhorrence of cen- sorship and the legal constraints imposed by the Chinese government. The moral calculus needed to weigh one social benefit against an- other, or against its financial costs, has yet to be developed. Moral principles do not tell a pharmaceutical company how to allocate its revenues among subsidizing care for the indi- gent today, developing cures for the future, and providing dividends to its investors.
The principle of sustainability appeals to en- lightened self-interest, often invoking the so- called triple bottom line of economic, social, and environmental performance. In other words, companies should operate in ways that secure long-term economic performance by avoiding short-term behavior that is socially detrimental or environmentally wasteful. The principle works best for issues that coincide with a company’s economic or regulatory in- terests. DuPont, for example, has saved over $2 billion from reductions in energy use since 1990. Changes to the materials McDonald’s uses to wrap its food have reduced its solid waste by 30%. These were smart business deci- sions entirely apart from their environmental benefits. In other areas, however, the notion of sustainability can become so vague as to be meaningless. Transparency may be said to be more “sustainable” than corruption. Good em- ployment practices are more “sustainable” than sweatshops. Philanthropy may contribute to the “sustainability” of a society. However true these assertions are, they offer little basis for balancing long-term objectives against the short-term costs they incur. The sustainability school raises questions about these trade-offs
The Ratings Game
Measuring and publicizing social perfor- mance is a potentially powerful way to influence corporate behavior—assuming that the ratings are consistently mea- sured and accurately reflect corporate social impact. Unfortunately, neither condition holds true in the current pro- fusion of CSR checklists.
The criteria used in the rankings vary widely. The Dow Jones Sustainability Index, for example, includes aspects of economic performance in its evalua- tion. It weights customer service al- most 50% more heavily than corporate citizenship. The equally prominent FTSE4Good Index, by contrast, contains no measures of economic performance or customer service at all. Even when criteria happen to be the same, they are invariably weighted differently in the final scoring.
Beyond the choice of criteria and their weightings lies the even more perplexing question of how to judge whether the cri- teria have been met. Most media, non- profits, and investment advisory organi- zations have too few resources to audit a universe of complicated global corporate
activities. As a result, they tend to use measures for which data are readily and inexpensively available, even though they may not be good proxies for the social or environmental effects they are intended to reflect. The Dow Jones Sustainability Index, for example, uses the size of a com- pany’s board as a measure of community involvement, even though size and in- volvement may be entirely unrelated.
1
Finally, even if the measures chosen accurately reflect social impact, the data are frequently unreliable. Most ratings rely on surveys whose response rates are statistically insignificant, as well as on self-reported company data that have not been verified externally. Companies with the most to hide are the least likely to re- spond. The result is a jumble of largely meaningless rankings, allowing almost any company to boast that it meets some measure of social responsibility—and most do.
1. For a fuller discussion of the problem of CSR ratings, see Aaron Chatterji and David Levine, “Breaking Down the Wall of Codes: Evaluating Non-Financial Performance Measurement,”
Cali- fornia Management Review,
Winter 2006.
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harvard business review • december 2006 page 5
Mapping Social Opportunities
The interdependence of a company and society can be analyzed with the same tools used to analyze competitive posi- tion and develop strategy. In this way, the firm can focus its particular CSR ac- tivities to best effect. Rather than merely acting on well-intentioned impulses or reacting to outside pressure, the organi- zation can set an affirmative CSR agenda that produces maximum social benefit as well as gains for the business.
These two tools should be used in dif- ferent ways. When a company uses the value chain to chart all the social conse- quences of its activities, it has, in effect, created an inventory of problems and
opportunities—mostly operational issues—that need to be investigated, prioritized, and addressed. In general, companies should attempt to clear away as many negative value-chain social im- pacts as possible. Some company activi- ties will prove to offer opportunities for social and strategic distinction.
In addressing competitive context, companies cannot take on every area in the diamond. Therefore, the task is to identify those areas of social context with the greatest strategic value. A company should carefully choose from this menu one or a few social initia- tives that will have the greatest shared
value: benefit for both society and its own competitiveness.
Looking Inside Out: Mapping the Social Impact of the Value Chain
The
value chain
depicts all the activities a company engages in while doing business. It can be used as a frame- work to identify the positive and nega- tive social impact of those activities. These “inside-out” linkages may range from hiring and layoff policies to greenhouse gas emissions, as the par- tial list of examples illustrated here demonstrates.
Inbound Logistics
(e.g., incoming material
storage, data, collection, service,
customer access)
Operations (e.g.,
assembly, component fabrication,
branch operations)
Outbound Logistics (e.g., order processing,
warehousing, report
preparation)
Marketing & Sales
(e.g., sales force,
promotion, advertising,
proposal writing, Web
site)
After-Sales Service
(e.g., installation, customer support,
complaint resolution, repair)
S up
po rt
A ct
iv it
ie s
Pr im
ar y
A ct
iv it
ie s
Firm Infrastructure (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)
• Relationships with universities
• Ethical research practices (e.g., animal testing, GMOs)
• Product safety
• Conservation of raw materials
• Recycling
• Procurement & supply chain practices (e.g., bribery, child labor, conflict diamonds, pricing to farmers)
• Uses of particular inputs (e.g., animal fur)
• Utilization of natural resources
• Transportation impacts (e.g., emissions, con- gestion, logging roads)
• Emissions & waste
• Biodiversity & ecological impacts
• Energy & water usage
• Worker safety & labor relations
• Hazardous materials
• Packaging use and disposal (McDonald’s clamshell)
• Transportation impacts
• Marketing & advertising (e.g., truthful advertising, advertising to children)
• Pricing practices (e.g., price discrimination among customers, anticompetitive pricing practices, pricing policy to the poor)
• Consumer information
• Privacy
• Financial reporting practices
• Government practices
• Transparency
• Use of lobbying
• Education & job training
• Safe working conditions
• Diversity & discrimination
• Health care & other benefits
• Compensation policies
• Layoff policies
• Disposal of obsolete products
• Handling of consumables (e.g., motor oil, printing ink)
• Customer privacy
Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1985
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harvard business review • december 2006 page 6
without offering a framework to answer them. Managers without a strategic understanding of CSR are prone to postpone these costs, which can lead to far greater costs when the company is later judged to have violated its social obligation.
The license-to-operate approach, by con- trast, is far more pragmatic. It offers a concrete way for a business to identify social issues that matter to its stakeholders and make decisions about them. This approach also fosters con- structive dialogue with regulators, the local cit- izenry, and activists—one reason, perhaps, that it is especially prevalent among compa- nies that depend on government consent, such
as those in mining and other highly regulated and extractive industries. That is also why the approach is common at companies that rely on the forbearance of their neighbors, such as those, like chemical manufacturing, whose op- erations are noxious or environmentally haz- ardous. By seeking to satisfy stakeholders, how- ever, companies cede primary control of their CSR agendas to outsiders. Stakeholders’ views are obviously important, but these groups can never fully understand a corporation’s capabili- ties, competitive positioning, or the trade-offs it must make. Nor does the vehemence of a stakeholder group necessarily signify the im- portance of an issue—either to the company
Looking Outside In: Social Influences on Competitiveness
In addition to understanding the social ram- ifications of the value chain, effective CSR requires an understanding of the social di-
mensions of the company’s competitive context—the “outside-in” linkages that af- fect its ability to improve productivity and execute strategy. These can be understood using the
diamond framework,
which shows
how the conditions at a company’s locations (such as transportation infrastructure and honestly enforced regulatory policy) affect its ability to compete.
Context for Firm Strategy
and Rivalry The rules and incentives that
govern competition
Local Demand Conditions The nature and
sophistication of local customer
needs
Related and Supporting Industries
The local availability of supporting
industries
• Fair and open local competition (e.g., the absence of trade barriers, fair regulations)
• Intellectual property protection
• Transparency (e.g., financial report- ing, corruption: Extractive Industries Transparency Initiative)
• Rule of law (e.g., security, protection of property, legal system)
• Meritocratic incentive systems (e.g., antidiscrimination)
• Availability of human resources (Marriott’s job training)
• Access to research institutions and universities (Microsoft’s Working Connections)
• Efficient physical infrastructure
• Efficient administrative infrastructure
• Availability of scientific and technological infrastructure (Nestlé’s knowledge transfer to milk farmers)
• Sustainable natural resources (GrupoNueva’s water conservation)
• Efficient access to capital
• Availability of local suppliers (Sysco’s locally grown produce; Nestlé’s milk collection dairies)
• Access to firms in related fields
• Presence of clusters instead of isolated industries
• Sophistication of local demand (e.g. appeal of social value propositions: Whole Foods’ customers)
• Demanding regulatory standards (California auto emissions & mileage standards)
• Unusual local needs that can be served nationally and globally (Urbi’s housing financing, Unilever’s “bottom of the pyramid” strategy)
Factor (Input) Conditions
Presence of high- quality, specialized
inputs available to firms
Source: Michael E. Porter, The Competitive Advantage of Nations, 1990
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harvard business review • december 2006 page 7
or to the world. A firm that views CSR as a way to placate pressure groups often finds that its approach devolves into a series of short-term defensive reactions—a never-ending public re- lations palliative with minimal value to society and no strategic benefit for the business.
Finally, the reputation argument seeks that strategic benefit but rarely finds it. Concerns about reputation, like license to operate, focus on satisfying external audiences. In consumer- oriented companies, it often leads to high- profile cause-related marketing campaigns. In stigmatized industries, such as chemicals and energy, a company may instead pursue social responsibility initiatives as a form of insurance, in the hope that its reputation for social con- sciousness will temper public criticism in the event of a crisis. This rationale once again risks confusing public relations with social and busi- ness results.
A few corporations, such as Ben & Jerry’s, Newman’s Own, Patagonia, and the Body Shop, have distinguished themselves through an extraordinary long-term commitment to so- cial responsibility. But even for these compa- nies, the social impact achieved, much less the business benefit, is hard to determine. Studies of the effect of a company’s social reputation on consumer purchasing preferences or on stock market performance have been inconclu- sive at best. As for the concept of CSR as insur- ance, the connection between the good deeds and consumer attitudes is so indirect as to be impossible to measure. Having no way to quantify the benefits of these investments puts such CSR programs on shaky ground, liable to be dislodged by a change of management or a swing in the business cycle.
All four schools of thought share the same weakness: They focus on the tension between business and society rather than on their inter- dependence. Each creates a generic rationale that is not tied to the strategy and operations of any specific company or the places in which it operates. Consequently, none of them is suf- ficient to help a company identify, prioritize, and address the social issues that matter most or the ones on which it can make the biggest impact. The result is oftentimes a hodgepodge of uncoordinated CSR and philanthropic activ- ities disconnected from the company’s strategy that neither make any meaningful social im- pact nor strengthen the firm’s long-term com- petitiveness. Internally, CSR practices and initi-
atives are often isolated from operating units— and even separated from corporate philan- thropy. Externally, the company’s social impact becomes diffused among numerous unrelated efforts, each responding to a different stake- holder group or corporate pressure point.
The consequence of this fragmentation is a tremendous lost opportunity. The power of corporations to create social benefit is dissi- pated, and so is the potential of companies to take actions that would support both their communities and their business goals.
Integrating Business and Society
To advance CSR, we must root it in a broad understanding of the interrelationship be- tween a corporation and society while at the same time anchoring it in the strategies and activities of specific companies. To say broadly that business and society need each other might seem like a cliché, but it is also the basic truth that will pull companies out of the mud- dle that their current corporate-responsibility thinking has created.
Successful corporations need a healthy soci- ety. Education, health care, and equal opportu- nity are essential to a productive workforce. Safe products and working conditions not only attract customers but lower the internal costs of accidents. Efficient utilization of land, water, energy, and other natural resources makes business more productive. Good government, the rule of law, and property rights are essen- tial for efficiency and innovation. Strong regu- latory standards protect both consumers and competitive companies from exploitation. Ulti- mately, a healthy society creates expanding de- mand for business, as more human needs are met and aspirations grow. Any business that pursues its ends at the expense of the society in which it operates will find its success to be illu- sory and ultimately temporary.
At the same time, a healthy society needs suc- cessful companies. No social program can rival the business sector when it comes to creating the jobs, wealth, and innovation that improve stan- dards of living and social conditions over time. If governments, NGOs, and other participants in civil society weaken the ability of business to operate productively, they may win battles but will lose the war, as corporate and regional competitiveness fade, wages stagnate, jobs dis- appear, and the wealth that pays taxes and sup- ports nonprofit contributions evaporates.
The prevailing approaches to CSR are so disconnected from business as to obscure many of the greatest opportunities for companies to benefit society.
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harvard business review • december 2006 page 8
Leaders in both business and civil society have focused too much on the friction be- tween them and not enough on the points of intersection. The mutual dependence of cor- porations and society implies that both busi- ness decisions and social policies must follow the principle of
shared value
. That is, choices must benefit both sides. If either a business or a society pursues policies that benefit its in- terests at the expense of the other, it will find itself on a dangerous path. A temporary gain to one will undermine the long-term prosper- ity of both.
1
To put these broad principles into practice, a company must integrate a social perspective into the core frameworks it already uses to understand competition and guide its busi- ness strategy.
Identifying the points of intersection.
The interdependence between a company and society takes two forms. First, a company im- pinges upon society through its operations in the normal course of business: These are
inside-out linkages
. Virtually every activity in a company’s value
chain touches on the communities in which the firm operates, creating either positive or negative social consequences. (For an example of this process, see the exhibit “Looking Inside Out: Mapping the Social Impact of the Value Chain.”) While companies are increasingly aware of the social impact of their activities (such as hiring practices, emissions, and waste disposal), these impacts can be more subtle and variable than many managers realize. For one thing, they depend on location. The same manufacturing operation will have very differ-
ent social consequences in China than in the United States.
A company’s impact on society also changes over time, as social standards evolve and sci- ence progresses. Asbestos, now understood as a serious health risk, was thought to be safe in the early 1900s, given the scientific knowledge then available. Evidence of its risks gradually mounted for more than 50 years before any company was held liable for the harms it can cause. Many firms that failed to anticipate the consequences of this evolving body of research have been bankrupted by the results. No longer can companies be content to monitor only the obvious social impacts of today. With- out a careful process for identifying evolving social effects of tomorrow, firms may risk their very survival.
Not only does corporate activity affect soci- ety, but external social conditions also influ- ence corporations, for better and for worse. These are
outside-in linkages
. Every company operates within a competi-
tive context, which significantly affects its ability to carry out its strategy, especially in the long run. Social conditions form a key part of this context. Competitive context garners far less attention than value chain impacts but can have far greater strategic importance for both companies and societies. Ensuring the health of the competitive context benefits both the company and the community.
Competitive context can be divided into four broad areas: first, the quantity and quality of available business inputs—human resources, for example, or transportation infrastructure; second, the rules and incentives that govern
Prioritizing Social Issues
Social Dimensions of Competitive Context Social issues in the external environment that significantly affect the underlying drivers of a company’s competitiveness in the locations where it operates.
Value Chain Social Impacts
Social issues that are significantly affected by a company’s activities in the ordinary course of business.
Generic Social Issues
Social issues that are not significantly affected by a company’s operations nor materially affect its long-term competitiveness.
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competition—such as policies that protect in- tellectual property, ensure transparency, safe- guard against corruption, and encourage in- vestment; third, the size and sophistication of local demand, influenced by such things as standards for product quality and safety, con- sumer rights, and fairness in government pur- chasing; fourth, the local availability of sup- porting industries, such as service providers and machinery producers. Any and all of these aspects of context can be opportunities for CSR initiatives. (See the exhibit “Looking Out- side In: Social Influences on Competitiveness.”) The ability to recruit appropriate human re- sources, for example, may depend on a num- ber of social factors that companies can influ- ence, such as the local educational system, the availability of housing, the existence of dis- crimination (which limits the pool of work- ers), and the adequacy of the public health infrastructure.
2
Choosing which social issues to address.
No business can solve all of society’s problems or bear the cost of doing so. Instead, each com- pany must select issues that intersect with its particular business. Other social agendas are best left to those companies in other indus- tries, NGOs, or government institutions that are better positioned to address them. The es- sential test that should guide CSR is not whether a cause is worthy but whether it pre- sents an opportunity to create shared value— that is, a meaningful benefit for society that is also valuable to the business.
Our framework suggests that the social is- sues affecting a company fall into three catego- ries, which distinguish between the many worthy causes and the narrower set of social issues that are both important and strategic for the business.
Generic social issues
may be important to so- ciety but are neither significantly affected by the company’s operations nor influence the company’s long-term competitiveness.
Value chain social impacts
are those that are signifi- cantly affected by the company’s activities in the ordinary course of business.
Social dimen- sions of competitive context
are factors in the ex- ternal environment that significantly affect the underlying drivers of competitiveness in those places where the company operates. (See the exhibit “Prioritizing Social Issues.”)
Every company will need to sort social issues into these three categories for each of its busi- ness units and primary locations, then rank them in terms of potential impact. Into which category a given social issue falls will vary from business unit to business unit, industry to in- dustry, and place to place.
Supporting a dance company may be a ge- neric social issue for a utility like Southern California Edison but an important part of the competitive context for a corporation like American Express, which depends on the high-end entertainment, hospitality, and tour- ism cluster. Carbon emissions may be a ge- neric social issue for a financial services firm like Bank of America, a negative value chain
Generic Social Impacts
Corporate Involvement in Society: A Strategic Approach
Value Chain Social Impacts
Good citizenship Mitigate harm from value chain activities
Social Dimensions of Competitive Context
Strategic philanthropy that leverages capa- bilities to improve salient areas of competitive context
Transform value- chain activities to benefit society while reinforcing strategy
Strategic CSR
Responsive CSR
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impact for a transportation-based company like UPS, or both a value chain impact and a competitive context issue for a car manufac- turer like Toyota. The AIDS pandemic in Af- rica may be a generic social issue for a U.S. re- tailer like Home Depot, a value chain impact for a pharmaceutical company like Glaxo- SmithKline, and a competitive context issue for a mining company like Anglo American that depends on local labor in Africa for its operations.
Even issues that apply widely in the econ- omy, such as diversity in hiring or conserva- tion of energy, can have greater significance for some industries than for others. Health care benefits, for example, will present fewer challenges for software development or bio- technology firms, where workforces tend to be small and well compensated, than for companies in a field like retailing, which is heavily dependent on large numbers of lower- wage workers.
Within an industry, a given social issue may cut differently for different companies, owing to differences in competitive positioning. In the auto industry, for example, Volvo has cho- sen to make safety a central element of its com- petitive positioning, while Toyota has built a competitive advantage from the environmen- tal benefits of its hybrid technology. For an individual company, some issues will prove to be important for many of its business units and locations, offering opportunities for strate- gic corporatewide CSR initiatives.
Where a social issue is salient for many companies across multiple industries, it can often be addressed most effectively through cooperative models. The Extractive Industries Transparency Initiative, for example, includes 19 major oil, gas, and mining companies that have agreed to discourage corruption through full public disclosure and verification of all corporate payments to governments in the countries in which they operate. Collective action by all major corporations in these in- dustries prevents corrupt governments from undermining social benefit by simply choos- ing not to deal with the firms that disclose their payments.
Creating a corporate social agenda.
Categorizing and ranking social issues is just the means to an end, which is to create an ex- plicit and affirmative corporate social agenda. A corporate social agenda looks beyond com-
munity expectations to opportunities to achieve social and economic benefits simultaneously. It moves from mitigating harm to finding ways to reinforce corporate strategy by advancing social conditions.
Such a social agenda must be responsive to stakeholders, but it cannot stop there. A sub- stantial portion of corporate resources and at- tention must migrate to truly strategic CSR. (See the exhibit “Corporate Involvement in Society: A Strategic Approach.”) It is through strategic CSR that the company will make the most significant social impact and reap the greatest business benefits.
Responsive CSR.
Responsive CSR comprises two elements: acting as a good corporate citi- zen, attuned to the evolving social concerns of stakeholders, and mitigating existing or antici- pated adverse effects from business activities.
Good citizenship is a sine qua non of CSR, and companies need to do it well. Many wor- thy local organizations rely on corporate con- tributions, while employees derive justifiable pride from their company’s positive involve- ment in the community.
The best corporate citizenship initiatives in- volve far more than writing a check: They spec- ify clear, measurable goals and track results over time. A good example is GE’s program to adopt underperforming public high schools near several of its major U.S. facilities. The company contributes between $250,000 and $1 million over a five-year period to each school and makes in-kind donations as well. GE managers and employees take an active role by working with school administrators to assess needs and mentor or tutor students. In an independent study of ten schools in the program between 1989 and 1999, nearly all showed significant improvement, while the graduation rate in four of the five worst- performing schools doubled from an average of 30% to 60%.
Effective corporate citizenship initiatives such as this one create goodwill and improve relations with local governments and other im- portant constituencies. What’s more, GE’s em- ployees feel great pride in their participation. Their effect is inherently limited, however. No matter how beneficial the program is, it re- mains incidental to the company’s business, and the direct effect on GE’s recruiting and re- tention is modest.
The second part of responsive CSR—
The vehemence of a stakeholder group does not necessarily signify the importance of an issue— either to the company or to the world.
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mitigating the harm arising from a firm’s value chain activities—is essentially an operational challenge. Because there are a myriad of possi- ble value chain impacts for each business unit, many companies have adopted a checklist ap- proach to CSR, using standardized sets of so- cial and environmental risks. The Global Re- porting Initiative, which is rapidly becoming a standard for CSR reporting, has enumerated a list of 141 CSR issues, supplemented by auxil- iary lists for different industries.
These lists make for an excellent starting point, but companies need a more proactive and tailored internal process. Managers at each business unit can use the value chain as a tool to identify systematically the social im- pacts of the unit’s activities in each location. Here operating management, which is closest to the work actually being done, is particularly helpful. Most challenging is to anticipate im- pacts that are not yet well recognized. Con- sider B&Q, an international chain of home supply centers based in England. The company has begun to analyze systematically tens of thousands of products in its hundreds of stores against a list of a dozen social issues—from cli- mate change to working conditions at its sup- pliers’ factories—to determine which products pose potential social responsibility risks and how the company might take action before any external pressure is brought to bear.
For most value chain impacts, there is no need to reinvent the wheel. The company should identify best practices for dealing with each one, with an eye toward how those prac- tices are changing. Some companies will be more proactive and effective in mitigating the wide array of social problems that the value chain can create. These companies will gain an edge, but—just as for procurement and other operational improvements—any advantage is likely to be temporary.
Strategic CSR.
For any company, strategy must go beyond best practices. It is about choosing a unique position—doing things dif- ferently from competitors in a way that lowers costs or better serves a particular set of cus- tomer needs. These principles apply to a com- pany’s relationship to society as readily as to its relationship to its customers and rivals.
Strategic CSR moves beyond good corporate citizenship and mitigating harmful value chain impacts to mount a small number of initiatives whose social and business benefits are large
and distinctive. Strategic CSR involves both inside-out and outside-in dimensions working in tandem. It is here that the opportunities for shared value truly lie.
Many opportunities to pioneer innovations to benefit both society and a company’s own competitiveness can arise in the product offer- ing and the value chain. Toyota’s response to con- cerns over automobile emissions is an example. Toyota’s Prius, the hybrid electric/gasoline ve- hicle, is the first in a series of innovative car mod- els that have produced competitive advantage and environmental benefits. Hybrid engines emit as little as 10% of the harmful pollutants conventional vehicles produce while consum- ing only half as much gas. Voted 2004 Car of the Year by
Motor Trend
magazine, Prius has given Toyota a lead so substantial that Ford and other car companies are licensing the technol- ogy. Toyota has created a unique position with customers and is well on its way to establishing its technology as the world standard.
Urbi, a Mexican construction company, has prospered by building housing for disadvan- taged buyers using novel financing vehicles such as flexible mortgage payments made through payroll deductions. Crédit Agricole, France’s largest bank, has differentiated itself by offer- ing specialized financial products related to the environment, such as financing packages for energy-saving home improvements and for audits to certify farms as organic.
Strategic CSR also unlocks shared value by investing in social aspects of context that strengthen company competitiveness. A symbi- otic relationship develops: The success of the company and the success of the community be- come mutually reinforcing. Typically, the more closely tied a social issue is to the company’s business, the greater the opportunity to lever- age the firm’s resources and capabilities, and benefit society.
Microsoft’s Working Connections partner- ship with the American Association of Commu- nity Colleges (AACC) is a good example of a shared-value opportunity arising from invest- ments in context. The shortage of information technology workers is a significant constraint on Microsoft’s growth; currently, there are more than 450,000 unfilled IT positions in the United States alone. Community colleges, with an enrollment of 11.6 million students, repre- senting 45% of all U.S. undergraduates, could be a major solution. Microsoft recognizes, how-
An affirmative corporate social agenda moves from mitigating harm to reinforcing corporate strategy through social progress.
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ever, that community colleges face special chal- lenges: IT curricula are not standardized, tech- nology used in classrooms is often outdated, and there are no systematic professional devel- opment programs to keep faculty up to date.
Microsoft’s $50 million five-year initiative was aimed at all three problems. In addition to contributing money and products, Microsoft sent employee volunteers to colleges to assess needs, contribute to curriculum development, and create faculty development institutes. Note that in this case, volunteers and assigned staff were able to use their core professional skills to address a social need, a far cry from typical volunteer programs. Microsoft has achieved results that have benefited many communities while having a direct—and po- tentially significant—impact on the company.
Integrating inside-out and outside-in prac- tices.
Pioneering value chain innovations and
addressing social constraints to competitive- ness are each powerful tools for creating eco- nomic and social value. However, as our exam- ples illustrate, the impact is even greater if they work together. Activities in the value chain can be performed in ways that reinforce improvements in the social dimensions of con- text. At the same time, investments in compet- itive context have the potential to reduce con- straints on a company’s value chain activities. Marriott, for example, provides 180 hours of paid classroom and on-the-job training to chronically unemployed job candidates. The company has combined this with support for local community service organizations, which identify, screen, and refer the candidates to Marriott. The net result is both a major bene- fit to communities and a reduction in Marri- ott’s cost of recruiting entry-level employees. Ninety percent of those in the training pro-
Integrating Company Practice and Context: Nestlé’s Milk District
Nestlé’s approach to working with small farmers exemplifies the symbiotic relation- ship between social progress and competitive advantage. Ironically, while the company’s reputation remains marred by a 30-year-old controversy surrounding sales of infant for- mula in Africa, the corporation’s impact in developing countries has often been pro- foundly positive.
Consider the history of Nestlé’s milk busi- ness in India. In 1962, the company wanted to enter the Indian market, and it received gov- ernment permission to build a dairy in the northern district of Moga. Poverty in the re- gion was severe; people were without elec- tricity, transportation, telephones, or medical care. A farmer typically owned less than five acres of poorly irrigated and infertile soil. Many kept a single buffalo cow that produced just enough milk for their own consumption. Sixty percent of calves died newborn. Because farmers lacked refrigeration, transportation, or any way to test for quality, milk could not travel far and was frequently contaminated or diluted.
Nestlé came to Moga to build a business, not to engage in CSR. But Nestlé’s value chain, derived from the company’s origins in Switzerland, depended on establishing local sources of milk from a large, diversified base
of small farmers. Establishing that value chain in Moga required Nestlé to transform the competitive context in ways that created tre- mendous shared value for both the company and the region.
Nestlé built refrigerated dairies as collec- tion points for milk in each town and sent its trucks out to the dairies to collect the milk. With the trucks went veterinarians, nutrition- ists, agronomists, and quality assurance ex- perts. Medicines and nutritional supplements were provided for sick animals, and monthly training sessions were held for local farmers. Farmers learned that the milk quality de- pended on the cows’ diet, which in turn de- pended on adequate feed crop irrigation. With financing and technical assistance from Nestlé, farmers began to dig previously unaf- fordable deep-bore wells. Improved irrigation not only fed cows but increased crop yields, producing surplus wheat and rice and raising the standard of living.
When Nestlé’s milk factory first opened, only 180 local farmers supplied milk. Today, Nestlé buys milk from more than 75,000 farm- ers in the region, collecting it twice daily from more than 650 village dairies. The death rate of calves has dropped by 75%. Milk production has increased 50-fold. As the quality has im- proved, Nestlé has been able to pay higher
prices to farmers than those set by the govern- ment, and its steady biweekly payments have enabled farmers to obtain credit. Competing dairies and milk factories have opened, and an industry cluster is beginning to develop.
Today, Moga has a significantly higher stan- dard of living than other regions in the vicin- ity. Ninety percent of the homes have electric- ity, and most have telephones; all villages have primary schools, and many have second- ary schools. Moga has five times the number of doctors as neighboring regions. The in- creased purchasing power of local farmers has also greatly expanded the market for Nestlé’s products, further supporting the firm’s eco- nomic success.
Nestlé’s commitment to working with small farmers is central to its strategy. It enables the company to obtain a stable supply of high- quality commodities without paying middle- men. The corporation’s other core products— coffee and cocoa—are often grown by small farmers in developing countries under similar conditions. Nestlé’s experience in setting up collection points, training farmers, and intro- ducing better technology in Moga has been repeated in Brazil, Thailand, and a dozen other countries, including, most recently, China. In each case, as Nestlé has prospered, so has the community.
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gram take jobs with Marriott. One year later, more than 65% are still in their jobs, a substan- tially higher retention rate than the norm.
When value chain practices and investments in competitive context are fully integrated, CSR becomes hard to distinguish from the day- to-day business of the company. Nestlé, for ex- ample, works directly with small farmers in developing countries to source the basic com- modities, such as milk, coffee, and cocoa, on which much of its global business depends. (See the sidebar “Integrating Company Prac- tice and Context: Nestlé’s Milk District.”) The company’s investment in local infrastructure and its transfer of world-class knowledge and technology over decades has produced enor- mous social benefits through improved health care, better education, and economic develop- ment, while giving Nestlé direct and reliable access to the commodities it needs to maintain a profitable global business. Nestlé’s distinctive strategy is inseparable from its social impact.
Creating a social dimension to the value proposition.
At the heart of any strategy is a unique value proposition: a set of needs a company can meet for its chosen customers that others cannot. The most strategic CSR oc- curs when a company adds a social dimension to its value proposition, making social impact integral to the overall strategy.
Consider Whole Foods Market, whose value proposition is to sell organic, natural, and healthy food products to customers who are passionate about food and the environment. Social issues are fundamental to what makes Whole Foods unique in food retailing and to its ability to command premium prices. The company’s sourcing emphasizes purchases from local farmers through each store’s pro- curement process. Buyers screen out foods containing any of nearly 100 common ingredi- ents that the company considers unhealthy or environmentally damaging. The same stan- dards apply to products made internally. Whole Foods’ baked goods, for example, use only un- bleached and unbromated flour.
Whole Foods’ commitment to natural and environmentally friendly operating practices extends well beyond sourcing. Stores are con- structed using a minimum of virgin raw mate- rials. Recently, the company purchased renew- able wind energy credits equal to 100% of its electricity use in all of its stores and facilities, the only
Fortune
500 company to offset its elec-
tricity consumption entirely. Spoiled produce and biodegradable waste are trucked to re- gional centers for composting. Whole Foods’ vehicles are being converted to run on biofu- els. Even the cleaning products used in its stores are environmentally friendly. And through its philanthropy, the company has created the An- imal Compassion Foundation to develop more natural and humane ways of raising farm ani- mals. In short, nearly every aspect of the com- pany’s value chain reinforces the social dimen- sions of its value proposition, distinguishing Whole Foods from its competitors.
Not every company can build its entire value proposition around social issues as Whole Foods does, but adding a social dimension to the value proposition offers a new frontier in competitive positioning. Government regula- tion, exposure to criticism and liability, and consumers’ attention to social issues are all persistently increasing. As a result, the num- ber of industries and companies whose com- petitive advantage can involve social value propositions is constantly growing. Sysco, for example, the largest distributor of food prod- ucts to restaurants and institutions in North America, has begun an initiative to preserve small, family-owned farms and offer locally grown produce to its customers as a source of competitive differentiation. Even large global multinationals—such as General Electric, with its “ecomagination” initiative that focuses on developing water purification technology and other “green” businesses, and Unilever, through its efforts to pioneer new products, packag- ing, and distribution systems to meet the needs of the poorest populations—have de- cided that major business opportunities lie in integrating business and society.
Organizing for CSR
Integrating business and social needs takes more than good intentions and strong leader- ship. It requires adjustments in organization, reporting relationships, and incentives. Few companies have engaged operating manage- ment in processes that identify and prioritize social issues based on their salience to business operations and their importance to the com- pany’s competitive context. Even fewer have unified their philanthropy with the manage- ment of their CSR efforts, much less sought to embed a social dimension into their core value proposition. Doing these things requires a far
Typically the more closely tied a social issue is to a company’s business, the greater the opportunity to leverage the firm’s resources—and benefit society.
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different approach to both CSR and philan- thropy than the one prevalent today. Compa- nies must shift from a fragmented, defensive posture to an integrated, affirmative approach. The focus must move away from an emphasis on image to an emphasis on substance.
The current preoccupation with measuring stakeholder satisfaction has it backwards. What needs to be measured is social impact. Operat- ing managers must understand the importance of the outside-in influence of competitive con- text, while people with responsibility for CSR initiatives must have a granular understanding of every activity in the value chain. Value chain and competitive-context investments in CSR need to be incorporated into the perfor- mance measures of managers with P&L re- sponsibility. These transformations require more than a broadening of job definition; they re- quire overcoming a number of long-standing prejudices. Many operating managers have de- veloped an ingrained us-versus-them mind- set that responds defensively to the discussion of any social issue, just as many NGOs view askance the pursuit of social value for profit. These attitudes must change if companies want to leverage the social dimension of corpo- rate strategy.
Strategy is always about making choices, and success in corporate social responsibility is no different. It is about choosing which social issues to focus on. The short-term performance pressures companies face rule out indiscrimi- nate investments in social value creation. They suggest, instead, that creating shared value should be viewed like research and develop- ment, as a long-term investment in a company’s future competitiveness. The billions of dollars already being spent on CSR and corporate phi- lanthropy would generate far more benefit to both business and society if consistently in- vested using the principles we have outlined.
While responsive CSR depends on being a good corporate citizen and addressing every social harm the business creates, strategic CSR is far more selective. Companies are called on to address hundreds of social issues, but only a few represent opportunities to make a real dif- ference to society or to confer a competitive advantage. Organizations that make the right choices and build focused, proactive, and inte- grated social initiatives in concert with their core strategies will increasingly distance them- selves from the pack.
The Moral Purpose of Business
By providing jobs, investing capital, purchas- ing goods, and doing business every day, cor- porations have a profound and positive influ- ence on society. The most important thing a corporation can do for society, and for any community, is contribute to a prosperous economy. Governments and NGOs often for- get this basic truth. When developing coun- tries distort rules and incentives for business, for example, they penalize productive compa- nies. Such countries are doomed to poverty, low wages, and selling off their natural re- sources. Corporations have the know-how and resources to change this state of affairs, not only in the developing world but also in eco- nomically disadvantaged communities in ad- vanced economies.
This cannot excuse businesses that seek short-term profits deceptively or shirk the so- cial and environmental consequences of their actions. But CSR should not be only about what businesses have done that is wrong— important as that is. Nor should it be only about making philanthropic contributions to local charities, lending a hand in time of disas- ter, or providing relief to society’s needy— worthy though these contributions may be. Ef- forts to find shared value in operating practices and in the social dimensions of competitive context have the potential not only to foster economic and social development but to change the way companies and society think about each other. NGOs, governments, and companies must stop thinking in terms of “cor- porate social responsibility” and start thinking in terms of “corporate social integration.”
Perceiving social responsibility as building shared value rather than as damage control or as a PR campaign will require dramatically dif- ferent thinking in business. We are convinced, however, that CSR will become increasingly important to competitive success.
Corporations are not responsible for all the world’s problems, nor do they have the resources to solve them all. Each company can identify the particular set of societal problems that it is best equipped to help re- solve and from which it can gain the greatest competitive benefit. Addressing social issues by creating shared value will lead to self- sustaining solutions that do not depend on private or government subsidies. When a well-run business applies its vast resources,
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expertise, and management talent to prob- lems that it understands and in which it has a stake, it can have a greater impact on social good than any other institution or philan- thropic organization.
1. An early discussion of the idea of CSR as an opportunity rather than a cost can be found in David Grayson and Adrian Hodges,
Corporate Social Opportunity
(Greenleaf, 2004). 2. For a more complete discussion of the importance of competitive context and the diamond model, see Michael E. Porter and Mark R. Kramer, “The Competitive Advan-
tage of Corporate Philanthropy,” HBR December 2002. See also Michael Porter’s book
The Competitive Advantage of Nations
(The Free Press, 1990) and his article “Locations, Clusters, and Company Strategy,” in
The Oxford Handbook of Economic Geography
,
edited by Gordon L. Clark, Mary- ann P. Feldman, and Meric S. Gertler (Oxford University Press, 2000).
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Further Reading A R T I C L E Disruptive Innovation for Social Change by Clayton M. Christensen, Heiner Baumann, Rudy Ruggles, and Thomas M. Sadtler Harvard Business Review December 2006 Product no. R0612E
One of the best ways to gain competitive ad- vantage while serving society is to identify and invest in disruptive innovations in the so- cial sector. These innovations take the form of low-cost and simple—but useful—services for people whom traditional social sector or- ganizations ignore. Consider MinuteClinics, lo- cated in stores such as CVS: nurse practitio- ners, armed with software-based protocols, provide fast, affordable walk-in diagnosis and treatment for common health problems. Less expensive for uninsured people than physi- cian office visits—and convenient for the insured—MinuteClinics have a 99% customer satisfaction level.
Disruptive innovations that drive real social change crop up in other arenas besides health care—including education and economic de- velopment. For example, Apex Learning pro- vides special online classes (for instance, in certain languages) to tens of thousands of U.S. high school students. This innovation enables school systems to offer good-enough courses at a fraction of what live courses cost and ex- pands students’ options. As education bud- gets are squeezed and online learning alterna- tives improve, organizations like Apex may well become the de facto educators for many subjects, particularly noncore classes.
And in economic development, Bangladesh’s Grameen Bank makes small loans to latent en- trepreneurs who otherwise have little or no access to capital. By the end of 2005, it had 4.6 million borrowers. Since its inception in 1976, it has lent over $5.2 billion, with a 99% recov- ery rate. And it has generated a profit for its owners in every year but three.
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