Corporate Social Responsibility and Competitive Advantage Moderating Role of Corporate Strategy Working paper

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1 Ref 2.03 Corporate Social Responsibility and Competitive Advantage Moderating Role of Corporate Strategy Working paper Li-Hwa Hung 1 Department of Business Administration, Ching Yun University lhhung@cyu.edu.tw Keywords: corporate social responsibility; competitive advantage; corporate strategy; corporate sustainability; competitive context; corporate philanthropy Abstract In recent years, scholars and managers have made efforts to determine the strategic value of corporate social responsibility. Resources and capabilities are used by firms to develop and implement their strategies. Since different firms have different bundles of resources and capabilities, and some of them are difficult or even impossible to imitate, their ability to implement any given strategy will differ. The strategic social investor who upon making a social investment may obtain an additional benefit (good reputation, differentiated products that extract a premium, more highly qualified personal) by design and thus obtain greater profitability. Such design may involve either the position of the firm with respect to its competitors or the leveraging of distinctive resources and competences. This study attempts to increase the understanding of why CSR may have a positive impact on financial performance and what might be considered in the minds of managers in deciding when to adopt socially responsible practices. The purpose of this study is to explore corporate strategy as a moderator of the corporate social responsibility and competitive advantage. 1 Jung-Li, Taiwan 320, R. O. C. 1

2 Introduction In recent years, scholars and managers have made efforts to determine the strategic value of corporate social responsibility (CSR). Unfortunately, the analyses of CSR in theoretical frameworks, measurement, and empirical methods are not consistent. Moreover, this concept cannot be analyzed through the lens of a single disciplinary perspective (McWilliams et al., 2006). Branco and Rodrigues (2006) indicated that CSR related to complex issues such as environmental protection, human resources management, health and safety at work, relations with local communities and relations with suppliers and consumers. One definition of CSR relates it to a firm s commitment to contribute to corporate sustainability. (Holme and Watts, 2000 in Branco and Rodrigues, 2006). Dyllick and Hockerts (2002) defined corporate sustainability as meeting the needs of a company s direct and indirect stakeholder Usually, corporate sustainability links to the triple bottom line approach in which corporate performance associates to a firm s economic viability, minimization of negative environmental impacts and action in conformity with social expectations. Engaging in social responsibility activities involves costs. For example, it may require the purchasing of environmentally friendly equipment, the implementing of stricter quality controls, or new health, safety and environmental programs. Since having and presenting an image of social responsibility involves incurring costs, benefits are expected to accrue to sustain business (Branco and Rodrigues, 2006). Does CSR lead to improved financial performance? If so, what kind of benefits does CSR have that can lead to improved financial performance? Husted and De Jesus Salazar (2006) maintained a firm s three desires to engage in CSR: altruism, coerced egoism, and the strategic use of CSR. Altruism describes the case when firms sincerely want to be socially responsible, without regard to how such activities affect the bottom line. Coerced egoism occurs when firms act in socially responsible manners only when they are regulated to do so. The strategic use of CSR is defined as instances where there are clear benefits to the firms for engaging in CSR. The authors demonstrated that both society and firms are better off when firms use CSR strategically than when they are coerced into making such investments. Porter and Kramer (2002) assessed the majority of corporate contribution programs as diffuse and unfocused, rather than being tied to well-thought-out social or business objectives. The authors suggested corporations need to rethink both where they focus their philanthropy and how they go about their giving. They argued that true strategic giving addresses important social and economic goals simultaneously. It would target areas of competitive context where the company and society both benefit because the firm brings unique assets and expertise. This study attempts to increase the understanding of why CSR may have a positive impact on financial performance and what might be considered in the minds of managers in deciding when to adopt socially responsible practices. The purpose of this study is to explore corporate strategy as a moderator of the corporate social responsibility and competitive advantage. 2

3 Theoretical perspectives on CSR Numerous theories have been brought to bear on the subject of CSR. McWilliams et al., (2006) indicated multiple perspectives on CSR, such as agency theory (Friedman, 1970); stakeholder theory (Donaldson and Preston, 1995); stewardship theory (Donaldson and Davis, 1991), resource-based view of the firm (RBV)(Hart, 1995); institutional theory (Jennings and Zandbergen, 1995); theory of the firm (Mcwilliams and Siegel, 2001) and strategic leadership theory (Waldman et al., 2004). In recent years scholars have witnessed a change in the CSR debate from questioning whether to make substantial commitments to CSR to asking how such a commitment should be made (Smith, 2003). Several influential authors began to consider the advantages of CSR. They suggest that it allows a firm to increase financial performance (Porter and Kramer, 1999; Smith, 2003). Some authors even argue that managers precisely as they treat all investment decisions (McWilliams and Siegel, 2001, P.125) or that it should be considered as a form of strategic investment (McWilliams et al., 2006, P.4). Corporate social responsibility and competitive advantage The RBV examines the link between a firm s internal characteristics and its performance. The differentials in performance are explained primarily by the existence of firm-specific resources that are valuable, rare, not easily imitated by rivals (inimitable) and not easily bought or sold on markets (non-substitutable). Firms are social actors embedded in society. They are responsible for carrying out social activities to provide social members the products or services that will fulfill their needs. Resources are the means through which firms accomplish their activities (Mathews, 2002). Resources include the assets that firms use to accomplish the activities they are engaged in to convert inputs into outputs, and can be classified as tangible (physical and financial assets) or intangible (corporate reputation, employee s knowledge, experiences and skills, and their commitment and loyalty). However, resources are not productive on their own and can only be a source of competitive advantage if they are used by firms to perform their activities. Thus, the analysis also needs to consider a firm s abilities to assemble, integrate, and manage these bundles of resources, i.e. its capabilities (Russo and Fouts, 1997, P.537). Capabilities are thus seen as referring to the actions through which resources are used and firms engage in to get something done and accomplish their objectives. Resources and capabilities are used by firms to develop and implement their strategies. Since different firms have different bundles of resources and capabilities, and some of them are difficult or even impossible to imitate, their ability to implement any given strategy will differ. Management s task can be seen as being that of assembling a bundle of resources and develop the capabilities needed to capture as many of the services from these resources as possible (Mathews, 2002). Corporate Social Responsibility and Competitive Advantage Moderating Role of Corporate Strategy Husted and De Jesus Salazar (2006) employed standard microeconomic analysis to determine the optimal level of social output that results under three cases: altruism, coerced egoism, and the strategic use of CSR. They demonstrate that both society and firms are better 3

4 off when firms use CSR strategically than when they are coerced into making such investments. The strategic social investor who upon making a social investment may obtain an additional benefit (good reputation, differentiated products that extract a premium, more highly qualified personal) by design and thus obtain greater profitability. Such design may involve either the position of the firm with respect to its competitors (Porter and Kramer, 2002) or the leveraging of distinctive resources and competences (Barney, 1991). Burke and Logsdon (1996) argued that corporate social responsibility can provide economic benefits when such programs are central to the firm s mission, highly specific, proactive, visible, and voluntary. There are at least three circumstances under which a firm may engage in activities that benefit the environment or society and also increase the expected value of the firm: where the possibility exists of strategic interaction based on governmental intervention; where opportunities exist to differentiate products; and where cost reduction may occur within the firm. Strategic interaction is particularly relevant because many social and environmental innovations increase costs relative to competitor. Governmental regulation can significantly help firms with cost advantages in complying with regulation to compete against rivals that do not enjoy such advantages (Husted and De Jesus Salazar, 2006). Porter and Kramer (2002) indicated that companies do not function in isolation from the society around them. In fact, their ability to compete depends heavily on the circumstances of the locations where they operate. Competitiveness today depends on the productivity with which companies can use labor, capital, and natural resources to produce high-quality goods and services. Productivity depends on having workers who are educated, safe, healthy, decently housed, and motivated by a sense of opportunity. Preserving the environment benefits not only society but companies too, because reducing pollution and waste can lead to a more productive use of resources and help produce goods that consumers value. Porter and Kramer (2002) argued that competitive context has always been important to strategy. The availability of skilled and motivated employees; the efficiency of the local infrastructure, including roads and telecommunications; the size and sophistication of the local market; the extent of governmental regulations such contextual variables have always influenced companies ability to compete. Competitive context has become even more critical as the basis of competition because modern knowledge-based and technology-based competition depends more and more on workers capabilities. Also, companies today rely more on local partnerships. They depend on outsourcing and collaboration with local suppliers and institutions rather than on vertical integration; they work more closely with customers; and they draw more on local universities and research institutes to conduct research and development. Moreover, passing increasingly complex local regulations and reducing approval times for new projects and products are becoming increasingly important to competition. As a result of these trends, companies successes have become more tightly intertwined with local institutions and other contextual conditions. Based on above discussion, the following proposition is formulated: Proposition: Corporate strategy acts as the moderating role of corporate social responsibility and competitive advantage. 4

5 Conclusion The RBV suggests that firms generate sustainable competitive advantages. They do this by effectively controlling and manipulating their resources and/or capabilities that are valuable, rare, cannot be perfectly imitated, and for which no perfect substitute is available. Corporate social investments may act as a driver for technological and managerial innovation (Kanter, 1999) and for building new competencies (Russo and Fouts, 1997). In such a strategic case, Husted and De Jesus Salazar (2006) indicated that there are additional benefits that the firm extracts from a given level of social output, because the firm has designed a strategy to receive such benefits. These benefits may occur through the differentiation of the product, which allows the firm to charge a price premium (McWilliams and Siegel, 2001), increased sales, or through cost reduction. Costs may decrease, for example, because of the firm s ability to attract more highly qualified employees and thus increase the firm s productivity (Kanter, 1999; Russo and Fouts, 1997). Porter and Kramer (2002) suggested that when corporations support the right causes in the right ways when they get the where and the how right they set in motion a virtuous cycle. By focusing on the contextual conditions most important to their industries and strategies, companies ensure that their corporate capabilities will be particularly well suited to helping grantees create greater value. And by enhancing the value produced by philanthropic efforts in their fields, the companies gain greater improvements in competitive context. Both the corporations and the causes they support reap important benefits. References Barney, J. (1991) Firm resource and sustained competitive advantage, Journal of management, 17(1), pp Burke, L. and Logsdon, J. M. (1996) How corporate social responsibility pays off, Long Range Planning, 29(4), pp Branco, M. C. and Rodrigues, L. L. (2006) Corporate social responsibility and resource-based perspectives, Journal of Business Ethics, 69(2), pp Donaldson, L. and Davis, J. H. (1991) Stewardship theory or agency theory: CEO governance and shareholder returns, Australian Journal of Management,16(1), pp Donaldson, T. and Preston, (1995) The stakeholder theory of the corporation: concepts, evidence, and implication, Academy of Management Review, 20, pp Dyllick, T. and Hockerts, K. (2002) Beyond the business for corporate sustainability, Business Strategy and the Environment, 11(2), pp Friedman, M. (1970) The social responsibility of business is to increase its profits, New York Times Magazine, September, 13. Hart, S. (1995) A natural resource-based view of the firm, Academy of Management Review, 20(4), pp

6 Holme, R. and Watts, P. (2000) Corporate social responsibility: making good business sense (World Business Council for Sustainable Development, Geneva). Husted, B. W. and De Jesus Salazar, J. (2006) Taking Friedman seriously maximizing profits and social performance, Journal of Management Studies, 43(1), pp Jennings, P. and Zandbergen, P. (1995) Ecologically sustainable organizations: an institutional approach, Academy of Management Review, 20(4), pp Kanter, R. M. (1999) From space change to real change, Harvard Business Review, 77(3), pp Mathew, J. A. (2002) A resource-based view of Schumpeterian economic dynamics, Journal of Evolutionary Economics, 12(1/2), pp McWilliams, A. and Siegel, D. (2001) Corporate social responsibility: a theory of the firm perspective, Academy of Management Review, 26(1), pp McWilliams, A., Siegel, D. & Wright, P. M. (2006) Corporate social responsibility: strategic implication, Journal of Management Studies, 43(1), pp Porter, M. E. & Kramer, M. R. (2002) The competitive advantage of corporate philanthropy, Harvard Business Review, 80(12), pp Porter, M. E. & Kramer, M. R. (1999) Philanthropy s New Agenda: creating Value, Harvard Business Review, 77(6), pp Russo, M. V. and Fouts, P. A. (1997) A resource-based perspectives on corporate environmental performance and profitability, Academy of Management Journal, 40(3), pp Smith, N. C. (2003) Corporate social responsibility: whether or how? California Management Review, 45(4), pp Waldman, D., Siegel, D. and Javidan, M. (2004) CEO transformational leadership and corporate social responsibility, Working paper, Rensselaer Polytechnic Institute. 6