In terms of CSR, there are several dimensions that affect a company’s actions and it is essential for operation managers to understand these facets to make any key decisions. This can be analysed using the five dimensions of CSR framework that identifies the environmental, social, economic, stakeholder and voluntary dimensions. Further, we will consider how these influence operations decisions.
Environmental Dimension:
Environmental concern and sustainable development have been a cardinal aspect of corporate social responsibility and a topic of discussion for the past thirty years in the business world (Uddin et al, 2008). It primarily refers to the impact that the businesses have on the environment, and the measures they’re taking to make it sustainable and beneficial to the ecosystem. These measures can be as simple as choosing to use recyclable materials for packaging or substituting energy sources with renewable solar energy (Scilly, 2016).
But in today’s modern society, the scope of business activities is growing at a rapid pace and consequently, the environment turmoil is much deeper and complex. Such impacts include: deforestation, climate change, overuse of renewable resources, pollution, degeneration of bio-diversity etc. (Uddin, 2008). It is not as simple for businesses to make minor changes to create a positive impact, but rather requires them to probe in-depth into their processes and alter significant operations to contribute to the welfare of the biosphere. IKEA has been recognised as an environmentally conscious firm and this has been enabled by significant decisions taken throughout its business operations, mainly its supply-chain. The Swedish furniture-maker sources about 50% of its wood from sustainable foresters and 100% of its cotton from farms that meet Better Cotton Standards, i.e., reduced use of water, energy and chemical pesticides in cotton production (Viles, 2016). In terms of distribution, IKEA stores are powered by 700,000 solar panels and it aims at being powered by 100% renewable sources by 2020 (Care2, 2016). IKEA’s role in being socially responsible and validating its reputation has been enabled by a series of conscious decisions taken within its daily operations management.
Whilst reviewing the environmental dimension, it is important to take into consideration the ‘greenwashing effect’. This refers to the idea that the more the consumers are sensitised to the benefits of firms acting in an environmentally conscious manner, the more the firms are motivated to exaggerate their environmental credentials (Slack et all, 2010). Further, Slack also suggested that to showcase that operations is integral to environmental management it is pinnacle to first consider the environmental burden (EB) created by business activities.
EB = P x A x T
Where, P = Size of Population; A = Affluence of Population; and T = Technology
According to the above formula, to achieve sustainability, it is essential to reduce the environmental burden caused by business operations. However, it is not feasible to reduce the population or their affluence and hence, this can only be achieved by altering the technology used in production and operations of firms (Slack, 2010).
Operations in Environmental Management:
In order to achieve this, business operations are taking to practices that involve developing environmental strategies and green technologies, creating environmental staff functions and processes and implementing pollution prevention programmes amongst many other measures (Smart, 1992). These are because of decisions taken in day to day operations by operation managers; this includes decisions within production to ensure efficient utilisation of materials and reduced wastage, and planning within process design to ensure competent use of energy and labour (Slack, 2010). Consequently, operation managers have found that streamlining the processes to improve environmental performance has proved to reap the business benefits through reduced costs and wastage (Uddin, 2008). However, it is not always this simple, as sometimes processes that are logical to the business maybe harmful to the ecosystem or environmentally efficient methods might be expensive to businesses.
Patagonia has been a firm that has been committed to reducing the environmental impact and has consistently maintained this stand despite it costing the company. In Spring 1996, Patagonia decided to manufacture its cotton products from only organically grown cotton as opposed to that grown conventionally, which created a greater ecological footprint (Reinhardt et al, 2010). As a result, the cost of production increased forcing Patagonia to increase the price of the product and the limited availability of organic cotton led to a reduction in its product line from 91 styles to 66 (Chouinard, 2005). Despite these losses, Patagonia was devoted to its promise of protecting the environment and has been continuing to do so.
Corbett and Van Wassenhove (1993) proposed that organisations must internalise environmental issues with their long-term goals and further, operationalise these by creating synergies between environmental programmes and operational management. This would help the operations managers in developing a distinctive competence and secure a competitive advantage. AT&T set rigid environmental goals to create value and in 1989 saved $1.4million through recycling efforts alone (Gupta, 1994). Likewise, 3M focused on environmental efficiency and saved more than $537 million through its Pollution Prevention Pays program (Fischer and Schot, 1993).
Social Dimension:
The social dimension of CSR is concerned with the relationship between the business and the society and refers to the steps taken by businesses to benefit the society (Scilly, 2016). It is the firm’s commitment to fulfil the norms and expectations of the consumers, shareholders and employees and act in a way that they consider fair and just (Carroll, 1991). In essence, it is the firm’s ethical responsibilities that extend beyond its legal requirements and immediate financial interest (Carroll and Shabana, 2010).
These responsibilities could extend from creating jobs and employment opportunities to identifying and dealing honestly with employees. It is the responsibility of the business to not knowingly disadvantage any individual in the society but rather work towards the welfare of the society at large.
When the value chains are fully integrated in a competitive context, CSR becomes hard to distinguish from day to day operations. Nestle is an example, wherein its strategy became inseparable from its social impact (Christensen et al, 2015). In 1962, Nestle wanted to enter the Indian market and decided to build a dairy plant in Moga. However, the district was impoverished with poor living condition of farmers, inferior irrigation facilities, lack of food for cattle and the absence of refrigeration systems contaminated the milk. Nestlé’s value chain was developed by establishing local sources of milk from farmers and establishing its value chain in Moga meant for Nestle to transform this district and obtain a shared value for its business and the local community. Thus, Nestle invested in building refrigeration units at collection points, sent veterinarians, agronomists and other professionals to conduct regular quality checks and ensure the healthiness of the animals. It also provided the farmers with financial aid to improve their irrigation systems that not only fed cows but also helped the district’s agricultural output and raised its standard of living. As of 2006, 75,000 local farmers sell milk to Nestle and as the quality improved it has been able to pay these farmers more than price set by the government. Nestlé’s commitment to its value chain of working with local farmers directly enabled the company to gain a stable supply of high quality goods, eliminating middlemen. Likewise, the company has been successful in transforming many districts in Thailand and Brazil and as Nestle prospered so did the local communities (Porter and Kramer, 2006).
Strategic Approach to Corporate Involvement in Society (Porter and Kramer, 2006)
The Global Reporting Initiative (2006) identified four categories of social performance indicators, namely, labour practices and decent work, human rights, society and product responsibility. In April 2000, renowned global coffee retailer, Starbucks fulfilled its ethical responsibility by signing a contract with Trans-Fair USA and announced that it will sell Fairtrade coffee in more than 2000 stores beginning fall that year. Coffee is referred to as Fairtrade coffee when the farmers are provided credit and are assured a minimum of $1.26 per pound (Cray, 2000). This is certified by the Trans-Fair USA which is a branch of the Fairtrade Labelling Organisations (FLO). In 2009, Starbucks doubled its purchase of Fairtrade coffee to 40 million pounds (Starbucks, 2009).
However, over the last decades the world has become much more well connected and has paved way to the globalization of business activity. Companies are sourcing materials and doing business across the planet and whilst some see it as the root cause for exploitation, others see it as the channel for prosperity (Slack, 2010).
Globalization:
Decisions made within operations has an impact on the consumer, the employees and the local community where the business is located. The world is becoming a small place to do business in and with businesses expanding beyond geographic horizons, there is always the dilemma if operations in each location must consider the cultural differences of that location. However, it is important to know that cultural and economic variations do impact the day to day operation decisions of the management (Slack et al, 2010).
The management is required to make key decisions whether they want to outsource the jobs to a third world or developing country and seek benefits of low cost of production through low wages, which might in some cases see opposition from local trade unions for exporting their jobs. However, it is the responsibility of the management to ensure that the labour in the outsourced countries are not exploited. A recent example of this is the Palm Oil Scandal. According to the report released by Amnesty International (2016), big corporations such as Unilever, Nestle, Procter & Gamble among nine other household names were found contributing to labour abuse in Indonesia. Though these companies vouch for being ethically responsible in their palm oil supply chains, findings reveal production carried out by child labour and forced labour within hazardous working conditions. This showcases a series of poor decisions made by the management of these companies that failed to conduct themselves ethically.
Economic Dimension:
The economic dimension focuses on the financial impact the social responsibility actions have had on the company and how the ‘resources to produce goods and services are distributed amongst the social system’ (Nicolae and Sabina, 2010). This reflects the fact that there are economic consequences involved by undertaking CSR, which involves bearing costs in the short term that may or may not be a fruitful investment (Slack, 2010).
The government also plays a significant role in ensuring that the businesses are ethical and has passed antitrust laws to prevent companies from monopolising trade to practice price discrimination and unfair competition (Nicolae, 2010). Further, stock market analysts are beginning to pay more attention to CSR and are including environmental, social and governance issues whilst forecasting potential stock valuations (Heal, 2004).
Operational Costs:
Operations managers are always trying to achieve a balance between the costs and expenditure involved in CSR and the benefits from the same. Slack (2010) divides these costs involved into three categories, namely input costs, transformation costs and output costs.
- Input costs: As discussed earlier, globalization has brought about the outsourcing of certain functions of a business to capitalise on lower costs. However, it is the duty of the business to monitor these outsourced facilities and ensure that they are compliant with the ethical code of conduct that the company follows. These costs, that are involved in monitoring and conducting regular audits can be referred to as the input costs. In 2006, clothing retailer Gap was shamed on when it was brought to the news of the public that the clothes were manufactured using the child labour in its outsourced units in developing countries. However, upon investigation Gap announced that ‘a small portion of the order was subcontracted to an unauthorised contractor’, which was in violation of their agreement (McDougall, 2007). Further, Gap terminated business with 23 factories who violated the code and appointed 90 officials who were to ensure compliance with the Code of Vendor Conduct (Foster, 2007). These measures taken by Gap to maintain its ethical standards reflect the influence of its social responsibility on operation decisions and the input costs involved.
- Transformation costs: These costs typically refer to investment into operation processes such as energy saving in production, which will benefit the business in reducing the cost as well as to the welfare of the environment. It is not only confined to this function but can be extended to any function of the business. For example; to invest in diversity, recreational and motivational programs for staff will result in better performance from employees and lower turnover. Google’s investment among many Fortune 500 companies in ensuring diversity in the workplace, equal opportunities for all and wellness programs reaps them the economic and ethical benefits of multi-perspective performance and social equality (Slack, 2010).
- Output costs: This cost to operations is also known as the ‘end of life responsibility’, which is concerned with services of the business that collect the product after its been used to recycle and reuse the same. In 2010, Patagonia launched its ‘Reduce, Repair, Reuse and Recycle’ campaign whereby it encouraged its consumers to limit consumption to only essential products and pledged to repair those to increase its longevity (Patagonia, 2010). Further, it also organised online and retail swap events to support the reuse of products and donated still-useful products to environmental charities. Lastly, if a product was completely worn out, Patagonia asked its consumers to return it to them and recycled these goods (Rapp, 2010); it also offered fully paid postage return for all repair and recycle requests (Patagonia, 2010).
Further, the economic dimension of corporate responsibility considers the direct and indirect impact a company’s operations have on the community. Uddin, Hasan and Tarique (2008) shine light on some significant impacts:
- Multiplier Effect: The economic performance of a company has an impact on all its stakeholders. It equips the company to make further investments and develop operations. This in turn, will ensure that the employees are making good salaries and are paying taxes, which would fuel government programs and communities.
- Contributions to the community where their operations are based through paying taxes
- Behaving in an ethical manner and refraining from actions that motivate distrust, such as, bribery, corruption, etc.
Stakeholder Dimension:
The stakeholders of a business can be defined as those that are directly or indirectly affected by the firm’s actions and objectives. Usually, the key stakeholders of a business include – the customers, shareholders, employees, government, owners, suppliers and the community (BBC, 2014). It is important to note that not all stakeholders are equal and their level of interests within the company may also differ. Theoretical developments in explaining a business’s role towards the society dates to the 1920s that acknowledges an ‘interconnectedness’ between the various constituencies of a business performance (Morris, 1997).
The two principles that summarise the stakeholder concept can be defined as “that to perform well, managers need to pay attention to a wide array of stakeholders, and that managers have obligations to stakeholders which include, but extend beyond, shareholders” (Jones et al, 2002).
Slack (2010) pointed out two noteworthy points while considering stakeholders in making business decisions;
- Firstly, a broad range of stakeholders must be considered whilst making decisions within the business
- Secondly, not all these decisions will be in agreement as various stakeholders will have varying perspectives subjective to their background and cultures.
However, it is imperative to understand that the same decision will not hold good for all functions of an operation or geographic locations and the managers must be responsive to this.
The influence of this dimension on operations can be explained with respect to the decisions pertaining to each stakeholder:
- Responsibility to the Consumers: The business is liable to provide the consumers a value for their money. These duties extend to providing safe and durable products or services, after sale service, full disclosure of information to potential customers and fair standards of advertising (Uddin et al, 2008). It is the management’s responsibility to ensure the quality and safety of the product and that it is not hazardous to the consumer or the environment. Although Nike received negative publicity in the past for not being eco-friendly, they have now made strides within that aspect and are deemed as one of most sustainable clothing and footwear brand by Morgan Stanley (2015). This can be attributed to the fact that Nike maintains transparency and discloses all information to its consumers about its supply-chain and production processes. They use post-consumer recycled materials, have invested in energy efficiency in factories and even designed an App that allows designers to compare materials that have the least environmental footprint (Viles, 2016). In 2016, Samsung’s newly launched phone, the Galaxy Note 7 was reported to be catching on fire and exploding proving to be extremely hazardous to the consumers (Hern, 2016). On investigation, it was known that overheating of the phone was caused by problems within the battery sourced from two different suppliers (Moynihan, 2017). This signifies a failure on Samsung’s operations to conduct quality checks and produce a safe product for its customers.
- Responsibility to the Employees: The business must ensure that it provides safe working conditions and does not exploit its employees by paying low wages or overworking them. It should contribute to the welfare of its workers, upholding their skills and sustaining equal opportunities for all (Hassan, 2008).
- Responsibility to the Community: Businesses can only sustain if the community they’re present in is sustainable. Hence, they are instrumental in promoting and conducting training workshops, hosting recreational events and donate to charitable causes in their community. Marriot in collaboration with local community service organisations screens, identifies and offers 180 hours of paid classroom and on-job training to unemployed candidates. This has proved beneficial to both, the community by providing opportunities as well Marriot in reducing its cost of recruiting entry level employees and resulted in a high retention rate (Porter and Kramer, 2006).
- Suppliers: When choosing suppliers, businesses must make integral decisions as if would let the supplier cater to other businesses as well or if they will be the sole client. Further, they must also assess on whether they will engage with any suppliers that pursue unethical practices or will expect them to follow the same value and ethics as the business. In many cases, companies terminate their contracts with suppliers that take to unethical practices such as exploitation of labour or cause damage to the environment etc., it is the responsibility of the business to monitor these as discussed above under input costs. In 2013, Dell Inc. was accused of its suppliers in China resorting to immoral practices through exploiting their labour. A video showcased that the workers were made to work overtime and provided proof of under aged workers in poor working conditions (Sanghani, 2013). Dell claimed to immediately audit these facilities and terminate the contract if the accusations were proven true.
Voluntary Dimension:
The final dimension tries to address the long-lasting question of whether companies should indulge in CSR just to comply with the legal requirements or if this responsibility goes beyond these regulations. Typically, this dimension refers to the actions that the company is not required to do but does it anyway because it is the right thing to do (Scilly, 2016).
Carroll’s Pyramid of CSR (1991) explains how each business has different motives from each level. In the first stage – the legal stage, companies engage in CSR to comply with legal and governmental regulations. In the economic stage, they become involved to seek a competitive advantage and foster their financial performance. However, in the last two stages – the ethical and philanthropic stage, companies aim to have a balance between the society and profit. They go beyond the profit motive and work towards the welfare of the society (Kotler and Lee, 2005).