Corporate Social Responsibility

Michael Porter made headlines early last year when he co-authored an article in the January-February 2011 issue of Harvard Business Review with the grand title on the magazine cover: “How to fix capitalism and unleash a new wave of growth”.

It turns out that Porter – along with his co-author Mark Kramer – had been advocating a link between competitive advantage and corporate social responsibility as early as December 2006, also in HBR, and innovation guru Clayton Christensen (with Heiner Baumann, Rudy Ruggles and Thomas Sadtler) was writing about disruptive innovation for social change in the same issue.

Porter’s more recent writings on corporate social responsibility (CSR) seem to have attracted a lot more attention in the media, including a Schumpeter column in The Economist that expressed doubts on his acumen (“Oh, Mr Porter: The new big idea from business’s greatest living guru seems a bit undercooked”, March 12^th, 2011). I find it interesting that Porter’s and Kramer’s idea predates significantly the moment where concepts such as sustainability became fashionable in business. In fact, the two pioneered the CSR movement years ahead of their time, which might be what they are repeating their idea now. They seem to be finding a more receptive audience.

In the 2006 article, Porter and Kramer argue that “the prevailing approaches to CSR are so disconnected from strategy as to obscure many great opportunities… CSR can be much more than a cost, a constraint, or a charitable deed – it can be a potent source of innovation and competitive advantage.” They recommend considering:

• Value-chain social impacts (“social issues that are significantly affected by a company’s activities in the ordinary course of business”). This is explained in further detail in the diagram Looking Inside Out: Mapping the Social Impact of the Value Chain.
• Social dimensions of competitive context (“social issues in the external environment that significantly affect the underlying drivers of a company’s competitiveness in the locations where it operates”). This is explained in further detail in the diagram Looking Outside In: Social Influences on Competitiveness.

They also define responsive vs strategic CSR, the latter “mov[ing] beyond good corporate citizenship and mitigating harmful value chain impacts to mount a small number of initiatives whose social and business benefits are large and distinctive.” Examples include Toyota’s Prius and Whole Foods Market. As another example, “Nestlé… works directly with small farmers in developing countries to source the basic commodities such as milk, coffee and cocoa, on which much of its global business depends.”

The 2006 article by Christensen defines the concept of catalytic innovators as follows:

1. “they create social change through scaling and replication.”
2. “they meet a need that is either overserved (that is, the existing solution is more complex than necessary for many people) or not served at all.”
3. “the products and services they offer are simpler and cheaper than alternatives, but recipients view them as good enough.”
4. “they bring in resources in ways that initially seem unattractive to incumbents.:
5. “they are often ignored… by existing organizations, which don’t see the catalytic innovators’ solution as viable.”

The article provides several examples, such as Minneapolis-based MinuteClinic, which provides “fast, affordable walk-in diagnosis and treatment for common health problems as well as vaccinations” and the New York-area Freelancers Union, which provides “low-cost health insurance and other services to independently employed contractors, consultants… and other workers… who wouldn’t otherwise be able to afford insurance.” Health care is not the only sector where catalytic innovation is taking place: education is another one, especially through online education and community colleges as well as micro-lending.

In the 2011 HBR article, shared value is defined as “policies and operating practices that enhance the competitiveness of a company while simultaneously advancing the economic and social conditions in the communities in which it operates.” Porter and Kramer argue that companies can create shared value opportunities in one of three ways: “reconceiving products and markets”, “redefining productivity in the value chain” and “enabling local cluster development.”

I found the connection between sustainability (through low greenhouse gases) and optimized logistics particularly interesting, especially in the context of Wal-Mart, which has been able to “cut 100 million miles from its delivery routes in 2009, saving $200 million even as it shipped more products” and Marks & Spencer, whose “ambitious overhaul of its supply chain… is expected to save the retailer £175 million annually by fiscal 2016.” Porter and Kramer further argue that the idea that “location no longer matters” is a myth because of “the rising costs of energy and carbon emissions but also by a greater recognition of the productivity cost of highly dispersed production systems and the hidden costs of distant procurement.” They again discuss the example of Nestlé (which they had already covered in 2006), among others.  

Schumpeter (that is not the real name of the column writer, but it is more convenient to call him Schumpeter) comments that this idea sounds close to Jed Emerson’s concept of blended value and apparently overlaps with Stuart Hart’s 2005 book “Capitalism at the crossroads.” He also points out that political environments need to be taken into consideration, for instance in the case of “advising a ravaged country on how to cut poverty at the risk of bolstering its dictatorship.” Schumpeter also pointedly comments that Porter “has not had the equivalent of a number-one hit since “The Competitive Advantage of Nations” 20 years ago.”

But as I described in my previous blog post, there is a lot of interest, independently from Porter’s opinion on the topic, in companies that do more than maximizing shareholder value. My guess is that CSR and shared value will play a significant role in cementing Porter’s legacy.

Comments

[Ilyaquant.wordpress.com]

Ehhh...the problem is that corporations are legally bound to maximize shareholder value. So if a corporation *isn't* trying to extract every penny it can for its shareholders, then it's literally breaking the law. Now in days gone by, this may have meant to build a better mousetrap. But in this day and age, it means financial shenanigans, toeing the line of bribery and other completely illegal things to influence our congresscritters, and generally being as dirty as their PR campaign can cover.

If there are indeed publicly (for the record, the spelling is publicly, NOT publically, to whoever needs to think about it in the future) traded companies that will win the day by truly being socially responsible and good, it will be a great day. But at the moment, even the "Don't Be Evil" Google seems to be getting corrupted by its own size.

[Aurelie C. Thiele]

Ilya, as you might remember from a post of mine a few weeks ago, there are now legal structures that allow companies to include social responsibility in their foundations.
http://engineered.typepad.com/thoughts_on_business_engi/2012/03/nonprofits-for-profits-and-in-between-b-corps.html
The B-corp seems to be gaining momentum, in fact, even if it will most likely remain in the minority.