The Strategic Context of CSR

Introduction • There are three kinds of organizations: nonprofit,

governmental , and for- profit.• Each exits to meet needs in society. • Those needs may be philanthropic, such as feeding

the poor, in case of a non- profit; they may be civic such as providing for the safety and security of the public, in case of government agencies; or they may be primarily economic, such as organizing resources to meet societal needs in ways that yield a surplus for the owners, called profit.

• In a free society, organizations that do not meet needs go away. Putting differently, no publically traded company, government or nonprofit initially sets out to do harm.

• In pursuing societal needs all organizations face constraints on their methods and results. For example, the economics of survival requires each entity to produce the results that generate the donations, taxes or profits needed to operate.

• At the same time, these results must be attained by methods that are deemed acceptable to the larger society. Leaders of the various organizations tries to establish balance between methods and results.

• When these issues involve for profit, CSR helps businesses to balance the means they use and the ends they seek. It does this by ensuring that profit seeking businesses plan and operate from the perspective of multiple .

• The problem that a firm’s decision makers face is simple to state: Which stakeholders and what issues matter under the broad heading of corporate social responsibility as it pertains to their organisation?

• The answer depends on the for- profit’s strategy. And , because profit strategies vary widely, the right mix will differ from firm to firm and will evolve over time as firms adapt both their strategy and execution to increasingly turbulent operational environment.

• It is impossible to prescribe the exact issues that any firm is likely to face at any given time.

• Instead a strategic lens offers that best viewpoint through which to study CSR.

The strategic Lens: Vision, Mission, Strategy and Tactics

• Companies need to view CSR through a strategic lens.• Although businesses exist for many reasons, survival depends on

profits. These profits depends on revenues that only come about through customer who are satisfied with the value the firm offers through its competent and motivated employees.

• The quest of profits, however, is so broad a mandate that it offers little guidance about where to begin or what to do.

• Indeed, insight comes from understanding the need in society that a business seeks to meet.

• The need, towards which the organization strives, forms the basis of its aspirations or Vision.

• Ideally, an organization's Vision is an ennobling, articulated statement of what it seeks to be and become.

• A vision that ignores, the larger role that a firm plays in society is likely to be neither ennobling nor sustainable.

• Vision statements must appeal to multiple stakeholders , including customers, members of the organization (employees) , its direct beneficiaries (owner) and the larger community in which the organisation operate.

• Firm’s Mission identifies what the organization is going to do to attain its vision or aspirations. For example, a food company may have the vision of “ ending hunger in the community”, and its mission is to “ feed the poor”. A transport business may have the vision of “ providing the best personal transportation vehicles” and a mission of “making cars”.

• Mission must balance both the methods and the results to be considered socially responsible.

• Vision identifies what the organization is striving towards and the mission tells us what the organisation is going to do to get there. Both these statements are constrained by what society deems as acceptable.

• Strategy explains how the organisation is going to go about attain its vision or mission . It defines the organization’s response to its competitive environment. Thus the food company may have a strategy of using mobile soup kitchen that can transport the food to where the poor live, whereas the auto firm may have strategy of producing high- end sports cars.

• Tactics are the day –to- day management decisions that implement the strategy. Tactics are the actions people in the organisation take every day.

The Tactics, Strategy , CSR , Mission , Vision Constraints

Environmental Constraints(Social, Cultural, legal, Stakeholders, Markets, Technology)

Organizational Constraints(Internal Resources and capabilities)

Policy Constra

ints

• A sustainable effort to attain a firm’s mission and vision depends on a strategy and tactics that are evaluated through the CSR filter within the organizational policy and external environmental constraints under which the firm must operate.

• Both CSR and strategy are primarily concerned with the firm’s relationship to the environment within which it operates. Whereas strategy addresses how the firm competes in the marketplace, CSR considers the strategy’s impact on relevant stakeholders .

• In fact both CSR and strategy are constrained by these environment.

The Environment- Strategic- Competency- Structure ( E.S.C.S) Framework

Leadership Driven

Vision

Mission

ENVIRON MENT

STRA TEGY

COMPETENCIES

ST RUCTURE

CSRFilter

•Opportunities•Threats •Strengths

•Weaknesses

The Strategic lens: The E.S C. S Framework

• For a business strategy to provide a source of sustainable competitive advantage assumes a marriage of the firm’s internal strengths( its competencies) with its external (environmental) opportunities.

• Multiple arrows show that vision and mission shape strategy. Additionally, strategy is influenced by both the firm’s internal competencies and demand of the external environment in which it must operate.

• In turn, strategy helps influence the organisational structure.

• The connection among the internal strengths and the external opportunities (needs in society) is driven by the strategic saying that success depends on a position of competing from strengths; however for the strategist to connect strengths with opportunities in a globalizing business environment requires an intimate understanding of both, while implementing the competitive strategy through a CSR filter.

• CSR filter fits between strategy and the environment in which the strategy operates.

• A better understanding of the role CSR plays in a firm’s strategic success (the CSR filter) requires an understanding of the interplay among a firm’s competencies, strategy, and structure as it faces its environment.

Competencies• For a firm to compete from strengths, it must have and be able to

identify them. These strengths represents the critical factors that determine how the firm will compete in the external environment.

• To facilitate an understanding of strengths, a clear differentiation among capabilities, capabilities, competencies and core competencies is required: – Capabilities are action that a firm can do, such as pay its bills

and produce some value added good or service.– Competencies are actions a firm can do and can do very well.– Core competencies are actions a firm does very well, and it is so

superior at performing these activities that is difficult (or at least time consuming) for other firms to match its performance in this area.

Strategy • Strategy helps in attaining Vision and Mission of a

company. • Strategy is built upon competencies and core

competencies, which are the competitive weapons with which firms competes in the markets.

• Thus, the strategy rests upon the competencies of the firm and supports its mission and vision.

• When the competitive environment demands a different strategy, the existing capabilities or competencies of the firm may no longer be sufficient.

• When environment changes like these others occur, leader face a make or buy decision. Should the needed competencies be developed internally( make) or acquired from others outside the firm (buy)?

• Whether firms compete on costs, differentiation, or a focused strategy that embraces either cost or differentiation (or both) strategy seeks ways for the firm to provide customer focused value added as a means of gaining a competitive advantage.

Structure

• The structure- the organizational design- exits to support the strategy of the firm. What architects say of building, organizational designers say of the firm’s structure: The form follows the function.

• Thus, expertise is often concentrated into a functional organization design, in which site location, store construction oversight, information systems, warehousing, distribution, store operations and like other activities grouped together by their common function into specialized department.

• The optimal organizational design is the one that best supports the firm’s strategy, giving attention to key functions.

• Therefore, organization structure varies from industry to industry and form company to company within an industry.

The CSR Filter• Competencies molded into a strategy and supported

by structure are no longer sufficient for success.• It is vital that firms also consider the societal and

stakeholder implications of these aspects of operations.

• The CSR filter is a conceptual screen through which strategic and tactical decisions are evaluated for their impact on the firm’s various stakeholders.

• Here the intent is to take a viable strategy and make it optimal for the stakeholder environment in which the strategy must be executed.

Filter contd….

• Although CSR is only one part of the strategic big picture, even clever strategies can fail if the strategy or its implementation is perceived as socially irresponsible.

• The CSR filter injects multiple considerations into the decision mix beyond the profit maximization goals that are central to the firm’s survival.

The Strategic Lens: Environment Context

• Customers, competitors, economics, technology, government, socio- cultural factors and other forces all drive changes in the firm’s external environment.

• These changes are gradual and invisible to all but the keenest observers. But over time, their cumulative impact redefines the competitive environment and what organizational strategies and actions are deemed socially acceptable.

• Overtime, actions previously considered discretionary or ethical can be codified as laws or government ruling and finally as economic components of operations

• For example, many firms in the United States once blatantly paid women less than men for the same work. For whatever justifications that were applied, this behavior was within the discretionary decision making authority of the business. Gradually these discrimination was seen to be unfair, even unethical. Then in 1963 the federal govt. enacted the Equal Pay Act which outlawed discrimination in pay solely based on one’s gender.

• Today, diversity in the workplace is viewed as an economic imperative, helping firms respond effectively to their consumer needs.

Profit v/s society

• At one extreme are the views of Milton Friedman, that consider that CSR related issue is a distraction from the firm’s profit- seeking and wealth creating functions. Friedman has stated that as long as company can remain in business (consumer continuing buying its products or services), it should be entitled to do so because it provides jobs for society and a ROI for shareholders.

• At the other extreme lies the argument that society has the right, even the obligation , to restrain the negative excesses of businesses.

• This position states that just as societies rely on commerce and industry business create, companies unarguably rely on the resources of the societies within which they are based.

• No organization exits in isolation and business without exception, have an obligation to contribute to the communities on which they rely so heavily for employees and financial or other resources

• Strategic CSR bridges both these arguments . A business cannot ignore its profit seeking and wealth creating functions if it is to remain in existence; however if the firm is to survive beyond the short run, it must pursue these ends of profits and wealth creation by means that are deemed acceptable to the larger society. Ultimately, stakeholders have the right and the power to determine what is acceptable corporate behavior.

• The standard that society applies to define socially responsible behavior embrace moral, cultural, ethical, historical, economic and other issues.

• Regardless of what those standards are or how they are transmited , long –term business success demands at least minimum compliance with societal expectations

• Simply put, businesses are increasingly expected to pursue their strategies in ways that do not harm others; and as societies become more affluent and interconnected, the definition of harm changes constantly.

Environmental Forces Propelling Greater CSR

• Four environmental forces are driving CSR to the forefront of corporate strategic thinking: growing affluence, globalization, communications technologies, and brands.

• Any one of these drivers might be ignored by managers not convinced of the strategic benefits to the firm of CSR. Collectively, they are reshaping the business environment by empowering stakeholder group.

• And, because each of these trends interacts with others, the reinforcing effects mean that the environmental context will not only change but will change at an increasingly rapid rate, often in ways not foreseen by today’s best strategists.

CSR and Growing Affluence• CSR issues tend to gain a foothold in societies that are more

affluent- societies where people have jobs, savings, and security and can afford the luxury of choosing between, for example, low- cost cars that pollute an those that do not.

• As public opinion evolves and government regulation races to catch up, actions previously thought of as discretionary often become legal obligations.

• As a result , the greatest attention to CSR is found in developed economies; however it would be shortsighted to assume that CSR is only applicable where there is affluence.

Example

• In the past, manufacturer have often been able to externalize some of their production costs to the higher society by polluting the environment. When the majority of people are desperately focused on the need for jobs to feed their families, pollution seems of limited concern.

• When most members of a society are desperately seeking food, shelter, and other necessities of life, CSR seems a luxury of little relevance. As societies become increasingly affluent, however , the collective understanding of social issues, like pollution, grows, as does the ability of society to afford solutions

• Increasingly, MNC are being held to high standards for their overseas activities in developing countries. Nike for example typically requires its subcontractors in developing nations to provide wages and working conditions above the local norms.

• Protest against pollution, deforestation and civil disruption by international petroleum companies have occurred (both internationally and at home) when the companies operating standards overseas have been considered as harmful to host countries societal interest.

CSR and globalization

• Corporations operate in a global business environment.

• The internet, which drives this global environment, is a powerful enabling tool for communication and education; however, it also depersonalizes between individuals and reduces our sense of an immediate community.

• This in turn, affects a business’s sense of self interest and can loosen the self- regulating incentives to maintain strong local ties.

• Globalization, therefore, transforms the CSR debate and magnifies its importance exponentially.

• A domestic context is not the only lens through which the issue of CSR should be viewed.

• Today, no MNC can afford to ignore CSR, even if employees or consumer appears not to care.

• Difference in cultures across the globe lead to widely varying expectations of workers, customers, government and citizens.

• Actions that may be acceptable, even required in one culture may be prohibited in another.

The Two Phases of Globalization

• Phase I of globalization greatly empowered corporations, enabling them to expand operations on a worldwide basis, shift manufacturing offshore, reform supply chain ,management, and develop powerful global brands.

• M& A activities blossomed and as companies grew their power increased significantly.

Phase II of Globalization

• As globalization transcends the control of nation states, the power of global firms expands further. Companies today are free to incorporate offshore to avoid paying high taxes than in their home country.

• They are also increasingly able to move their manufacturing operations to lower cost environment, often in countries with less rigorous labor and environmental regulations.

• Globalization however creates countervailing forces that are capable of curtailing corporations expanding power. Corporations are losing control over the flow of information, which empowers NGOs and consumer activists to communicate and mobilize.

• Companies now are not able to dictate quality and quantity of information about their company and how that information affects the social debate.

CSR and Communication Technologies

• Phase II of globalisation suggest a shift in the balance of power concerning control over the flow of information back toward stakeholders in general and three important constituents group in particular.

• First, the internet has greatly empowered consumer because of the access it provides to greater amounts of information, particularly when an issue achieves a critical mass in the media.

• Second, globalization has increased the influence of NGOs because they too, are benefiting from easily accessible and affordable communication technologies. These tool empower NGOs by enabling them to inform, attract, and mobilize geographically dispersed individuals and consumer segment helping to ensure that socially immoral activities achieve visibility .

• And third, new tools of communication and the demand for infrastructure information have enhanced the power of media conglomerates. corporations today are unable to hide behind the flag leaves of superficial PR campaigns .

The Free Flow of Information in a Globalizing World

Mediaconglomerates

Stakeholders( consumers, NGOs)

InformationAnd

Communications

Wireless

E-Mail

Internet

• Companies in such situation may be well advised to try to anticipate stakeholders needs and begin promoting operations from a CSR perspective rather than fight against the free flow of information.

CSR and Brands

• Brands today are often a focal point of corporate success.

• Companies try to establish popular brands in consumers’ minds because it increase any competitive advantage they hold that in then directly reflected in sales and revenue.

• Three benefits of CSR to brands:– Positive Brand building– Brand Insurance– Crisis Management (Recalling of products by J&J and saved

brand)

• Brand value is critical to firms, whether on the local or global stage. Today the value of intangible brand may even the value of firm’s tangible assets.

• The Coca- cola brand, for example, is worth significantly more than half of the company’s total m-cap.

• So given the large amount of time, money and effort companies invest in creating brands, a good CSR policy has become vital component of a successful corporate brand- an effective means of maximizing its market appeal while protecting the firm’s investment over the long term.

The Strategic CSR Model

Aspirations Statement(VISION)

Strategic Intent Statement

(Mission

Strategy CompetenciesEnvironmental

Factors and stakeholders

Corporate operations: Finance, Accounting , Human Resources , marketing, Operations

Strategic (CSR) Imperatives (Strategic objectives)

Strategic Initiatives(Action Oriented Projects)

Strategic CSR• Corporate success assumes that strategy matches internal competencies

with external opportunities in such a way that the firm achieves its mission as it strives towards its vision. An effective CSR policy requires proactive action (regarding strategic initiatives) that helps the company achieve its strategic and CSR objectives.

• As societies in general become even more affluent, societal expectations evolve, and communication technologies become even more widespread , greater and greater demands for CSR will result.

• Certainly, moral and rational argument exist for companies to act in a socially manner; however , a strong economic incentive also exists to be perceived as a net contributor with in a society and provides the strongest reason for the implementation of CSR with the long term viability of the organization.

• Companies need to reflect the concerns of society through substantive actions, especially regarding the consumer base of their target market. Ideally, progressive companies seek to stay ahead of these evolving values and are able to meet new stakeholders demands as they arise.

• The balance of power and influence is shifting between corporations and their stakeholders because of this change in control of the flow of information. An effective CSR policy allows firms to take advantage of these changes and maximize their economic performance in an increasingly globalizing world.

• Key to practical impact of CSR, therefore is ability to persuade business leaders that CSR offers strategic and economic benefits. Firms can only maximize shareholders value in a globalizing world by utilizing strategies that address the needs of key stakeholders. CSR driven by stakeholders theory, delivers these results.

• It is a means of allowing firms to analyze the total business environment and formulate appropriate organizational strategies.

• It can protect the firm and its asset, while also offering a point of competitive differentiation.