TOWARD A MODEL OF CORPORATE SOCIAL STRATEGY FORMULATION

BRYAN W. HUSTED Instituto Tecnologico y de Estudios Superiores de Monterrey

and Instituto de Empresa

Mailing address: ITESM/EGADE Ave. Eugenio Garza Sada 2501 Sur

Col. Tecnologico C.P. 64849 Monterrey, N.L., MEXICO

Tel.: 52-8358-1400, ext. 6163

Fax: 52-8-328-4413 E-mail: bhusted@egade.sistema.itesm.mx

DAVID B. ALLEN Instituto de Empresa Maria de Molina, 12

28006 Madrid Spain

Tel.: 341-563-9318 Fax: 341-561-0930

E-mail: David.Allen@ie.ucm.es

Paper presented at the Social Issues in Management Division, Academy of Management

August 2001

The research for this paper was funded in part by a grant from the Consejo Nacional de Ciencia y Tecnología.

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Submission #31581

TOWARD A MODEL OF CORPORATE SOCIAL STRATEGY FORMULATION

ABSTRACT

This paper explores the conditions that foster a positive relationship between

corporate social responsibility and financial performance by developing a model of

corporate social strategy. The paper defines corporate social strategy and elaborates a

typology of generic social strategies extant in the literature: differentiation, cost leadership,

and strategic interaction. It then develops a framework for formulating social strategy by

exploring the relationship of industry structure, firm resources, corporate values and

ideology, and stakeholders to the generic strategies in order to create competitive

advantages that are valuable, rare and imperfectly imitable.

Key words: corporate social responsibility, strategy formulation, resource-based view

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TOWARD A MODEL OF CORPORATE SOCIAL STRATEGY FORMULATION

One of the great preoccupations of the social issues in management literature has

been the study of the relationship between corporate social responsibility (CSR) and its

variants (corporate social responsiveness, corporate citizenship, etc.) and financial

performance (Waddock & Graves, 1997; Griffin & Mahon, 1997; Preston & O’Bannon,

1997; Russo & Fouts, 1997). However, the results of these studies have been inconclusive,

sometimes indicating a direct relationship, an inverse relationship, and sometimes no

relationship at all (Griffin and Mahon, 1997). As a result, there is a growing interest in

discovering the conditions that foster a positive relationship between corporate social

responsibility and financial performance (Burke & Logsdon, 1996; Reinhardt, 1999;

Rowley & Berman, 2000). This paper builds on these prior approaches by developing a

model of corporate social strategy. It argues that what distinguishes cases where CSR leads

to positive financial performance from cases where it does not is the design of CSR as

strategy (Liedtka, 2000).

Traditionally, social responsibility and business strategy have been viewed

separately, each one contributing to either the economic or social objectives of the firm.

Some theorists have postulated that there do exist linkages between social responsibility

and the creation of competitive advantage, but have not specified the nature of those

linkages (see Rowley & Berman (2000) as an exception). Typically, the argument goes that

doing good works for society or engaging in ethical behavior builds support from

stakeholders that is necessary to firm survival (Clarkson, 1995) and creates competitive

advantage by reducing agency and transaction costs (Jones, 1995). The relationship

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between social responsibility and financial performance thus is postulated to occur in a

manner similar to that depicted in Table 1-A. In contrast, we argue that these links do not

occur as a matter of chance by simply including a CSR program, but must be carefully

designed. It is this element of design that distinguishes the traditional approach to the social

responsibility-financial performance relationship from the integrated approach postulated

between social strategy and business strategy in Table 1-B.

In order to investigate the relationship between corporate social responsibility,

business strategy, and corporate performance, we develop a framework for formulating

corporate social strategy based on four elements: 1) industry structure, 2) firm resources, 3)

corporate ideology and values, and 4) stakeholders. We begin by defining corporate social

strategy and sketching three generic social strategies. We then explore the relationship of

the four determinants of social strategy to the selection of a generic strategy and its impact

on the creation of competitive advantage for the firm.

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Insert Table 1 about here

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CORPORATE SOCIAL STRATEGY

Prior Models

A number of initiatives in the literature have been developed to address the links

between different kinds of CSR activity and competitive advantage. Let us briefly review

some of the models that take a strategic approach to this relationship.

Murray & Montanari (1986) developed what they called the marketing approach to

responsive management by conceiving of the social impacts of the firm as social

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products—goods and services—that can be managed in the same ways that marketing

manages ordinary products. In this model, the firm identifies social product markets and

determines the marketing mix variables (product, place, price, and promotion) for each

relevant stakeholder group. It then formulates and implements a social responsibility

program to satisfy needs in those social product markets, and finally evaluates the ability of

the firm to satisfy societal expectations.

Work on corporate citizenship is very closely related and refers “to activities

undertaken by businesses to concretely meet social demands responsibly” (Maignan,

Ferrell, & Hult, 1999). This focus goes beyond mere social responsibility to incorporate

concerns about the long-run profitability of citizenship activities (Fombrun, 1996).

Preliminary research has found that corporate citizenship does have a positive impact on

the development of both customer and employee loyalty (Maignan, Ferrell, & Hult, 1999).

McGowan (1997) and Mahon & McGowan (1998) develop a model of social and

political strategy based on Porter’s (1980) model of competitive strategy. In Mahon &

McGowan’s (1998) approach, the product of the social strategy model is the social issue.

The theater of the transaction shifts from the product market in Porter’s model to the issue

arena, and the unit of exchange shifts from money to influence. Similar to Porter’s five

forces model, Mahon and McGowan (1998) postulate five forces that affect social and

political strategy: stakeholders, issues, political rivalry, substitute issues, and audience. A

successful social and political strategy involves a correct positioning with respect to these

forces, although Mahon and McGowan (1998) do not specify how fit can be achieved and

how competitive advantage can be created.

Strategic stakeholder management consists of a body of work that examines how

firm attention to stakeholder relationships can have positive consequences for financial

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performance (Freeman, 1984; Jones, 1995; Berman, Wicks, Kotha, & Jones, 1999).

Preliminary research has found that proper management of employee and customer

relationships is especially important to the firm in contributing to its financial performance

(Berman, Wicks, Kotha, & Jones, 1999).

Finally, Burke and Logsdon (1996) have developed a concept of strategic CSR, but

stopped short of elaborating a comprehensive framework. Building on work in the area of

strategic management, Burke and Logsdon (1996) identify five dimensions of CSR activity

that allow the activity to serve the firm’s economic interests as well as the interests of its

stakeholders. They postulate that those CSR activities characterized by higher centrality,

specificity, proactivity, voluntarism, and visibility are more likely to create value for the

firm.

Taken together, these different initiatives provide the theoretical building blocks for

a comprehensive approach to corporate social strategy, which we begin to develop in this

paper.

Definition

In this paper, strategy refers to the plans, investments, and actions taken to achieve

sustainable competitive advantage and both superior economic and social performance. We

use the term business strategy when we refer to economic issues and social strategy when

treating social issues. Corporate strategy encompasses both the economic (corporate

business strategy) and non-economic (corporate social strategy) objectives of the firm. This

approach modifies current strategic management terminology in consonance with the

advances achieved by the resource-based view (RBV). Traditionally, the terms business

(business unit) strategy and corporate strategy have been used to identify different levels of

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analysis: business strategy has been defined as the search for economic rents via the

achievement of competitive advantage(s) in specific customer-product-market segments,

and corporate strategy as the selection of the industries in which to compete (Andrews,

1967; Porter, 1980; Grant, 1995; Hax and Majluf, 1996; Segev, 1997).

The resource-based view effectively eliminates this distinction by defining

competitive advantage as the creation of unique resources and capabilities (Peteraf, 1993)

that leverage organizational routines across different business units (Nelson and Winter,

1982). In fact, the main objective of Prahalad and Hamel’s (1990) influential “The Core

Competence of the Corporation” was to warn against the limitations of business unit

strategy in favor of the development of firm-wide, frequently intangible, competencies that

most strategic management researchers now believe are the cornerstone to sustainable

competitive advantage. As a result, strategic management research has turned once again to

the challenge of investigating “soft” behavioral issues that are difficult to operationalize

(Papadakis, Lioukas, Chambers, 1998), including those of corporate values and ethics

central to our concept of corporate social strategy.

As a result, we define corporate social strategy as the firm’s positioning with respect

to social issues in order to achieve long-term social objectives and create competitive

advantage. Let us examine each of the elements of this definition more closely.

First, a social issue refers to:

(a) an [opportunity/risk] based on one or more expectational gaps (b) involving management perceptions of changing legitimacy and other stakeholder perceptions of changing cost/benefit positions (c) that occur within or between views of what is and/or what ought to be corporate performance or stakeholder perceptions of corporate performance and (d) imply an actual or anticipated resolution that creates significant, identifiable present or future impact on the organization (Wartick & Mahon, 1994: 306).

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Although complicated, this definition solidly builds on others that have been used in the

literature (Ackerman, 1973; Post, 1990). Significantly, this definition contemplates the

possibility that expectational gaps may occur within management as well as between

management and other stakeholders. It thus has both an internal and an external focus.

Consequently, this definition is probably the most complete one within the literature and

amply serves the needs of this paper. The careful reader will note that we have slightly

altered the original Wartick and Mahon (1994) definition to focus on “opportunities/risks”

rather than “controversial inconsistencies,” which allows us to avoid an unnecessary

antagonism between the firm and its stakeholder environment and uses the vocabulary of

strategic management to express the opportunities implicit in such situations. As social

issues arise, the firm responds by taking a position with respect to these issues.

Social objectives refer to all those goals not directly related to creating value added

for the customer or maximizing shareholder wealth. These social objectives are closely

related to the notion of corporate social performance, which has been defined as “the

satisfaction of stakeholders’ expectations regarding the firm’s behavior as it relates to the

firm’s societal relationships with those stakeholders” (Husted, 2000). This definition is

simple and fits well with the notion of social issue developed by Wartick and Mahon,

1994). The firm’s positioning allows it to achieve its social objectives by reducing the

expectational gaps that occur between the firm and its stakeholders. Generally speaking one

would expect that the use of social strategy would have a positive impact on corporate

social performance by reducing expectational gaps between the firm and its stakeholders,

thus increasing stakeholder satisfaction.

In addition to achieving social objectives, social strategy must create competitive

advantage by developing unique capabilities that have a positive impact on the firm’s

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profitability. Competitive advantage is the core concept of strategic management, just as

natural selection is the core concept of evolutionary biology. Both concepts have as their

aim the explication of why some organizations (organisms) succeed while others do not. In

strategic management, competitive advantage has consistently been defined as a function of

profit (Porter, 1980; 1985). “When two firms compete ... one possesses a competitive

advantage over the other when it earns a higher rate of profit...” (Grant, 1995, 124).

Research indicates that capabilities and resources create competitive advantage when they

are valuable, rare, and imperfectly imitable (Barney, 1986b). The greatest concern of this

paper deals with the ways in which social strategy can create value for stockholders

(Bureke & Logsdon, 1996).

Two caveats should be added with reference to this definition of social strategy.

First, social strategy normally involves the investment of capital, whether financial or

human, in order to achieve social objectives. It is difficult to conceive of social strategy

where such investments are not made. Second, although not essential to the definition of

social strategy, we are particularly concerned with specific actions or plans to design social

strategy (Liedtka, 2000). Contemporary intellectual theories treat intentions and plans with

considerable skepticism (Lyotard, 1984), with the knowledge that operationalizing

intentions and plans is likely to be extraordinarily difficult. Nonetheless, we believe that

there is much to be gained by considering the announced social strategies of firms and the

plans made to implement these social strategies. At this early stage of research into

corporate social strategy, we must begin with those firms that deliberately create social

strategies and plans so that we can begin the task of building models that can be tested.

Moreover, the logical nexus between corporate learning, distinctive competencies,

sustainable competitive advantage, and strategic planning is crucial to developing a

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corporate social strategy concept that provides practitioners with tools to analyze social

strategy and motivates them to create and implement such strategies.

Generic Social Strategies

Currently, there exists no generally accepted typology of corporate social strategies.

Three different generic social strategies typically emerge from the literature: product

differentiation, cost leadership, and strategic interaction between the firm and its regulators

(either government or industry) (Porter, 1980; Reinhardt, 1998, 1999). These three generic

strategies permit an integration of the economic and social objectives of the firm by using

social action to create value for stockholders.

In the case of product differentiation, the social objectives of the firm allow it to

extract a price premium from the customer by differentiating existing products or

developing new products and markets. Generally speaking, such product differentiation

may only occur under conditions where customers are willing to pay for social products,

credible information about social products exists, and protection against imitators is

available (McWilliams & Siegel, 2001; Reinhardt, 1998). The availability of a product

differentiation social strategy depends upon the existence of consumers sensitive to

environmental and social issues and whose purchasing decisions are affected by corporate

behavior in these areas (Zalka, Downes, & Paul, 1997).

A cost leadership social strategy occurs where firms discover cost savings that are

available through process innovation (Porter & van der Linde, 1995; Hart, 1995). Although

much debate exists as to the possibility of finding such “free lunches” (Palmer, Oates, &

Portney, 1995), there does appear to exist considerable evidence of the capacity of firms to

innovate in response to social opportunities and threats (Kanter, 1999). Such cost leadership

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may occur through the ability of a firm to attract and maintain an effective labor force

based on its commitment to the firm’s social products (O’Reilly & Pfeffer, 2000; Greening

& Turban, 2000). Other mechanisms for cost savings may occur through the wise

management of relationships with suppliers (Husted, 1994; Dyer & Singh, 1998), who are

committed to similar social objectives.

Finally, the strategic interaction social strategy involves the strategic use of

regulation and/or self-regulation in order to create rent-seeking opportunities for the firm.

Researchers have demonstrated that firms can use government and industry regulation as a

means to obtain competitive advantage with respect to other firms that are less well

positioned to comply with such standards (Leone, 1986; Shaffer, 1995a; Shaffer, 1995b;

Schuler, 1996). Where compliance with a standard, such as avoiding the use of sweatshop

labor, may increase costs, regulation may be a way for a firm with a particular cost

advantage relative to competitors to exploit that advantage in a way that creates value for

stockholders. Without invoking some sort of regulation, such cost advantages may not be

available. It should be pointed out that these three generic social strategies are not mutually

exclusive, and may be used in combination.

DETERMINANTS OF CORPORATE SOCIAL STRATEGY

Industry structure

The influence of industry structure on social strategy raises difficult questions that

have vexed strategy researchers for the last two decades (Eisenhardt, 2000a). We are faced

with firm heterogeneity, permeable industry boundaries, dynamic capabilities and

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managerial perception of industry structure (Sutcliffe and Huber, 1998), which raise

important challenges for understanding industry impact on firm business and social

strategy.

Accordingly, two approaches to industry structure are necessary. First, top

management perceptions of the environment need to be assessed with regard to instability,

munificence, complexity, hostility and controllability (Sutcliffe and Huber, 1998). These

five dimensions of firm environment are indicators of the perceived power a firm holds in

relationship to its principal stakeholders. Second, industry characteristics are evaluated:

market concentration, product attribute differentiation, and industry growth rates (Bain,

1959; Porter, 1981; Robinson & McDougall, 1998). Robinson and McDougall (1998) find

that specific adaptations of industry structural elements using multiple measures provide

support for the significance of the impact of industry characteristics on firm performance.

Together, we link managerial (internal) and industry (external) indicators of the firm’s

relationship to its competitors in order to evaluate the ability of the firm to create and

sustain competitive advantage.

Applying this approach to social strategy, we find that just as with business strategy,

competitive advantage is realized through achieving superiority in one or more of six

competitive factors: product attributes, product image, design, price, service, or corporate

reputation (Kotha and Vadlamani, 1995). Just as in the case of business strategy, a

differentiation social strategy is successful when customers are willing to pay a premium

for social products and entry barriers to competitors are created (Reinhardt, 1998). Though

the causal relationships between the competitive factors and social strategies is frequently

complex (see Figure 1), they create real and measurable competitive advantages. In fact,

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the path determined, casually ambiguous nature of social strategy may provide stronger

opportunities for inimitability (Barney, 1986; Peteraf, 1993).

The possibility of a differentiation social strategy exists because of demanding

consumers who make purchase decisions based on both the environmental (Brown &

Wahlers, 1998; Menon, Menon, Chowdhury & Jankovich, 1999) and social (Zalka,

Downes, & Paul, 1997) performance of the firm. In addition, entry barriers may exist, for

example, where environmentally safe products are protected by patents or socially sound

processes (e.g., avoidance of sweatshop labor) are based upon trust relationships with

suppliers that are rare and inimitable (Barney, 1986b).

The Body Shop put into practice a differentiation social strategy in such a

competitive environment. At time of entry, the health and beauty care industry was

dominated by product image and cost competitors. The Body Shop reenacted the

competitive environment by providing women with health and beauty care products

consistent with social values of self-respect and animal rights. In order to do so, the firm

had to redefine all six of the competitive factors, thus creating a “temporary monopoly,”

until competitors began to imitate the redefined factors because of the low entry barriers.

Proposition 1: The greater the perceived bargaining power of customers in a given

market, the greater the impact of a differentiation social strategy on the creation of

competitive advantage.

A cost leadership social strategy is possible where innovation offsets reduce costs

associated with stricter social and environmental standards (Porter & van der Linde, 1995).

Often such process innovation does not occur because of the failure of information to flow

freely between the firm and its suppliers in imperfectly competitive markets. The existence

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of strong suppliers that are themselves competitive at global levels can foster innovation

within the firm (Porter, 1990). Supplier influence increases under conditions where firms

deal with fewer suppliers and each supplier has bargaining power with respect to the firm

because of relation-specific assets invested in the relationship (Pfeffer & Salancik, 1978).

Such investments greatly enhance the possibility of the creation of competitive advantage

through cooperative innovation by the customer and supplier (Dyer & Singh, 1998).

Proposition 2: The greater the perceived bargaining power of the suppliers in a

given market, the greater the impact of a cost leadership social strategy on the creation of

competitive advantage.

Some industries are characterized by considerable cost asymmetries that provide

one firm with a cost advantage in providing social products that comply with higher

environmental or social standards than its competitors (Reinhardt, 1999; Shaffer, 1995b). If

monitoring is possible in order to detect free riders who fail to comply with high standards,

it may make sense for the firm to use a strategic interaction social strategy to influence

public policy so that the regulator imposes such standards on the entire industry. Such

strategies often provide policy makers with information about new policy or build

constituencies to support such initiatives (Hillman & Hitt, 1999). After the new standard is

enacted, the firm may then exploit its cost advantage with respect to its competitors.

Proposition 3: The greater the perceived cost asymmetries that characterize

compliance with social and environmental standards in an industry, the greater the impact

of a strategic interaction social strategy on the creation of competitive advantage.

Firm resources

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The resource-based view (RBV) has had a significant impact on how we regard firm

resources and capabilities, in particular intangible resources. The emergence of intangible

resources as a major component of firm capital, often overshadowing traditional capital

(Barney, 1991; Peteraf, 1993; Rao, 1994; Hitt et., al, 2001), has contributed to refocusing

strategic management on “organizational advantage” (Ghoshal and Moran, 1996). As a

result, the firm has been redefined as “a social community specializing in speed and

efficiency in the creation and transfer of knowledge” (Kogut and Zander, 1996).

Knowledge, according to Kogut and Zander (1996), has been the principle firm

resource. While this may be an overstatement of the case, RBV research has been working

hard to establish a theory to support the overwhelming importance of intangible resources.

Where traditional economic theory emphasized “the importance of external market

factors in determining firm success” (Hansen and Wernerfelt, 1989), RBV theory, grounded

in the work of Penrose (1959); Selznick, (1957), Polayni (1967), argues that organizational

competitive advantage depends on the dynamic relationship between innovation and

managerial behavior by which organizational resources and capabilities are developed.

Adapting concepts from economics, sociology and cognitive psychology, RBV attempts to

systematize causally ambiguous (Rumelt, 1984), path dependent (Nelson and Winter, 1982;

Rosenberg, 1990) and socially complex (Barney 1986b) processes by which firms develop

firm specific competitive advantages that are difficult to copy.

In the context of social strategy, the complex evolutionary relationships outlined by

RBV are especially important. Firm resources include not only the traditional tangible

resources (physical and financial assets), but also intangible resources (human capital,

social capital and reputational capital (Grant, 1996; Nahapiet and Ghoshal, 1998). These

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resources are developed over time as the firm interacts with all its stakeholders. The

application of these resources to market and social opportunities represents for each firm a

unique, dynamic positioning (Eisenhardt, 2000a).

Credibility is a particularly important resource needed for the development of a

differentiation social strategy. Without credible information, customers are unlikely to pay

premium prices for social products (Reinhardt, 1998). Such credibility is an essential

element of a corporate reputation that is only developed through consistent effort in the

long-run and contributes to the firm’s financial performance (Fombrun & Shanley, 1990;

Fombrun, 1996; Miles & Covin, 2000). The development of a reputation for credibility lies

in part on the willingness of a firm to disclose information about environmental and social

impacts (Szwajkowski, 2000; Hart, 1995). Such activity is quite rare. Sharma &

Vredenburg (1998: 740) explain that “trust and credibility developed by proactive

companies… is a path-dependent strategic capability that cannot be easily imitated by

competitors.” In addition, the consistency of a policy of credibility, required both over time

and across issues, is difficult to imitate. As a result, it is likely that a firm with such

resources will be more effective in the development of a differentiation social strategy.

Proposition 4: The greater the degree to which a firm possesses credibility with its

stakeholders, the greater the impact of a differentiation social strategy on the creation of a

competitive advantage.

Cost leadership is particularly difficult to achieve in highly competitive markets and

depends upon the ability of a firm to innovate (Porter & van der Linde, 1995). Stakeholder

integration and continuous innovation have been identified by both Hart (1995) and Sharma

and Vredenburg (1998) as essential firm resources that permit the development of creative

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solutions to environmental and social problems. Stakeholder integration refers to the ability

of the firm to develop collaborative, problem-solving relationships with a variety of

stakeholders (Sharma and Vredenburg, 1998). As previously mentioned, supplier-buyer

cooperation can facilitate innovation leading to cost leadership, but such cooperation can

occur only if the firm has well developed resources for stakeholder integration as well as

continuous innovation. In addition, the integration of employee perspectives and ideas is

also vital to innovation (O’Reilly & Pfeffer, 2000). Christman’s (2000) study of chemical

companies found that capabilities related to process innovation were essential to the

creation of cost advantages for firms that implement environmental best practices.

Proposition 5: The greater the degree to which a firm possesses resources of

stakeholder integration and continuous innovation, the greater the impact of a cost

leadership social strategy on the creation of competitive advantage.

A final resource that is particularly relevant to the development of a strategic

interaction social strategy is political acumen (Leone, 1986). Russo and Fouts (1997: 540)

define this resource as “the ability to influence public policies in ways that confer a

competitive advantage.” This kind of political savvy is a rare and inimitable resource that

allows a firm to effectively pursue public policy change. Starik and Rands (1995) discuss

how effectively the political capability of Cummins Engine Company was applied to the

adoption of laws extending clean air legislation to diesel truck engines, which gave

Cummins a significant advantage with respect to its competitors.

Proposition 6: The greater the degree to which the firm possesses the resource of

political acumen, the greater the impact of a strategic interaction social strategy on the

creation of competitive advantage.

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Corporate values and ideology

Corporate culture consists in part in the values, both implicit and explicit, of the

firm. The explicit values are captured by the concept of corporate ideology (Pettigrew,

1979), which is particularly relevant to the formulation of corporate social strategy.

Considerable controversy over the nature of ideology exists within the management

literature. In the more narrow, interest-driven approach to ideology, the concept is defined

simply as the study of the origin of ideas, where the origin is usually explained by the

political interests served by those ideas (Weiss & Miller, 1987). Other scholars have argued

for a broader use of the term ideology, which may in some cases serve specific political

interests, but not always (Beyer, Dunbar, & Meyer, 1988). We adopt this broader usage of

the term and follow Trice and Beyer (1993: 33) who define corporate ideology as “shared,

relatively coherently interrelated sets of emotionally charged beliefs, values, and norms that

bind some people together and help them to make sense of their worlds.” Corporate

ideology in this second sense has been referred to as philosophy orientation or business

philosophy by some authors and consists of the stated values of the firm (Goll &

Sambharya, 1990; Alvesson & Berg, 1992). Corporate ideology is related to strategy,

performance, and social responsibility because ideology affects the decisions made by

managers based on their goals, objectives, and beliefs about how the world works (Simons

& Ingram, 1997).

There is evidence that corporate ideology has at least three dimensions: progressive

decision-making, social responsibility, and organicity (Goll & Zeitz, 1991). Subsequent

research has confirmed the validity of these dimensions (Goll, 1991; Goll & Sambharya,

1995). Progressive decision-making emphasizes a proactive search for opportunities,

participation, analytic decision tools, and open communication channels. Social

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responsibility refers to a company’s commitment to participating in the solution of social

problems. Finally, organicity deals with the firm’s informality and ability to adjust to new

circumstances (Goll & Sambharya, 1995). This framework is not exhaustive. Of special

interest is Miles’ (1987) work on corporate ideologies dealing with business-government

collaboration. Miles (1987) describes two distinct ideologies in the insurance industry: the

institution philosophy and the enterprise philosophy. The institution philosophy

acknowledges the legitimate claims of society on the firm and the responsibility of the firm

to respond to those claims by collaborating with governmental regulators. The enterprise

philosophy holds that the insurance firm only owes a responsibility to its policyholders and

generally supports an adversarial relationship with regulators.

Corporate ideology affects strategy by helping to channel available firm responses

to opportunities and threats. Specifically, ideology shapes the formulation and

implementation of strategy by influencing the manager’s evaluation of the environment by

limiting his or her vision through processes of selective perception (Goll & Sambharya,

1990). We know that strategic choice and performance levels are determined in part by the

values and background characteristics of the top management team (Hambrick & Mason,

1984). These values and beliefs, embodied in that aspect of culture referred to as ideology,

can be a source of competitive advantage for the firm (Barney, 1986a).

There is some evidence that ideology does affect financial performance. Initial

research suggests that companies that believe in rational decision-making, involving a

search for alternatives, evaluation, selection, and implementation, demonstrate poorer

financial performance than those firms that do not share such beliefs (Goll & Sambharya,

1990). In addition, conglomerates with high organicity (emphasis on flexibility) and

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progressive decision-making have better financial performance than conglomerates with

low organicity and little progressive decision-making (Goll & Sambharya, 1995).

There appears to be a clear nexus between certain corporate ideologies and social

strategy. The social responsibility dimension of ideology channels the kinds of responses

that managers make to social threats and opportunities. A strong commitment to social

responsibility provides a set of values that is not easily imitable by competitors (Barney,

1986a; O’Reilly & Pfeffer, 2000). Research indicates that managerial values act as a frame

for recognizing and evaluating the importance of social issues (Kahneman & Tversky,

1984; Sharfman, Pinkston, & Sigerstad, 2000) and the salience of stakeholders (Agle,

Mitchell, & Sonnenfeld, 1999).

These managerial interpretations of social and environmental issues directly affect

the selection of social strategies (Sharma, Pablo, & Vredenburg, 1999; Sharma, 2000;

Bansal & Roth, 2000). The social responsibility ideology of a firm is especially important

for its customers who play an essential role by their willingness to pay a price premium for

differentiated social products (Menon & Menon, 1997; Berman, Wicks, Kotha, & Jones,

1999; Maignan, Ferrell, & Hult, 1999). Without such a clear ideology, it is impossible to

create differentiated social products.

Proposition 7: The greater the social responsibility orientation of a firm, the greater

the impact of a differentiation social strategy on the creation of competitive advantage.

A progressive decision-making orientation is especially relevant to the cost

leadership social strategy because this orientation includes a commitment to the

participation of employees in decision making. Theorists argue that the participation of

employees is the key for an effective cost-leadership strategy to work because it fosters

process innovation (Sharma & Vredenburg, 1998). Generally, a cost leadership social

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strategy can only be effective if information flows more freely among employees within the

firm than it does within competing firms (Reinhardt, 1999).

Proposition 8: The greater the progressive-decision making orientation of the firm,

the greater the impact of a cost leadership social strategy on the creation of competitive

advantage.

An additional element of corporate ideology is the attitude that a firm has with

respect to collaboration with the government. Miles (1987) found that the institution-

oriented philosophy was associated with a collaborative/problem-solving approach to

regulators. On the other hand, an enterprise philosophy was associated with an

individualistic/adversarial approach. The collaborative/problem-solving strategy was

characterized by maintaining open lines of communication between the firm and its

regulators. In addition, Miles (1987) showed that there was a relationship between

management philosophy and corporate social performance. Specifically, he found that firms

with an institution-oriented philosophy were more likely to be more highly evaluated by

independent third parties in terms of their social performance than firms with an enterprise-

oriented philosophy. Thus, an effective strategic interaction strategy requires a

predisposition to work effectively with the government.

Proposition 9: The greater the governmental collaboration orientation of the firm,

the greater the impact of a strategic interaction social strategy on the creation of

competitive advantage.

Stakeholders

Freeman’s (1984: 46) now classic definition of the stakeholder broadly includes all

persons or groups that “can affect or [are] affected by the achievement of an organization’s

22

objectives.” However, his definition is widely debated and numerous other definitions have

been offered (Mitchell, Agle, & Wood, 1997). Stakeholder research has often been divided

among both normative and descriptive streams as scholars attempt to distinguish among

those groups that should be considered stakeholders and those groups that managers

actually treat as stakeholders (Donaldson & Preston, 1995).

These stakeholders form the fabric of the social structure in which firms operate and

determine to whom the firm is responsible. The interaction of stakeholders create social

issues, which provide the opportunities and threats with respect to which firms position

themselves through their social products. However, not all stakeholders receive the same

attention from firms because attention is a limited resource that must be allocated

efficiently (Simon, 1976). A firm’s attention and response to a stakeholder depends largely

on that stakeholder’s salience.

Stakeholder salience refers to “the degree to which managers give priority to

competing stakeholder claims” (Mitchell, Agle, & Wood, 1997: 854). According to the

theory of stakeholder salience developed by Mitchell, Agle, and Wood (1997), salience is

itself a function of the power and legitimacy of the stakeholders as well as of the urgency of

the claims made by stakeholders upon the firm. Stakeholder power is the inverse of the

firm’s dependence on the stakeholder (Pfeffer & Salancik, 1978). Empirical research has

confirmed that a high correlation exists between power, legitimacy, and urgency on the one

hand and stakeholder salience on the other (Agle, Mitchell, & Sonnenfeld, 1999). Highly

salient stakeholders represent both a potential opportunity for cooperation and a potential

threat to the firm (Savage, Nix, Whitehead, & Blair, 1991).

As the salience of a stakeholder group increases, due especially to increased power,

firms tend to either develop a collaborative strategy in which they work together jointly

23

with the stakeholder or a defensive strategy in which they reduce dependence on that

stakeholder (Freeman, 1984; Savage, Nix, Whitehead, & Blair, 1991). Since the section on

industry structure has dealt with the impact of market stakeholders on social strategy, we

shall now examine the implications of dependence of the firm on certain non-market

stakeholders for the formulation of strategy.

A product differentiation strategy is particularly effective in situations characterized

by high salience of NGOs and community stakeholders. In these situations, groups that

represent a variety of interests in the community or society at large make demands upon the

firm. Such demands create additional constraints on firm performance. Such constraints, in

and of themselves, imply greater costs for the firm (Palmer, Oates, & Portney, 1995). The

best option for the firm to respond to such demands is by creating a social product that

commands a price premium from its customers. The firm thus needs to differentiate its

products and create new markets for these products as have firms like the Body Shop,

which has been very sensitive to the demands of animal rights groups.

Proposition 10: The greater the salience of NGO stakeholders, the greater the

impact of a product differentiation social strategy on the creation of competitive advantage.

Where employees are a particularly salient stakeholder, there exists greater

opportunities to reduce actual costs through innovation. Employees are the key to

increasing firm productivity (O’Reilly & Pfeffer, 2000). The innovation offsets that Porter

and van der Linde (1995) suggest are available to firms depend upon these productive kinds

of employees. Certainly firms for which employees are not a particularly salient

stakeholder, possibly because their processes require low levels of technical skill and thus

face an abundant supply of labor, would not be able to develop a cost leadership social

strategy.

24

Proposition 11: The greater the salience of employees, the greater the impact of a

cost leadership social strategy on the creation of competitive advantage.

Finally, strategic interaction of a firm with regulators depends in large part upon the

existence of a government or regulatory authority with the power to affect a particular

industry. Where governments do not have that kind of power, a strategic interaction social

strategy will not be effective. Unfortunately, governments are frequently subject to

regulatory failure (Breyer, 1982). Sources of regulatory failure include technical and

information shortcomings, jurisdictional mismatches, and public distortions (Esty, 1999).

One common cause of regulatory failure, although certainly not the only one, is corruption,

which undermines the ability of governments to effectively monitor and enforce public

policy (Abaroa, 1999). A strategic interaction social strategy will only function where the

government is an effective and, therefore, powerful stakeholder.

Proposition 12: The greater the salience of the government, the greater the impact

of a strategic interaction social strategy on the creation of competitive advantage.

CONCLUSION

This paper contributes to a change in the focus of the CSR literature by examining

the conditions under which firm social strategies will have a positive impact upon financial

performance. It has drawn on the literatures of strategic management, corporate social

responsibility, environmental management, and political strategy to create a model of the

formulation of social strategy. Certainly it is not exhaustive, but it is illustrative of the

direction that research might take in order to make a greater contribution to the practice of

management. The model itself can be extended fairly simply by incorporating other aspects

of industry structure, firm resources, corporate values, and stakeholder relationships. By

25

taking a realistic view of the firm as a profit maximizer, this approach should move forward

an agenda of incorporating the concerns of social responsibility into the strategic plans of

business firms.

The aim of incorporating social strategies into the CSR literature coincides with the

historical objective of the field: building a more comprehensive theory of the firm that

accounts in a richer way for firm behavior. This requires developing a more complete

definition of stakeholders, one in which the multiple objectives of those affected by firm

behavior are accurately reflected in the strategic formulation and implementation processes.

We must remember that shareholders are not only shareholders—they may have social

objectives, they may be managers or employees, they may be members of community

organizations that seek to influence firm behavior. All stakeholders stand somewhere

between a 100% social orientation and a 100% profit orientation, with short, medium, and

long-term objectives that may be ambiguous or contradictory. Creating a theory of firm

behavior that incorporates these varying perspectives is the “ultimate” objective of our

research agenda. Building a theoretical model of social strategy formulation is a first step.

26

Table 1-A

Traditional View of Business Strategy and Social Responsibility

`

Table 1-B

Integrated View of Business and Social Strategy

Industry Structure

Stakeholders

Corporate values and ideology

Resources

Social Responsibility

Social Performance

Financial Performance

CompetitiveAdvantage

Business Strategy

Industry Structure

Resources

Corporate values and ideology

Stakeholders

Social Strategy

Business Strategy

Social Performance

Competitive Advantage

Financial Performance

27

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