Essay: Relationship between corporate social responsibility & competitive advantage of multinational corporations

Abstract
The purpose of this research paper was to identify the relationship between corporate social responsibility and competitive advantage of multinational corporations. This research was conducted as an in-depth literature review, using both qualitative and quantitative methods to support its claims. The research was aimed to gain insight on how to effectively implement a CSR strategy, as well as understanding the financial impacts of such strategies on a business. The research revealed that strategic CSR can lead to a competitive advantage when properly implemented.
Introduction
Since the 1960s and 1970s, public debate has addressed the issues of equal opportunity, pollution control, energy and natural resources conservation, and consumer and worker protection, and how businesses should appropriately respond to them. Since these debates began, corporate social responsibility (CSR), or the obligation towards society assumed by a business, was born. Corporate social responsibility is a broad concept but is generally broken up into four major areas: economic, ethical, social, and environmental responsibilities.
The economic responsibility of CSR, or sometimes referred to as the strategic obligation of CSR, is to produce goods or services that society wants at a price that satisfies the business and shareholder obligations. The economic responsibility of CSR aims to gain a competitive advantage by implementing goals and actions towards sustainability in the long-term practices within the business (Augustine, 2012; Chakrabatry & Wang, 2012).
The ethical responsibility of CSR aims to provide companies with a competitive advantage by implementing business practices to meet social expectations that are not necessarily written by the law. The ethical responsibility seeks to turn ethics into a manageable variable by emphasizing business practices, such as code of conduct and the mission, which guide business activities and culture. Thus, this area of CSR emphasizes the internal importance of managing people within organizations in order to meet obligations of the stakeholders.
The social aspect of CSR regards concern for social and human welfare. Often generated through philanthropy and short-term actions, social CSR promotes practices that reflect a commitment to social and environmental concerns and can generate goodwill with stakeholders and shareholder wealth (Porter & Kramer, 2006).
The environmental dimension of CSR focuses on the aspect of sustainability. Bansal and Roth (2000) identified three main reasons for the adoption of environmental practices strategies: competitiveness, legitimacy, and ecological responsibility. Additionally, environmental sustainability is often implemented in companies who are aiming to achieve technological innovation, compliance with the rules and regulations set by the government, or arising to the business benefits of adopting such strategies.
How a business chooses to incorporate CSR into its business can lead to a competitive advantage within the industry. Similarly, failing to meet the needs of stakeholders can lead to a business’ demise. Recent attention of CSR has been centered on the possible competitive advantage of socially responsible actions. Research has found that while socially responsible organizations are not more or less successful in terms of financial performance, there is a positive correlation between companies who are socially responsible and long-term financial success. The following paper will address the adoption and implementation of corporate social responsibility practices, the financial impact of such adoption, and how effective strategic human resource’s management can contribute to the overall competitive advantage of multinational corporations (MNCs).
Adoption of CSR
There are two major strategies multinational corporations must decide between when adopting a CSR strategy to their business. The first of these strategies is making CSR, or developing the relevant skills and practices internally. The other strategy is buying CSR or acquiring a socially responsible enterprise, which is growing in popularity among MNCs. Which strategy a company ultimately decides to implement is based primarily on its organizational identity orientation.
“Organizational identity is characterized as attributes that members perceive as fundamental and uniquely descriptive to the organization, and that persist within the organization over time” (Albert and Whetten 1985). Thus, the organizational identity orientation is the nature of such relations between an organization and its stakeholders. According to Brickson (2005), there are three distinct types of organizational identity organizations, individualistic, relational, and collectivistic. The organizational identity orientation of individual organization often determines whether or not that firm will “buy” CSR or choose to make their own.
As the name implies, an individualistic organizational identity orientation is one in which a company emphasizes a strong motivation to promote the organization’s own welfare to maximize profits or gain market share. Individualistic organizations tend to forge relationships when they believe the relationship will benefit them in some way. Socially-oriented companies, such as Toms of Maine, a line of personal care products known for being all natural, are not usually individualistic in nature because they are primarily created to solve societal problems. On the other hand, multinational companies, are more likely to have an individualist orientation because of shareholders. In these types of companies, such as Colgate, CSR practices are only adopted if and when they are proven to be financially beneficial to the company. Similarly, multinational companies are more likely to acquire a socially-oriented enterprise as opposed to developing their own CSR strategy. This is primarily due to the fact that acquiring a CSR company does not require a shift from “norms and routines” (Wickert, Vaccaro, & Cornelissen, 2015).
According to Brickson (2005), the relational organizational identity organization “emphasizes the wellbeing of internal or external stakeholders and includes a strong motivation to establish a meaningful relationship with these stakeholders. The main purpose of organizations with this type of orientation style is to “address social problems, or self-selected and underprivileged, or disadvantageous stakeholders” (Austin & Leonard, 2008). Thus, both multinational and socially-oriented enterprisers can fall into this orientation strategy as they tend to focus on activities that benefit employees and/or society, as opposed to simply just a financial gain.
The last organizational identity orientation is collectivistic, which “emphasizes the protection and promotion of the overall societal welfare and a strong motivation to contribute to the wider community” (Wickert, Vaccaro, & Cornelissen, 2015). It can be argued that the collectivistic organizational identity orientation is a combination of the relational and individualistic orientation, in that collectivistic organizations build relationships based on a common purpose, but as “a means to an end”. However, the collectivistic style differentiates itself from the other two orientations in that it is often developed from intrinsic values and principles within the organization.
“Buying” Adoption Scenarios
A study conducted by Wickert, Vacaro, and Cornelissen (2015) found four major adoption scenarios when companies choose to acquire a socially-oriented enterprise as opposed to developing their own CSR strategy, which is primarily linked to the organizational identity orientation of both the acquirer and acquiree. These scenarios are identified as substantial adoption, selective adoption (individualistic-relational), selective adoption (relational-collectivistic), and symbolic adoption.
Substantial adoption is most likely to occur in instances where the MNC and socially oriented enterprise both conduct their business practices using the relational identity orientation. This is largely due to the fact that both organizations treat the acquirement as an opportunity to integrate each others best practices within their own business. One example of this can been seen through Danones acquisition of Stonyfield. Danone was willing to install a more expensive but pollution-reducing production techniques in order to meet the environmental demands of Stonyfields stakeholders. Similarly, Danone has incorporated many of Stonyfields strategies within several areas of their business in order to improve their own CSR plan.
Selective adoption occurs when companies only partially adopt the acquirees strategies into their business. These types of adoption strategies occur in situations when one company is individualistic or collectivistic in nature and the other is relational. Individualistic MNCs can be described as self-serving and thus, will only adopt CSR strategies of their socially acquired enterprise in order to increase their overall competitiveness or profitability. Similarly, an individualistic company will not adopt strategies from their socially-oriented counterpart, if they do not see it as a win-win. A 2011 study conducted by Orlizky found that these types of acquirements do not compromise the profit-maximization objective associated with individualistic companies but may actually enhance it. According to Austin and Leonard (2008), one example of this type of acquisition is Toms of Maine (relational) by Colgate (individualistic). Colgate considered the acquisition as a learning opportunity used to deepen its knowledge of the naturals segment. Colgate has only applied this knowledge to their existing product portfolio, which demonstrates Orlizkys point.
Similarly, selective adoption can also occur when a relational MNC acquires a collectivistic socially oriented enterprise. Relational MNCs are characterized by a stakeholder-oriented stance on CSR and therefore, would most likely adopt CSR strategies from their counterparts that best benefits their stakeholder relations and objectives. The partial overlap of interests from both sides can lead to selective adoption because some of the CSR strategies may not align with the MNCs objectives and therefore make it difficult to sell to stakeholders. An example of this is the acquisition of Ben & Jerrys (collectivistic) by Unilever (relational). According to Austin and Leonard, Ben and Jerrys brought a deep sense of values-led decision-making ad progressive vision that would complement and push Unilever into new areas of social, environmental, and economic commitment (2008). While Unilever has adopted some of the knowledge acquired from Ben & Jerrys, they have only focused on incorporating these strategies into segments which they felt were most important for their stakeholders.
A relational MNC and collectivistic socially oriented enterprise does not always lead to adoption. Meyer and Rowan defined symbolic adoption as organizations reactions to external instutional pressures by pretending to adopt certain practices, which are considered more socially acceptable (1977). In symbolic adoption, a MNC would simply purchase the socially oriented enterprise but not engage in adopting or implementing any of the CSR-related activities into their own business. In these types of adoption, MNCs believe that the slighest appearance of such practices, such as the acquirement of a socially oriented enterprise, is sufficient enough to meet the needs from these external pressures. For example, LOreal, was receiving a plethora of public blacklash for allegedly testing its products on animals, and acquired The Body Shop, which has been known for standing up against animal testing since the company was founded. While LOreal has introduced philantrophic campaigns since the acquirement, it has not made any substantial CSR-related changes to its business and therfore, believes that its acquirement of The Body Shop is simply enough to minimize external pressures. Thus, this form of buying behavior by companies raises an ethical dilemma as potentially harmful business practices are often maintained.
Innovative CSR
While many MNCs buy CSR as a cost-effective way to meet the needs of its stakeholders, studies have found that CSR without innovation is not viable in the long-term. Because of this, many MNCs are opting to create their own CSR strategy as opposed to purchasing it. Additionally, innovation is often considered a key success factor of many MNCs in regards to their overall performance, and thus, innovating CSR provides sustainability for a firms growth and survival in the long-run.
According to Rennings, sustainable innovation is defined as the process of creating new ideas, behavior, products, and processes that contribute to a reduction in environmental burdens or to ecologically specified sustainability targets (2000). According to Rangan, Chase, and Karim (2012) there are three theatres a company can implement to create its own CSR campaign: philanthropic giving, reengineering the value chain, and transforming the ecosystem.
Theatre one addresses one of the easiest, yet most effective ways in which an MNC can implement CSR into their business, philanthropic giving. Philanthropic giving can be implemented into an organization through direct funding, employee community service projects, or in-kind donations. Which philanthropic giving tactic a company chooses to implement is largely due to the size of the organization. Larger corporations often have the financial means necessary to fund larger donations or programs, whereas smaller companies may not. One of the easiest and most effective ways smaller companies and MNCs can implement philanthropic giving within their organization is through annual matching programs. Annual matching programs provide employees with the opportunity to donate a percentage of his or her paycheck to a charity of their choice that will be matched by the company up to a certain percent. This particular tactic allows for companies to support its employees motivations, which is why it is one of the most effective forms of philanthropic giving. Additionally, many MNCs often provide philanthropic funding through foundations that exist separately from the corporate entity. For example, Coca-Cola contributes approximately $88.1 million annually through The Coca-Cola Foundation. Philanthropic giving is shown to be even more effective when it is posed through in-kind donations, or donations related to a corporations core competencies and business practices, such as IBMs computer donations through its KidSmart Early Learning Program. As philanthropy programs begin to evolve, it may become more strategic and closely tied related to a company’s business practices. Strategic philanthropy efforts may return intangible benefits in the form of brand awareness and improved social capital, which in turn may translate to business profits, but it is not the goal of such initiatives (Rangan, Chase, & Karim, 2012). In a 2012 study conducted by Rangan, Chase, and Karim of 50 CSR managers, a majority of the philanthropic giving programs were aimed to improve the motivation of employees or increase the reputation of the company as opposed to developing an in-kind donation program directly related to the core business competencies. Thus, one of the major challenges with implementing such tactics is that it is difficult to evaluate the success, since many are not directly related to the company itself and are internally motivated.
The second theatre focuses on the shared value in which companies seek to create value for both internally and externally through reengineering the value chain. Unlike philanthropic giving, many companies are implementing this practice as a means to improve the corporations bottom line while simultaneously improving social value. Nike, for example, used this method in response to protests throughout Europe and the United States against its low wages and dangerous working conditions. Nike responded by revamping its entire supply chain and increasing employee wages. Nike was able to improve employee retention and productivity, while also reducing production, waste, materials, and energy use. As this example illustrated, when working conditions increase, productivity will likely increase. Similarly, when improvements are made in regards to a companys business operations, such as energy use, material costs will decline. If companies are able to communicate these impacts to consumers, they will like experience an increase in profits, as consumers have demonstrated their willingness to reward companies by paying 5 to 8 percent more for their products (Trudel & Cotte, 2009).
Theatre three poses the most significant financial impact to organizations, as a company attempts to create social value by addressing a need or concern within its business reach. Within this third domain the corporation creates a radically new ecosystem solution that may be outside its core business interests, and that is fundamentally disruptive to the existing value chain (Rangan, Chase, & Karim, 2012). These types of innovation strategies are most effective by companies who have the means to absorb the delayed financial gratification, such as multinational corporations. However, this type of innovation strategy is also plausible in smaller companies who have the technology available to make such change. For example, General Electric has invested into electric vehicle technologies in order to address the issues of global warming and climate change that are being impacted by carbon dioxide chemicals released from vehicles. To this day, General Electric has not seen a financial profit from investing in such technology, which shows that companies need to be willing to forgo short-term profits in order to reap the benefits long-term. Additionally, such innovations require management to be fully-committed to take such a risk. This particular theatre of CSR greatly emphasizes the social responsibility by companies attempting to achieve a higher standard than what may be legally required of them.
Nonetheless, whichever adoption strategy or strategies a company may choose to implement, requires the company to link its CSR adoption tactics into a cohesive implementation strategy in order to maintain strategic direction and thus, creating long-term value for its stakeholders.
Implementation of CSR
Once an adoption strategy has been chosen, companies must decide how to make this prevalent within their organization. One popular way of implementing CSR within a business is through the European Foundation for Quality Management (EFQM) Model. According to Gechevski, Mitrevska, & Chaloska (2016) the EFQM Framework provides guidelines on how to identify, improve and integrate socially responsible behaviors into its day-to-day operations and management by taking stakeholders into account. The EFQM Model is based on nine criteria, five of which are “enablers”leadership, strategy, people, partnership and resources, processes, products and services– and four of which are the “results”people, customer, society, or business results. The enablers are aimed to describe areas within a business that a company has control over and therefore, needs to have strong leadership and development practices in place. When the enablers are effectively implemented, they are able to produce results.
Companies using the EFQM Model for CSR implementation first need to evaluate themselves in terms of “CSR maturity”, which helps identify major strengths and areas of improvement for an effective implementation process. “The three CSR maturity levels are: start-up (meets all the legal and regulatory requirements), on the way (active involvement and a dialogue with stakeholders, some CSR activities taking place), and mature (stakeholders’ expectations are balanced, measured and take action; CSR is fully embedded into policy, strategy, and day-to-day management towards sustainable excellence”(Gechevski, Mitrevska, & Chaloska). Once the CSR maturity level has been identified, a company must then identify needs of the stakeholders, how and where the company can improve their CSR activities, and how they will report their CSR to the public.
In addition, companies can also use the EFQM Framework as a performance measurement using the RADAR method. “The first step in the RADAR method is to determine the Results it is aiming to achieve s part of its strategy. Then a company must plan and develop an integrated set of sound Approaches to deliver the required results both now and in the future. Next, a company will Deploy the approaches in a systematic way to ensure implementation. Finally, the company will Assess and Refine the deployed approaches based on monitoring and analysis of the results achieved on-going learning activities” (Gechevski, Mitrevska, & Chaloska).
CSR and Financial Performance
The relationship between CSR and financial performance has been studied through empirical and theoretical studies. The empirical studies have been studied on both a qualitative and quantitative basis. The qualitative approach has researched case studies or best practices aiming to determine the effects of CSR on overall competitiveness. The quantitative research has focused on portfolio studies, and multiple regression analyses. Previous empirical research on the relationship between CSR and financial results were mixed, however many authors (Margolis and Walsh) believed that a positive relationship does exist. Theoretical research on this topic argues that CSR and financial performance follows an inverse U-shaped curve, meaning that the positive and negative effects may be determined by a companys position on the curve. Thus, this could explain the inconsistencies of the results found in the empirical approach.
Nonetheless, as noted above, when implemented effectively CSR can benefit multinational corporations in the long-term. Weber (2008) noted five major benefits of CSR strategies: positive effects on company image and reputation, postitive effects on employee motivation, retention, and recruitment, cost savings, revenue increases from higher sales and market share, and CSR-related risk reduction or management. She further divides the benefits of CSR into three major categories: monetary, non-monetaryquantitative, and non-monetaryqualitative. Monetary benefits include direct financial effects as well as benefits that do not directly lead to cash flows but can be measured in monetary terms, such as revenue increases, cost decreases, risk reduction, and increase in brand value (Weber, 2008). Non-monetary benefits include benefits that are not directly measured in monetary terms but can influence a companys competitiveness and financial success and are further differentiated by qualitative and quantitative benefits (Weber, 2008). Non-monetary qualitative benefits include areas such as improved access to capital or secured license to operate. While these benefits are hard to measure in quantitative terms, they are important to consider as they can increase the relationship with stakeholders, which is an important factor in CSR. Non-monetary quantitative benefits include those that can be measured to some extent, such as improved customer attraction and retention, improved reputation, and improved employee recruitment, motivation and retention. While monetary benefits are often seen as the primary value driver for shareholders, it is important to note that non-monetary benefits can eventually turn into monetary benefits with proper execution. Building a companys reputation, for example, establishes trust with consumers and can lead to repurchase, or customer rentention, thus eventually creating a monetary value for companies (Weber, 2008).
There are several ways to determine the financial impact of CSR-related activities. The first of these is by determining the Net Present Value (NPV), or the difference between the present value of cash inflows and the present value of cash outflows over a period of time. While this calculation may be useful in terms of the monetary benefits discussed above, it can be very difficult and complex to apply to benefits that are not as easily quantifiable.
Figge and Schaltegger proposed the stakeholder value added, which attempts to evaluate all stakeholder relations of a company (2000). This evaluation method involves four steps. First, the company must determine the total stakeholder benefits by subtracting the cost equity from the profit before equity. Second, the Return on Stakeholder (RoST) is calculated by diving the benefit cash value by the stakeholder costs cash value. Third, the value spread between the RoST and the average (RoST) in the market by subtracting the average industry RoST from the companys RoST. Lastly, the value spread is multiplied with the stakeholder costs to determine to total stakeholder value added (Figge & Schaltegger, 2000). While this calculation may be useful in terms of determining the stakeholder relations, it can be very difficult and complex to assign CSR activities.
Because of the complexity and difficulty of the two calculations above, Weber developed a four step CSR impact assessment cycle, which includes both monetary and non-monetary business benefits. The steps included in this cycle are: an assessment of qualitative CSR impacts, the development and measurement of KPIs, an assessment of the monetary CSR value added, and the evaluation of strategic relevance of each of the assessments components (2008).
The qualitative assessment should include the evaluation of the relationships to all relevant stakeholders and report specific indications for their improvements (Weber, 2000). This step is crucial because it helps identify benefits that would otherwise be neglected.
As a next step, companies should develop and measure relevant key performance indicators that indicate improvement of company competitiveness due to CSR (Weber, 2008). Weber identified five potential benefits that could be considered key performance indicators: monetary brand value, customer attraction and retention, reputation, employer attractiveness, and employee motivation and retention. One interesting thing to note about this particular step in the CSR assessment cycle is that this shows the importance on customers and employees to the overall stakeholder value. Identifying KPIs help managers indicate additional business benefits that may eventually lead to monetary value (Weber, 2008).
The third step involves analyzing the monetary CSR value added using a discounted cash flow logic:
Monetary CSR Value Added= =_(n=1)^(n=)(B CSR/N-C CSR/N)* 1/((1+i)^n )
where n= period, B^CSR= CSR benefits, C^CSR= CSR costs, i= discount rate
Costs included in CSR benefits include CSR-induced revenue increases, such as an increase in sales or CSR grants from the government, and savings from CSR-induced cost decrease, such as internal cost savings and a decrease in taxes. This step also involves differentiating between one-time costs and continuous costs. One-time costs include costs from donations or investments that occur only once. Continuous costs include costs that are constant, such as continuous donations, materials and personnel costs, and other fees. While it can be often difficult to assess the costs associated with CSR in traditional accounting approaches, activity-based costing would be the most appropriate. In addition to the costs accumulated from the CSR activities, this step in the CSR impact assessment cycle also seeks to identify the risks for stakeholders. These risks can be further differentiated into systematic and unsystematic risk. Systematic risks refer to threats outside of the companys control that affect all companies within a given industry, such as economic conditions. Unsystematic risks refer to internal threats that are company-specific. Risk costs are further broken up into CSR risk-related benefits (avoidance of decrease in revenue and cost increases) and CSR risk-related costs (revenue or cost increase). (Weber, 2000).
Lastly, companies should prioritize the CSR benefits measured in the individual assessments according to their contribution to the CSR strategy of the company (Weber, 2000). While this model has been proven to help companies identify and evaluate the monetary and non-monetary benefits to determine the overall success of CSR activities, this model still poses some major challenges. The first of these is the nature of the complexity and length it takes for management to implement it for all relative benefits associated with the CSR strategy. This may force companies to focus on their KPIs in a simplified version. Additionally, it is difficult for companies to determine if benefits are derived from the CSR strategy alone, as other factors may be included (Weber, 2000).
Strategic Human Resource Management Role in CSR
Strategic human resource management is the process of adopting a human resources strategy that utilize and designates the HR competencies in a way that provides and allows a company to reach its goals and thus create a competitive advantage for the company. Employees are the heart of an organization and therefore having an HR plan that is properly designed to meet their needs can create an engaging and productive working environment.
While Human Resource Management plays a major role in how CSR is developed within the organization, their implementation is done with employees; therefore, the connection between CSR and HR management led to a concept called socially responsible human resources, or a socially responsible concern for employees and their families (Barrena-Martinez, Lopez-Fernandez, & Romero-Fernadez, 2017). Of all stakeholders employees are the most important in terms of corporate social responsibility because they assume the leading roles of these activities within an organization. Additionally, employees are communication agents for relevant CSR information to the customers and the community.
According to Vickers (2005), human resources should play an active role in managing a socially responsible environment in the company through four major responsibilities: “(1) keeping it as a top priority by business leaders, (2) including this component in the leadership selection and development systems, (3) ensuring the right programs and policies are being adopted and respected throughout the company, and (4) taking part in ethical and social responsibility issues”.
Competitive Advantage of CSR
Critics of CSR, including Milton Freidman, argue that it is sole duty of corporations to increase profits. However, according to Porter and Kramer, if companies use the same framework that guides core business choices in regards to CSR decisions, they would find that CSR can be a source of opportunity, innovation, and competitive advantage. Porter and Kramer believe that in order to advance CSR, there must be an understanding of the interconnectedness of society and corporations. This mutual dependence of each other establishes the need to create strategies in which both sides benefit.
The first step in this framework is to identify points of intersection between a corporation and society. This can be done through both an inside-out and outside-in basis. The inside-out approach involves a company determining areas of its business operations, such as the supply chain, that may negatively affect society. On the other hand, the outside-in approach involves a company determining areas in society that may be improved by their business operations.