The idea of stakeholder approach to strategic management suggests that managers must formulate and implement processes which satisfy all and only those groups who have a stake in the business. The main task in the process is to manage and integrate the relationships and interests of shareholders, employees, customers, suppliers, communities and other groups in a way that ensures the long-term success of the firm.

Stakeholder approach suggests that we repaint our picture of the firm. For good or ill, there are myriad groups who have a stake in the success of the firm. Many traditional views of strategy have ignored some stakeholders, marginalized others and consistently traded-off the interests of others against favoured stakeholder groups. Such an approach may well be appropriate in relatively stable environments. However, changing world the limitations of traditional approaches to strategic management become increasingly apparent. The interests of key stakeholders must be integrated into the very purpose of the firm, and stakeholder relationships must be managed in a coherent and strategic fashion [1] .

2. Porter, M. E., & Kramer, M. R., (2006). ‘Strategy and society: The link between competitive advantage and corporate social responsibility’. (2006, December) (Harvard Business Review), 84(12), p. 76-92.

Although businesses have become increasingly aware of stakeholder pressure to demonstrate a commitment to their corporate social responsibilities (CSR), this does not necessarily mean the adoption of an integrated and strategic approach to CSR. Rather, as Michael Porter (Harvard Business School, Boston) and Mark Kramer (John F Kennedy School of Government, Massachusetts) have recently argued in the Harvard Business Review (December 2006), current approaches to CSR are fragmented and disconnected from business goals. This has resulted in disparate and reactive initiatives designed to mollify vocal stakeholders or deflect attention from questionable business practices, and these have justifiably been criticised as ‘feel good’ marketing campaigns which have failed to generate bottom line benefits.

Porter and Kramer suggest a new approach to CSR which both (i) acknowledges the interdependence of companies and the broader community, and (ii) enables companies to develop a tailored, rather than generic, CSR strategy. In this way, companies will “make the most significant social impact and reap the greatest business benefits”. This note provides a summary of Porter and Kramer’s article, giving particular attention to the practical issues of creating a tailored corporate social agenda.

2.1 Background

Companies which have responded to their CSR have usually done so for one, or a combination, of the following four reasons/principles – moral obligation, sustainability, compliance or reputation. ‘Moral obligation’ refers to the compulsion for companies to be ‘good citizens’ and ‘do the right thing’. The sustainability argument emphasises the need for companies to have regard to the natural environment from which resources are drawn. The compliance or ‘licence to operate’ argument reflects a pragmatic response to agendas set by Government regulators, and the reputation impetus is all about creating a positive impression on consumers, staff and shareholders.

Porter and Kramer identify the individual deficiencies of each of these principles as a sufficient justification for CSR (e.g. they argue that the sustainability school of thought raises questions about balancing long term objectives against short term costs, but offers no framework for resolution). Fundamentally however, Porter and Kramer argue that there is an inherent weakness in all four school of thought, namely they “focus on the tension between business and society, rather than their interdependence”. Further “each strategy creates a generic rationale that is not tied to the strategy and operations of any specific company or the places in which it operates”.

Porter and Kramer argue that the deficiencies in approach to CSR have resulted in unco-ordinated and non-strategic activities that “neither make any meaningful social impact nor strengthen the firm’s long-term competitiveness”. Having set the scene, Porter and Kramer suggest a new approach to CSR to achieve these outcomes.

2.2 A new approach

Porter and Kramer’s new approach has two key elements. Firstly, they suggest that a CSR strategy should be predicated on an acceptance of the interdependence of business and society, i.e. ‘successful corporations need a healthy society’ and ‘a healthy society needs successful companies’. Porter and Kramer suggest that the points of intersection between companies and society are both ‘inside-out’ linkages (i.e. internal activities which affect the external environment such as ‘hiring practices, emissions and waste control’) and ‘outside-in’ linkages (i.e. social conditions which affect a company’s capacity to conduct business, e.g. rules and regulations, local education and health supports). This platform of understanding implies that both business decisions and social policy have shared values, and lifts CSR from a ‘nice to do’ (which is reminiscent of the moral obligation argument or philanthropic approach to CSR) to the ‘have to do’ (which, although not acknowledged by Porter and Kramer, is an extension of the sustainability argument).

Secondly, and this is the real benefit of Porter and Kramer’s thesis, they argue that each company should create a tailored (rather than a generic) corporate social agenda, and provide a practical tool to chart that agenda i.e. ‘to identify those areas of social context with the greatest strategic value’.

2.3 The practice of developing a new CSR strategy

Porter and Kramer’s practical tool to developing a new CSR strategy encompasses the following steps:

Choosing which social issues to address. “The essential test that should guide CSR is not whether the cause is worthy, but whether it presents an opportunity to create shared value – that is, a meaningful benefit for society that is also meaningful to the business”. Porter and Kramer argue that companies should sort social issues into three categories – (i) generic social issues which affect all companies; (ii) value chain social impacts which have a direct affect on the company’s ordinary course of business; and (iii) social dimensions of competitive context which significantly affect the underlying drivers of a company’s competitiveness in a specific location. Once the social issues have been categorised they should be ranked, i.e. prioritised, for action

Creating a corporate social agenda. The selected social issues should be identified in an explicit and affirmative corporate social agenda. This agenda will reflect an approach to CSR which is both responsive to stakeholder concerns and anticipated risks, andstrategic (i.e. integrates inside-out and outside-in linkages)

Organising for CSR. The corporate social agenda should be integrated into affirmative business practices, i.e. to ensure that operating management is engaged in processes that identify and prioritise social issues based on their “salience to business operations and their importance to the company’s competitive context”. Further, Porter and Kramer suggest that measurement of outcomes is critical to the agenda, and that “value chain and competitive context investments in CSR need to be incorporated into the performance managers with P&L responsibility”. In particular Porter and Kramer argue for the measurement of the CSR initiatives in terms of social impact (although omit to discuss what those measures might be).

Conclusion

Porter and Kramer offer a new approach to CSR which focuses on identifying the shared values between a particular company and its social context, and developing a tailored and strategic response. Using Porter and Kramer’s tool to map social opportunities, and practical steps to identify, develop and organise for CSR, companies now have a new CSR framework to enhance business and social outcomes. If companies are able to successfully use this model (and Porter and Kramer’s article provides numerous case studies to that effect) then the benefits will be reaped in terms of both a competitive advantage and social enhancement.

3.An Empirical Analysis of the Strategic Use of Corporate Social Responsibility by Donald S. Siegel and Donald F. Vitaliano

In a recent insightful survey of CSR, The Economist (2005, 8) identified four varieties of CSR based on whether this activity raised or lowered profits and raised or lowered social welfare. This paper constitutes the first empirical test of recent theories of strategic CSR. Specifically, we focus on the importance of the type of product or service sold by a firm as a determinant of management’s decision to invest in CSR. This decision could represent a signaling device regarding the quality of the firm’s output. Consistent with these theories of strategic CSR, we find that firms selling durable experience goods or credence services are much more likely than comparable firms to be socially responsible. Ceteris paribus, our results imply that a firmselling financial services (a credence service) is more likely to opt for CSR by about 23 percentage points (compared to firms selling search goods). Similarly, a firm producing durable experience goods, such as automobiles or software, is more likely (than a firm selling search goods) to be socially responsible by about 15 percentage points. Firms selling experience services or nondurable experience goods, by contrast, are no more likely to adopt CSR than a firm whose product is a search good. While additional research is needed to pin down the diverse reasons why firms adopt a CSR stance, the evidence presented here supports a view that it is consistent with strategic theories of CSR and rational, profit-seeking management decision making. Others may view the same evidence as proof that CSR is a “fraud” or “smokescreen” to disguise the same behavior, which they abhor. Regardless of interpretation, we hope that this exploratory paper stimulates additional empirical research on the strategic use of CSR.

Several caveats should be mentioned. The first is that our empirical analysis is based on a single cross section of data. It would be useful to test theories of strategic CSR using panel data, which would enable us to better control for unobserved firm heterogeneity and changes in CSR behavior and its determinants over time. A second concern is the possibility that our econometric analysis is subject to omitted variables bias; in contrast to ordinary least squares estimation, the estimated Co-efficients in a probit model would be inconsistent even if the omitted variables are uncorrelated with the included regressors (see Greene, 2000, p. 828). It is impossible to assess the importance of this effect on our estimates of the impact of good type on the propensity of firms to engage in CSR.

It is also difficult to classify a company cleanly into selling search, experience, or credence goods and service. Although we eliminated conglomerate firms from our sample and relied on the firm’s primary products or services for our industry classification, we recognize that many firms are diversified, which introduces a certain amount of measurement error in our empirical analysis. In an ideal world, the division or perhaps, the plant or establishment would serve as the unit of analysis, rather than the firm.