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Making the case for the competitive advantage of corporate social responsibility

Alan D. Smith

C ompanies have an obvious obligation to serve their shareholders. Owners trust firms

to manage their investment and produce returns. However, stockholders are not the

only party with an interest in a firm’s activities. Firms affect numerous groups and

individuals, both internally and externally, engendering a realm of responsibility far beyond

the positive economic returns demanded by shareholders. Corporate social responsibility

(CSR) defines organizational consideration of multiple stakeholders and global impact,

beyond simple focus on maximization of shareholder wealth.

CSR encompasses a wide range of stakeholders. Pearce and Robinson (2005) delineated

internal and external parties, including shareholders, employees, creditors, customers,

suppliers, governments, unions, competitors, local communities, and the general public.

Some obligations are obvious, such as the obligation of the firm to serve the financial

interests of shareholders and provide employee satisfaction.

But other obligations are not as apparent, such as the firm’s obligation to reduce pollution,

educate consumers, or consume supplies in a timely manner. All affected parties claim some

responsibility of the company, which may conflict with one another. Human and regional

developments are certainly matters of CSR. Management must clearly identify, understand,

and prioritize claims to plot strategic objectives. Control of resources and corporate philosophy

depend upon the compromises derived from the CSR claims of various stakeholders.

Businesses do not operate independently of society and the earth; business impacts both

the population and environment in which it operates. Mindful of its surroundings, a firm can

control the triple-bottom-line, or the environmental, societal, and economic aspects of the

firm’s performance (Castka et al., 2004). Ultimately, responsibility to society links with

environmental protection as concern for the earth grows among the public. Such concern is

reflected in governmental regulation of ecological factors. Philanthropic improvement of the

quality of life requires ecological awareness.

CSR captures the ethical and legal claims to environmental protection. Any firm harming the

environment in which it operates cannot sustain. Notably, in a European utility company, the

Environmental Manager, outside of executive management, serves as the champion of

sustainability (Schaefer, 2004); the Environmental Manager’s understanding of the

connection among the three bottom line components permeates strategic thought.

Ecological and social welfare can affect the sustainability of a firm.

CSR as a competitive advantage

One reason why social responsibility provides a sustainable competitive advantage is that it

requires a culture that can successfully execute a combination of activities. There is literature

(Black and Hartel, 2004; Hamel and Prahalad, 1994; Hout, 1999) that supports the idea that

social responsibility requires a combination of activities such as deeply studying the forces

that can shape the future of the industry.

PAGE 186 j BUSINESS STRATEGY SERIES j VOL. 8 NO. 3 2007, pp. 186-195, Q Emerald Group Publishing Limited, ISSN 1751-5637 DOI 10.1108/17515630710684187

Alan D. Smith is Professor of

Operations Management at

Robert Morris University,

Pittsburgh, Pennsylvania,

USA

Simply speaking, a good name can enhance business in good times and protect it during a crisis. This article argues that the prolonged advantage of corporate social responsibility ensures sustainable economic advantage and should be a long-term objective of any organization.

Hamel and Prahalad (1994) talked about gathering intelligence about current and potential

social and political issues, involvement of stakeholders, managing stakeholder expectations,

decision making, incorporating the decisions into the strategic plan and tactical activities,

communicating symbols to stakeholders, and ethical business behavior. These activities have

ties to aspects of some theories of strategy that are popular today such as complex adaptive

systems (Wah, 1998) and strategic fit (Porter, 1979, 1981, 1991, 1996, 1998, 1999, 2001a, b).

Research propositions to support CSR research

When a company is truly committed to social responsibility, it will look to have a unique

relationship with stakeholders, one that resembles a partnership with respect to the

intelligence gathering and communication activities. The stakeholder is placed on equal

ground with the company in these regards (Black and Hartel, 2004) such that

communication is two-way, with stakeholders being able to say whatever they want

without repercussion. The stakeholders can initiate communication, decide what topics

should be discussed, and decide the frequency and forum and vehicle of communication.

Stakeholders and the company are honest with each other, which may mean that they do not

have hidden agendas and do not hold back information from each other. This requires

companies to share both failures and successes in regards to social responsibility.

Companies may be reluctant to develop this type of relationship with stakeholders for a

couple of reasons. First, it takes significant time on the part of the company and it takes

coordination with stakeholders. Secondly, Stacey (1996) points out that people – and

companies are made up of people – shy away from genuine two-way honest communication

because of the conflicts that eventually arise due to differences of opinion and because of

the strong emotions tied to issues of the parties involved.

Perhaps it appears strange that these very things that scare people, and thus companies, are

the things that are necessary to be innovative, to think outside our normal ruts, to get us to shift

our paradigm. As online information and customer relationship management related (CRM)

technologies and their corresponding infrastructure continue to diffuse through the social

fabric of global business society, stakeholders demanding quality information exchanges

drive the future for CSR strategies. The basic research propositions that are suggested for

further empirical study, but for the basis of the discussion of this article, include the following:

P1. The future for CSR strategies will grow proportionally by quality information

exchanges associated with the development of strategic intangible assets

supported by the resource-based view theory of the firm, such as company and

product reputation, employee know-how, and company culture.

P2. The future for CSR strategies will be based on management’s ability to mediate the

negative arguments against social responsibility; namely reducing the agency

theory dilemmas of aversive selection and moral hazard. Management must

counter the negative image that most companies are not sincere with their efforts to

be socially responsible and that evil ulterior motives of pure profit and market share

lay beneath the surface.

P3. The future for CSR strategies will be based on management’s ability to promote the

concept of corporate sustainability through the application of triple bottom-line

thinking (the simultaneous integration of economic, environmental, and social

criteria in to strategy in order to create long-term shareholder value, spite its initial

costs involved in the implications associated with green designs).

‘‘ Corporate social responsibility (CSR) defines organizational consideration of multiple stakeholders and global impact, beyond simple focus on maximization of shareholder wealth. ’’

VOL. 8 NO. 3 2007 jBUSINESS STRATEGY SERIESj PAGE 187

Porter (1996, 2001a, b), perhaps the most cited author on the subject of strategy, has

determined that the fit of these types of long-term activities provides a sustainable

competitive advantage because it is much more difficult for a competitor to imitate multiple

activities than just one activity. Social responsibility involves combining activities involving

people inside and outside the company. The ability to successfully fit outside stakeholders

into an effective combination of business processes adds even greater complexity to the

strategic fit, making it even more sustainable as a competitive advantage.

Besides engaging with stakeholders, companies can utilize other resources to gather

information about current and future social and political issues. One resource companies

can utilize is academia. Professors, undergraduates, and graduate students are willing at

times to do research on a topic such as social responsibility and provide the results of such

research to companies. Another resource that companies could utilize to obtain information

on social responsibility issues and trends are think tanks. Gathering information from a

number of stakeholders and others and turning that into decisions that change the direction

and activities of a company is not easy to pull off, and could be considered complex. The

fact that the company makes changes based on the information gathered makes it adaptive.

Finally, that this involves multiple people and groups within the company as well as multiple

stakeholder groups shows that it requires a system and processes to gather the information

through the engagement of stakeholders.

Granted, this process requires oversight on the part of management in the decision-making

process, but the rest of the activities are very similar to a complex adaptive system (CAS)

(Wah, 1998). Allowing people to gain information from a number of sources and to use that

information to adapt to changes that are occurring or will occur is what a complex adaptive

system is about.

For companies to have a reputation as socially responsible, they must be proactive in their

efforts and not reactive to political regulations and stakeholder sanctions. If a company does

not act proactively, stakeholders may respond by creating awareness among other

stakeholders for counter action or even to encourage other stakeholders to withhold

important resources (Bryan and Smith, 2005; Maignan and Ferrell, 2004; Smith, 2004a, b;

Smith and Rupp, 2004; Smith et al., 2004).

Historically, a concentration on improved operational effectiveness and overcapacity

created a temporary economic advantage accompanied by increased profit and firm value.

Such an advantage is short-lived; investors may be satisfied, but competing companies will

eventually mimic technological and material improvements. Hence, physical technologies

can quickly become obsolete or re-engineered by competitors, negating any strategic value

such an asset may have possessed (Michalisin et al., 1997, 2000). As competing ideas

converge, operating competencies serve little or no competitive advantage. Material

advantages focused on profit also generally ignore CSR.

This short-lived economic advantage is in direct contrast to CSR, which produces a

sustainable competitive advantage attributable to positive organizational reputation. The

socially perceived image of the company depends upon the marketing of strategies like the

four Es; namely, make it easy for the consumer to be green, empower the consumers with

solutions, enlist the support of the customer, and establish credibility with all publics and

help to avoid a backlash (Pearce and Robinson, 2005).

Firms advertise their affection to public claims to enhance their corporate image.

Advertisement of the adoption of CSR provides a sustainable advantage amongst

competitors through improved appearance. The advantage is intangible and difficult to

duplicate. Competitors seeking to match the CSR competency of a firm will find

themselves slow to capture the consumer loyalty or governmental trust of the first. The

organizational impacts of a positive public image compound; not only can the firm expect

increased sales and revenue, but also greater employee satisfaction, the attraction of new

investors, and tax exemptions. CSR benefits manifest an enduring competitive

advantage.

PAGE 188jBUSINESS STRATEGY SERIESj VOL. 8 NO. 3 2007

How to measure CSR?

Theoretically, increased corporate value results from adoption of CSR, although the

relationship does not easily lend itself to objective analysis. How is CSR measured?

Response to stakeholder obligations is not as clearly quantifiable as a firm’s quarterly

income or operating expenses. Financial statistics measure a firm’s economic performance.

As CSR translates into sustainability, the superior economic performance of the Dow Jones

Sustainability Group Index highlights the advantage of embracing CSR (Castka et al., 2004).

Globally, the FTSE 350 represents the largest 350 companies of the London stock market.

Among the FTSE 350, ten of the most financially successful applied innovative CSR

techniques as strategic objectives (Cumming et al., 2005). Throughout the global economy,

strategic implementation of CSR links to improved monetary returns, despite CSR’s inherent

avoidance of quantification.

Effects of regulation on CSR

Difficulty in the measurement of CSR, along with the power controlled by multinational

corporations, complicates regulation. The amassed resources of global corporations

surpass those of national governments, making enforcement of corporate legislation

difficult. Since the 1940s, international dispute barred the development of international

business regulation. From the failure of the proposed International Trade Organization (ITO)

in the 1940s to the global expansion of business in the 1990s, the foundations of decreasing

governmental advantage over businesses appears (Florini, 2003).

It was not until the late 1970s that non-governmental agencies applied significant pressure,

resulting in the US Foreign Corrupt Practices Act in 1977 and the CSR movement of the

1990s. Non-governmental agencies, such as civil society groups, fight to fill ‘‘the

governance gap’’ through protest.

Avoiding measurable commitments with vague codes or statements

Some civil groups urge the application of controversial corporate codes of conduct and CSR

inclusion in corporate mission statements. Many business leaders attempt to avoid

measurable commitments with vague codes or statements, but others comply with

independent external auditing. Such auditing is voluntary, and many companies argue that

standards should be set by industry.

Auditing of self-inflicted standards conducted internally or by hired auditors lends itself to

bias. Public scrutiny often incites public reporting, but the standards for public reporting still

require some advancement. Of those standards that do currently exist, some of the more

popular standards include the Malcolm Baldridge National Quality Award (MBNQA) (see

www.isixsigma.com/ca/baldridge/), the European Quality Award (EQA) and ISO 14001.

These standards do consider results and not just policies (Kok et al., 2001).

Implications for small to mid-size enterprises (SMEs)

Various stakeholders may appreciate standard measurement and reporting of CSR, but

inflicting governance of such an issue presents some complexity for small and mid-size

enterprises (SMEs). Firms both large and small must consider strategy and, hence, CSR;

however, SMEs respond to a confined set of shareholders and have a smaller effect on

society.

While SMEs may share the human and ecological concerns of larger corporations, a fear of

the bureaucracy and investment associated with CSR bars its growth. SMEs do not posses

the mass of resources of large international firms. With fewer consumers, smaller firms have

less interest in the response of society. Impending European legislation may soon force all

businesses, including SMEs, to adopt a CSR agenda involving mandatory reporting,

stakeholder dialogue and director consideration of global issues (Castka et al., 2004).

Perhaps companies should be left to adopt CSR independently, but without pressure from

shareholders and consumers, what drives small businesses to act ethically? CSR adoption is

VOL. 8 NO. 3 2007 jBUSINESS STRATEGY SERIESj PAGE 189

economically beneficial, but regulation may be an impediment to smaller firms without the

necessary resources for standard enforcement.

The transition to enduring advantage through CSR requires the dismissal of traditional

operational goals and the development of innovative strategy. Creative strategies stretch the

effects of a firm’s operation and increase stakeholder awareness (Hout, 1999).

New partnerships or alternative processes are a few approaches to CSR. For example, a

study of the cement industry showed a necessity for product and process innovation with

environmental and social consideration. In a nearly homogeneous industry with high

competition, a conglomeration of competing companies considered the path to

sustainability, plotted with ideals like emissions reduction, ecological stewardship, and

cooperation (Placet et al., 2005). Such a partnership is unique. Even more unique, Tesco, a

grocery retailer, teamed up with deprived neighborhoods in a saturated market to provide

education, jobs, and a new façade through ‘‘regeneration-partnership stores’’ (Cumming

et al., 2005). Multiple industries employ socially responsible unique strategy and reap the

benefits, from telecommunications to utilities to health and beauty products.

The economic fruit of CSR is not limited to a specific industry. Firms apply innovative socially

responsible management or process improvements, which develop a competitive

advantage. Incremental transformation through partnerships, technology and business

practices typically support the firms’ strategies. Such companies have grasped the notion

that the risk of staying the same or ignorant of CSR in a complex business environment is

greater than the risk of changing (Cumming et al., 2005).

Profitability and market share

Through a study of company stock prices from 1995 to 2003 (Derwall et al., 2005), it was

shown that companies that are rated highly in social responsibility significantly outperform

companies who are rated low in social responsibility. Their study eliminated or adjusted for

factors that can influence stock prices. The factors they controlled were volatility/market risk,

size, value versus growth companies, and momentum effects (Derwall et al., 2005).

A couple of things can be concluded from this study. First, investors value companies that

are rated highly in social responsibility. When investors do not value a company, that

company’s stock price will fall and the stock will not perform well, i.e. stock performance is a

good, albeit not perfect, measure of company value. Investors are typically interested in

stocks that will perform well over a period of time, say five to ten years or longer, so the

results of the aforementioned study tell us that investors think that stocks of socially

responsible companies will outperform companies that are not socially responsible. The

second conclusion from the study is that the financial advantage, at least from a stock

performance perspective, of being socially responsible is sustainable, since the study

covered an eight-year period. A third conclusion that can be reached is that reputation is

sustainable competitive advantage because the reputation of a socially responsible

company has a significant positive impact on the stock performance.

Cautions

It would be difficult to find someone who views socially responsible behavior as a negative.

However, social responsibility is not without its skeptics. Most arguments against social

responsibility boil down to two points. The first argument has its foundation in the agency

theory dilemma. The second point is centered on the fact that companies are not sincere

‘‘ In the end, companies’ behaviors change when consumer preferences change. Social responsibility will exist as to the extent that the consumer is willing to pay for it. ’’

PAGE 190jBUSINESS STRATEGY SERIESj VOL. 8 NO. 3 2007

with their efforts to be socially responsible, and that evil ulterior motives lie beneath the

surface (Coors and Winegarden, 2005).

Companies should not allow social responsibility to divert their attention from the main goal,

which is to maximize shareholder value or to shed accountability for poor financial

performance. Behind the pressure to adopt social responsibility is the profit motive. Putting

people before profits is the wrong tactic. Doing the opposite will force competitive

businesses to find new markets and make better use of current resources. By doing this,

companies provide benefits to customers, employees and the community (Kerr, 2004;

Smith, 2005, 2006; Wulfson, 2001).

Companies that choose to be socially responsible may be perceived to engage in what is

called unprofitable corporate responsible action by critics of CSR. In the end, companies’

behaviors change when consumer preferences change. Social responsibility will exist to the

extent that the consumer is willing to pay for it.

According to Coors and Winegarden (2005), the market gives us precisely what we ask of it.

An example of this concept is the production of biomass fuel. The claim is that many

consumers may prefer to use an environmentally friendly product, but they are not willing to

pay a premium for it. If there were a demand for biomass fuel, gas stations would start selling

it tomorrow. Government can intervene and give incentives for businesses and consumers to

be socially responsible, but the extra cost to do this has the same impact as a tax (Coors and

Winegarden, 2005).

Businesses need to be especially cautious when using social responsibility as an

advertising campaign. Alsop (2004) declares that corporate reputation has never been more

valuable or vulnerable than today. The public has been slow to forgive business for scandals

such as Enron. Companies also have to be careful that their promises to be socially

responsible are not self-serving or contain hollow promises.

Before companies begin launching new social responsibility programs, they need to

recognize that the law of diminishing returns applies. This means that the reward of doing

something decreases as the doing of it increases, an example of the law of diminishing

returns. Companies do not need to spend endless amounts of money on social responsibility

because the rewards for doing so do not exist. The trick is to determine how much money to

spend on social responsibility to stay ahead of the competition and to maintain a strong

reputation as a socially responsible company.

Simply speaking, a good name can enhance business in good times and protect it during a

crisis (Alsop, 2004). This means that companies need to continuously promote a good

reputation rather than trying to enhance it only in good times and to do this, they need to

realize the importance of a good reputation and socially responsible behavior.

Resource-based view (RBV) and its implications to CSR

Corporate social responsibility is inherently attuned with the resource-based view (RBV) of a

firm. RBV asserts that owning or controlling strategic assets leads to a sustainable

competitive advantage and superior firm performance (Michalisin et al., 1997, 2000). A

strategic asset is defined in the business world as having the ability to be simultaneously

valuable, rare, imperfectly imitable and non-substitutable. This definition obviously shows

that any tangible asset could not meet this strict definition. For that reason we will focus on

the strategic assets associated with firms becoming more adept at CSR.

CSR can take the form of taking care of employees, taking care of the environment, or even

extending the interconnectedness of the company with the outside community. A good

example of a company significantly benefiting from a successful CSR strategy that paid off

with huge RBV benefits is Lincoln Electric (Hastings, 1999). The interconnectedness of the

firm with the surrounding community and also the company’s superior reputation can be

noted through the banks’ willingness to renegotiate loan covenants and even extend the

existing line of credit. This extension of the line of credit allowed the company to meet payroll

and remain a going concern.

VOL. 8 NO. 3 2007 jBUSINESS STRATEGY SERIESj PAGE 191

It was also the employees who were willing to sacrifice personal time for the benefit of the

company, which kept the company in business. In fact, Lincoln Electric even had 450

employees forfeit a combined 614 weeks of vacation! It was the social responsible policy of

Lincoln Electric to take care of their employees, which fostered a true connection of the

employees with the company. The employees’ connection with the company along with the

openness of management (two key attributes of RBV) allowed the company to increase per

day sales from $1.8 million to $3.1 million. Lincoln Electric was able to capitalize on its culture

and employee loyalty to bring all of the necessary components together to save the

organization (Hastings, 1999).

From this example we can discern that without the positive culture of the organization,

Lincoln Electric surely would have been doomed. The positive culture at Lincoln Electric

(developed through years of a successful CSR strategy) still remains their most valuable

asset.

Dean (2003/2004) also addressed this by identifying that corporate culture can also be

applied as part of the reason for a consumer’s perception of a firm’s trustworthiness. The

corporate values, behaviors and guiding principles are what makes up a firm as part of the

RBV, and if those values are strong and community minded as well, the consumer’s

perception of a firm will be greater than if the corporate culture were lacking.

Corporate trustworthiness is how much a consumer believes in a firm and their actions. If

consumers do not perceive firms to have a strong corporate culture, reputation and sense of

social responsibility, the trustworthiness of that firm from the consumer’s perspective will be

decreased. Trustworthiness can be seen as a competitive advantage for firms and it would

be in their best interest to gain the trust of consumers. Companies also need to make sure

their employees are aware of how their behavior affects the reputation of the organization. In

general, stakeholders are waiting to see companies demonstrate more goodwill toward their

customers, employees, and local communities (Alsop, 2004; Smith and Lias, 2005).

Enhanced reputation is inherently a core attribute of RBV. Being named on of the nation’s top

100 companies to work for and the reduction of employee injuries is indicative of a company

with highly valued strategic assets (Quinn and Norton, 2004).

Business case for social responsibility

Many companies cite the expenses associated with social responsibility and green design

efforts. More progressive thinkers are using terminology such as ‘‘corporate sustainability’’

and ‘‘triple bottom-line.’’ Corporate sustainability is defined by Wade (2005) as the idea of

integrating economic, environmental and social criteria into strategy and management to

create long-term shareholder value. The concept has been slow to catch on due to the costs

involved in green design.

However, some recent examples highlight the payback or triple-bottom-line thinking. In a

comparison of the Dow Jones Sustainability Index and the Dow Jones Global Index, the

sustainability index was found to have a 15.8 percent return as compared to 12.5 percent for

the global index over a six-year period starting in August 1996. This provides evidence that

that socially responsible behavior can lead to long-term profitability (Wade, 2005).

Management can also have short-term profits. West Bend Mutual reduced its electricity

costs by approximately 40 percent from $2.16 to 1.32 per square foot by using a

green-designed headquarters where individual employees were given control of their own

temperature and airflow.

As an added benefit, productivity also increased 16 percent. Boeing experienced similar

benefits when they implemented energy efficient ‘‘Green Lights’’ in their facility. Lighting

electricity has been reduced by 90 percent and will pay for itself in less than two years.

Again, another positive side effect included the reduction of production errors due to the

improved lighting (Wade, 2005).

PAGE 192jBUSINESS STRATEGY SERIESj VOL. 8 NO. 3 2007

Local ‘‘green’’ scene

Medrad, Inc. (see www.medrad.com/) announced in November 2005 that they would build a

new Corporate Center in the Tech 21 Research Park in Marshall Township. The new

corporate center will utilize green design. Medrad acknowledges the extra upfront costs

associated with green design, but feels the benefits far outweigh the costs. A study was

performed by Ellis (2005) to look into the cost-benefit of constructing a green corporate

center. The results showed that green buildings seek solutions that maximize overall human,

economic, and environmental health and productivity benefits. Green building design

strives to balance environmental responsibility, resource efficiency, occupant comfort, and

well-being and community sensitivity. Analyzed over 20-year NPV calculations, financial

benefits range from $48 to 67 per square foot, which include 25 to 30 percent energy

efficiency gains, and productivity gains of up to 15 percent, including reductions in

absenteeism and improved work quality. Minimal upfront investment of about 2 percent of

construction costs typically yields life cycle savings of over ten times the initial investment

(Ellis, 2005).

For example, the Greater Pittsburgh Building Industry has generated more certified green

projects than its counterparts throughout the country. Pittsburgh has the world’s first green

Convention Center, the first MS in Sustainable Design (Carnegie Mellon University) and the

first MS in Green Construction (University of Pittsburgh). The Greater Pittsburgh region has

over 2.7 milloion square feet of Leadership in Energy and Environmental Design (LEED)

Certified Buildings, and Pennsylvania is second only to California in the number of certified

projects. Currently, there are over 40 projects in the LEED system in the state of

Pennsylvania.

Other local examples include the PNC Firstside Center. Some benefits included two

business units having turnover decrease by 83 and 57 percent compared to a decrease of

just 11 percent during the same period for a similar business unit in another building. The

features of the Regional Learning Alliance (RLA) at Cranberry Woods include waterless

urinals, purchase of green power, non-toxic cleaning products, sunscreens, construction

waste recycling and an air quality plan (Ellis, 2005).

General conclusions and implications

An increasing number of studies, both in the practitioner and academic press, show that

firms locally are becoming more conscientious of the effects of their socially responsible

behavior. Innovative responsible strategy, exceeding government requirements and

considering multiple stakeholders, is a long-term objective.

Initially, adoption of CSR burdens a company financially. But, investing resources in charity,

environmental protection, and education pays dividends in corporate reputation.

Distribution of short-term gains increases the reliability of long-term returns through CSR.

A relationship with employees, competitors, consumers, and suppliers is invaluable.

Educated owners understand the importance of CSR. Increasingly, investors seek socially

responsible firms and not just the highest current financial returns. Sustainability is important

to investors, shown through portfolio screens for and mutual funds of CSR adopting

companies. The prolonged advantage of CSR ensures sustainable economic advantage

and should be a long-term objective of any organization.

Keywords:

Corporate social

responsibility,

Organizational

effectiveness,

Resources

‘‘ A third conclusion that can be reached is that reputation is a sustainable competitive advantage because the reputation of a socially responsible company has a significant positive impact on the stock performance. ’’

VOL. 8 NO. 3 2007 jBUSINESS STRATEGY SERIESj PAGE 193

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