12 Chapter 12 chapter Strategizing with Corporate Social

12 Chapter 12 chapter Strategizing with Corporate Social Responsibility Global Strategy Mike W. Peng Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned,

Outline • A stakeholder view of the firm • A comprehensive model of corporate social responsibility • Debates and extensions • The savvy strategist Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Social Responsibility • The consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks. • Stakeholder: Any group or individual who can affect or is affected by the achievement of the firm’s objectives • GS 3 E OPENING CASE: Launching the Nissan Leaf: The world’s first electric car 12– 3

A Stakeholder View of the Firm • A stakeholder is “any group or individual who can affect or is affected by the achievement of the organization’s objectives” • Goal for CSR is global sustainability, defined as the ability “to meet the needs of the present without compromising the ability of future generations to meet their needs” • Three drivers related to urgency of sustainability Ø Rising population, poverty, and inequity Ø NGOs and other civil society stakeholders have begun monitoring and in some cases enforcing social and environmental standards Ø Industrialization Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Stakeholder View of the Firm (cont’d) • Primary and secondary stakeholder groups Ø Primary stakeholder groups are those on whom the firm relies for survival and prosperity Ø Secondary stakeholder groups are defined as “those who influence or affect, or are influenced or affected by, the corporation, but they are not engaged in transactions with the corporation and are not essential for its survival” Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Stakeholder View of the Firm: A Fundamental Debate • The CSR debate centers on the nature of the firm in society. Why does the firm exist? • One side of the debate argues the “the social responsibility of business is to increase its profits” • Advocates of shareholder capitalism argue that if firms attempt to attain social goals, such as providing employment and social welfare, managers will lose their focus on profit maximization (socialism) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Stakeholder View of the Firm: A Fundamental Debate (cont’d) • CSR advocates argue that a free market system that takes the pursuit of self-interest and profit as its guiding light may fail to constrain itself, resulting in greed, excesses, and abuses • CSR advocates argue that all stakeholders have an equal right to bargain for a “fair deal” Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Managers: A Unique Group of Stakeholders • The free market and CSR camps agree: Ø Not to rock the capitalistic boat Ø On the central role of managers • Managers, as a stakeholder group, are uniquely positioned at the center of all stakeholder relationships; therefore, it is important to understand how they make decisions concerning CSR Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Comprehensive Model of Corporate Social Responsibility Figure 12. 2 © M. W. Peng (www. mikepeng. com) 12– 10

Rivalry Among Competitors • Mutual Interdependence Ø Reliance on old ways of doing business allows competitors to resist higher CSR standards • Increases in the Number of Rivals Ø Competition based on CSR is lower when there a small number of players determined to resist Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Threat of Potential Entry • First mover experience in pollution control technologies can create entry barriers Ø Effectiveness as entry barriers for two pollution control technologies—pollution prevention and pollution reduction—is not equal Ø The technologies creating the most effective entry barriers are proactive, pollution prevention—not end-of-pipe, pollution reduction Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Bargaining Power of Suppliers / Buyers • If socially and environmentally conscious suppliers provide unique, differentiated products with few or no substitutes, their bargaining power is likely to be substantial • CSR conscious buyers can extract concessions Ø Individual buyers: Shell’s North Sea platform fiasco Ø Corporate buyers: Nike requires its suppliers to be “sweatshop”-free Ø Buyers in great difficulties can extract CSR concessions Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Threat of Substitutes • If substitutes are superior to existing products and costs are reasonable, they attract more customers Ø Wind power, much more environmentally friendly than fossil-fuels and safer than nuclear power, may have great potential • Overall, the threat of substitutes requires firms to vigilantly scan the larger environment, instead of narrowly focusing on the focal industry Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Turning Threats to Opportunities • Not all industries are equal nor are any industries immune in terms of their exposure to CSR challenges • Industries and firms may want to selectively but proactively turn threats into opportunities Ø Treating CSR as a cost or nuisance may underestimate strategic business opportunities Ø The most proactive managers are far-sighted to make their firm’s CSR activities a source of differentiation as opposed to an additional cost Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Resource-Based Considerations • Value: Some CSR policies may not add to the firm’s value • Rarity: CSR policies may not pay off if common • Imitability: CSR that is embedded in people is harder to imitate • Organization: A firm needs to tie together CSR activities • The CSR-economic performance puzzle: Does CSR improve economic performance? Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Question of Value • Large firms, especially MNEs, can apply their financial, technological, and human resources toward a variety of CSR causes Ø Social issue participation (involvement in social causes not directly related to managing primary shareholders) does not qualify as value-adding activities and may actually reduce shareholder value Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Question of Rarity • If competitors also possess certain valuable resources and capabilities, then the focal firm does not gain a competitive advantage by having them Ø Valuable but common resources and capabilities only provide competitive parity Ø Only valuable and rare resources and capabilities can provide focal firms some competitive advantage Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Question of Imitability • Only valuable and rare resources and capabilities that are hard-to-imitate can offer firms sustainable competitive advantage Ø CSR-related resources and capabilities deeply embedded in the idiosyncratic managerial and employee skills, attitudes, and interpretations of firms Ø The socially complex way of CSR engagement is difficult to imitate Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Question of Organization • Complementary Assets Ø Assets that, when combined with valuable, rare, and hard-to-imitate resources and capabilities, enable a firm to fully utilize its CSR potential Ø Difficult to “fake it: ” These assets should grow from more general business strategies (e. g. , differentiation) Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CSR Economic Performance Puzzle • Why is there no conclusive evidence on a direct, positive link between CSR and economic performance? • Various studies produce different results • Not every firm benefits from CSR Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Institution-Based Considerations • Reactive strategy: Many cost-conscious manufacturers • • ignore CSR Defensive strategy: Argue against costs Accommodative strategy: CSR as a worthwhile endeavor Proactive strategy: Actively participate in policy discussions, build alliances with stakeholders and voluntarily go beyond what the regulations require Making strategic choices: A strategic menu of choices among reactive, defensive, accommodative, and proactive strategies Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Reactive Strategy • Characterized by a lack of support by top management for CSR causes • The need to accept CSR is neither internalized through cognitive beliefs, nor does it result in any norms in practice, leaving only formal regulatory pressures to compel firms into compliance • CSR Movement Ø Emerged in response to the blatant lack of responsiveness toward CSR Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Defensive Strategy • Focuses on regulatory compliance with only piecemeal involvement by top management • CSR issues are regarded as an added cost or nuisance • Firms admit responsibility, but often fight it • In the absence of informal normative and cognitive beliefs, it seems that formal regulatory pressures are the only feasible way to push firms ahead Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Accommodative Strategy • From both normative and cognitive standpoints, it may become a legitimate social obligation to accept responsibility and do all that is required Ø A negative view: Window dressing? Ø An instrumental view: Another plot to make money? Ø A positive view: Doing the right thing? • Institution-based answer: All of the above Ø From window dressing to self-motivated, better corporate citizens Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Proactive Strategy • Proactive participation in regional, national, and international policy discussions • Alliances with stakeholder groups (e. g. , NGOs) Ø Alliances with NGOs: The key lies in identifying shortterm, manageable projects of mutual interests • Voluntary activities beyond what is legally required Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

How the US chemical industry responds to environmental pressures 27

Debates and Extensions • Domestic versus overseas social responsibility Ø Potentially increases corporate profits, provides employment to host countries and increases standards of living there Ø However, often domestic employees and communities pay the price for this expansion • Active versus inactive engagement overseas: To what extent should an MNE use threats or its power to impose its values in a country? • Race to the bottom (“pollution haven”) versus race to the top: Some companies may move to a country to escape environmental regulations Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Savvy Strategist • Managers may want to integrate CSR as part of the core activities of the firm—instead of “faking it” and making cosmetic changes • Managers need to pick CSR battles carefully • Strategists need to understand the formal and informal rules of the game, anticipate changes, and seek to shape such changes • From a CSR perspective, we can revisit the four fundamental questions • The globally ambiguous and different CSR standards, norms, and expectations cause many managers to relegate CSR to the “backburner, ” but they have responsibility to safeguard and advance capitalism by building more humane, more inclusive, and fairer firms Copyright © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.