Can corporate social responsibility (CSR) be a source of good and a wellspring of innovation, competitive advantage and value creation for the firm? Although CEOs and government leaders insist in public that CSR projects create value for the firm, privately they admit that they do not know if CSR pays off. To address this question and drawing on experience for the Spanish context, we test one of the few efforts to model how the strategic management of CSR may contribute to improving firm profitability (Burke and Logsdon, 1996).
To do this, we examine the impact of three strategic CSR variables -. isibility, appropriability, and voluntarism – on value creation among large Spanish corporations. The conclusions from these findings suggest that managers need to understand how CSR is similar to and different from other traditional corporate market activities if they are to pursue value creation through CSR. We also suggest avenues for future research to explain how CSR may be integrated into firm processes to create resources (assets) and capabilities (routines) that may lead to competitive advantage and superior economic performance. Introduction Corporate social responsibility (CSR) has been defined in myriad ways.
A common feature of many of the definitions is the proviso that firm activities can be considered as CSR when the firm under- takes ‘‘actions that appear to further some social good, beyond the interests of the firm and that which is required by law’’. 1 However, this traditional definition, which clearly separated market from non-market (or social) activities, has given way to a new understanding driven by growing stakeholder pressure for greater CSR: firms are being asked to provide more and more social pro- grams designed to alleviate the world’s ills as they are told that this will also lead to superior firm financial performance. However, managers like British Petroleum’s Graham Baxter candidly worry that they just do not know whether CSR pays off.
Baxter, in the wake of BP’s failed ‘‘green strategy’’ and the subsequent firing of John Browne, cautions that while ‘‘Throughout BP’s 100-year history, maintaining a positive working relationship with communities and broader society where we operate has been an important part of our success. the ‘CSR Bubble’ has become overinflated which, at worst, tries to create a parallel universe dangerously separate from business purpose and strategy. ’3 In our own work with U. S. , Spanish, German and British multinationals in the pharmaceutical, banking and telecom industries, top management has frequently expressed skepticism of enthusiastic, high-profile academics like Michael Porter who claim that CSR can be both a source of good and a wellspring of innovation, competitive advantage and value creation for the firm. Man- agers rightly ask for clearer evidence of when and how nonmarket social activities can be converted into value-creating market activities.
After more than two decades of research on the relationship between CSR and firm financial performance, the results are mixed Unfortunately, academic studies have neither contributed significantly to our understanding of how CSR impacts on firm performance nor provided a compelling framework for the strategic management of CSR. After more than two decades of research on the relationship between CSR and firm financial performance, the results are mixed, at best: some studies show a positive relation- ship between the two; others, a negative relationship; and still others, no relationship.
The reason for this failure is methodological: financial performance comes at the end of a long chain of mediating and independent variables. In other words, too many variables influence firm financial performance for us to isolate effectively the impact of CSR activities. 5 Stated plainly, academics have been going about this the wrong way. We agree with those managers who ask for a more instrumental, pragmatic approach to meet the laudable goal of satisfying legitimate stakeholder claims while at the same time creating competitive advantage and shareholder value.
Accordingly, we propose re-configuring non-market social activities as social-market activities as a necessary first step in exploring how to manage CSR for value creation. This is consistent with the long-standing view in strategic management that a positive relationship between firm activities and value creation is more likely to be achieved when executives design projects that seek competitive advantage. In practical terms, strategic management of non- market social activities turns an expense into an investment with a measurable potential return.
However, we ought not to conclude blithely that managing CSR for profit is just like managing traditional market activities and that we can simply convert by decree non-market social activities into profitable goods and services. Salient and legitimate stakeholders may make demands on firms – e. g. General Motors must maintain pension commitments while competing against firms without such legacy commitments – such that some CSR activities provide opportunities for value creation while others do not.
Evaluating firm CSR activities strengthening and expanding those that provide the potential for gain while diminishing the impact of those that put the firm at a disadvantage – is one of the key tasks of CSR management. Successful strategic management of CSR allows firms to take into account legitimate stakeholder claims, focusing and expanding work in those areas where competitive advantage can be created, while assigning appropriate allocation of resources to meet social needs. A secondary benefit of successful CSR strategy is that it encourages firms to seek additional ways in which social action also leads to profit.
The challenge, then, is how to model the strategic analysis of CSR. A promising approach was suggested in 1996 by Burke and Logsdon,6 who set out five strategic dimensions of CSR projects (visibility, appropriability, voluntarism, centrality, and proactivity) and posited that the strategic management of these dimensions in pursuit of competitive advantage would positively impact firm financial performance. The framework presupposes that we understand how non-market social activities are different from market activities.
We start from the standard innovation scenario in which the potential for creating value via non-market social activities is enhanced when competing with firms that do not treat CSR as a source of competitive advantage. However, the social aspect of CSR activities makes additional demands on firm behavior; not only must the company provide product or service attributes that create value, it must also provide a social good. In other words, strategic CSR opens a competitive space in which there are new opportunities but also additional demands to be met.
Two examples may help illustrate the challenge. In renewable energy, BP, the energy giant, was the first of the oil majors to go ‘‘green’’, and did so by announcing that this was a new strategy. Despite an initial round of praise, BP quickly came under pressure to meet raised stakeholder expectations. In fact, John Browne’s recent resignation was due, in part, to his failure to deliver both on profits and going green. Another well-known example of the challenges of meeting competitive and social goals is Benetton.
For more than a decade Benetton claimed a competitive space in which they offered progressive social consciousness as part of their brand positioning. This worked well until a controversial advertising campaign using death row inmates confronted resistance in the United States and Sears dropped the Benetton line of clothes. In response, Benetton abandoned its progressive social advertising and fired its long-term Advertising Director. In turn, the firm found itself attacked by its most loyal customers for being hypocrites.
These customers did not accept the argument that the exigencies of business required the firm to make a change in market strategy. They demanded that Benetton fulfill both product and social issue customer demands. Since then, Benetton has been unable to reestablish its strategic position. Our research objective is to examine which strategic dimensions firms believe essential to creating value through CSR With the dual nature of CSR in mind, we set out to consider how firms think about the strategic opportunities and demands of social action programs that link market objectives and non-market social objectives.
To do so, we test Burke and Logsdon’s framework via a survey of Spain’s 500 largest firms. Our research objective is to examine which strategic dimensions firms believe essential to creating value through CSR. This knowledge, we argue, is necessary for the strategic management of CSR. The Burke and Logsdon framework provides a useful starting point for this work. The framework was proposed as a practical instrument for helping managers develop CSR strategies that ‘‘pay off’’; it was not a fully developed model with testable hypotheses.
Accordingly, we have translated the framework into the resource-based view, and defined strategic CSR as the firm’s ability to: 1) pro- vide a coherent focus to a portfolio of firm resources and assets (centrality); 2) anticipate competitors in acquiring strategic factors (proactivity); 3) build reputation advantage through customer knowledge of firm behavior (visibility); 4) ensure that the added value created goes to the firm (appropriability). 7 Voluntarism, we should note, is missing from this description of strategic CSR, though it is a key variable in CSR value creation. We will return to this issue below in the heory section of the paper. Given recent discussions of corporate citizenship, we should briefly discuss the relationship of strategic CSR to corporate citizenship.
This task is made difficult by the fact that there is no consensus regarding the meaning of corporate citizenship. Some authors equate corporate citizenship with corporate social responsibility, while others seem to focus corporate citizenship specifically on the strategic aspects of CSR, much as we are doing in this article. Still others speak of citizenship as the responsibilities that corporations have with respect to their role as administrators in a system of citizenship. Thus, this paper on strategic CSR is more or less related to current conceptions of corporate citizenship, depending on the particular conception used. Since we test the Burke and Logsdon framework, we continue their usage and employ the term ‘‘strategic CSR’’, leaving aside debates about the meaning and scope of corporate citizenship. The remainder of the paper is organized as follows: we first set out in greater detail how CSR projects may help firms create value and develop hypotheses for three of the five strategic dimensions that seem to have an impact.
We then discuss the research methodology, data analysis and results. In the discussion and conclusions section, we indicate the contribution of the individual strategic dimensions to value creation and implications of the results for firm strategy, management practice and public policy. We conclude with suggestions for future research. Theory In the strategic management literature, it is generally agreed that competitive advantage requires, in addition to superior firm resources and capabilities, a fit between the external environment and the strategic action of firms.
Strategic action, in turn, it is argued, is driven by top management’s values, including commitment to both profit and social responsibility. 9 Strategic management researchers have asserted that CSR can provide opportunities for innovation However, asserting that values are the basis for management principles and action does not mean that increased social responsibility is the best or easiest route to value creation and profitability. The first step in finding this route, as we indicated earlier, is to move beyond the simplistic approach that CSR is inherently profitable.
Strategic management theory has consistently argued that the key to success resides in creating competitive advantage which, skillfully managed, results in value creation. Value is created when consumers are willing to pay a premium for the firm’s products and services based on its involvement in and position with respect to specific social issues. Value creation occurs when firm resources are combined in new ways so as to increase the potential productivity of those resources. 10 Thus, value creation is necessarily about innovation.
Strategic management researchers have asserted that CSR can provide opportunities for innovation. 11 Yet, just as all market-based projects do not create value, not all CSR projects will create value for the firm. 12 Many CSR projects, in fact, increase costs, and although they may be positively evaluated by different stakeholder groups, stockholders may see the value of their shares diminished. For ex- ample, The Body Shop is frequently cited as a classic case of joining products and CSR. Unfortunately, The Body Shop also found that CSR could increase costs significantly.
Intent on maintaining its commitment to a broad range of local suppliers, manufacturing costs skyrocketed, and as other firms copied its products and outsourced to Asia, The Body Shop’s profits plummeted. Finally, Anita Roddick was forced to bring in management willing to put profit before CSR. In effect, the challenge CSR faces is an elegant inversion of the old conundrum of social cost. 13 Rather than worrying about how to compensate others for harm done in the process of creating value for our business, we need to figure out how social benefit creates value rather than cost for business firms.
Explaining, then, how social action creates value remains a key stumbling block to a theory of the firm that incorporates CSR. Our approach to this problem is to treat CSR as a strategic value creator. In our research, we ask managers to detail their understanding of their firms’ analysis of the social issues (stakeholder) environment and of how these firms create value through CSR projects. Specifically, the Burke and Logsdon model sets out, as we outlined above, five strategic dimensions of CSR projects that may affect the ability to create value: visibility, appropriability, voluntarism, centrality, and proactivity.
In this paper, we examine the hypothesis that firms with social (CSR) projects designed and managed to create greater visibility, appropriability, and voluntarism are more likely to undertake advantageous reconfigurations of resources and capabilities and hence create greater value for the firm. It is important to note, moreover, that a firm need not successfully apply all the variables in order to create value; one of the key objectives of the research is to deter- mine which of the variables are currently being employed by firms.
In Table 1, we provide a comparison of the strategic CSR approach proposed by Burke and Logsdon with traditional strategy and traditional CSR based on the original five dimensions of their model. Below, we examine three of the five dimensions in more detail and set out a hypothesis of the relationship of each dimension to value creation. We limit our discussion to these three dimensions given that our preliminary research indicates that centrality and proactivity do not affect value creation in the Spanish context.