Corporate Responsibility and Competitive Advantage

Can the application of Corporate Social Responsibility (CSR) to a business model create competitive advantage for the firm? Or is it a luxury that can only be promoted when times are good and profits high? It could all depend on social expectations.

CSR, also called ‘Corporate Responsibility’ or ‘Responsible Business’ can be described as ‘business doing good’ for the wider society of which it is part. But by adding value, making profits and generating wealth, it is clear that much business does create widespread benefits for at least some of their stakeholders: customers, employees and shareholders. They make products, create jobs and provide investors with returns. CSR seems to become important when morals and ethics become a major part of doing business. The scope of CSR is broadened further when one considers the natural environment: the degradation of nature and climate change are two huge issues which are entering increasingly into the public consciousness. With this heightened awareness comes a desire for change and improvement in behaviour, where possible. Stakeholders increasingly demand more from firms; and firms want to be seen to be ‘doing good’. Those with a conscience know that their company image has to communicate the ‘good’ that they really are doing. The effects of CSR need to run deep or customers could take their business elsewhere. This is where CSR can offer a competitive advantage.

Competitive advantage can be described as a position that a firm holds in the markeplace vis-a-vis its competitors. It could be ‘ahead of the game’ in terms of cost advantage or through differentiated products. If firm A realizes before its competitors that employing and communicating more effective CSR (for example giving out stronger reusable carrier bags) can differientiate its products and/or services from its rivals and bring in more customers, it can act to win an increased market share and total revenues. Such tactics will cost money, and eat into any projected increase in profits that come from the rise in market share. So there is a degree of risk in the strategy. If it works to raise profits at the expense of other firms in the market, the latter have an incentive to catch up and in so doing could make the form of CSR an industry standard, potentially reducing the profit rate of firm A and restoring their own profit rates. The process of competition thereby generates benefits to society that could be widespread, in this case reducing waste. Alternatively, if other firms in the market are slower-moving, firm A’s increased profit rate could be used to fund more investment in improved CSR, potentially further increasing its market share to the point where it becomes a monopoly. Whether it would still have the incentive to improve CSR without some intervention by government is another issue. For the moment, let us assume that the market remains competitive. But what drives firm A to become more responsible in the first place?

The prospective benefits to the individual firm from improving their CSR strategy derive from changing social expectations. When a large enough group of customers or other stakeholders begin to make demands on the firm to behave differently they can affect that change. Customers can buy from the firm they deem more responsible and take their custom away from firms that are less so, stimulating the competitive process outlined above. Shareholders that deem a firm to be acting unsustainably (admittedly a broad concept) can sell and drive the share price down.

As more and more space is taken up in the media, on the part of governments, NGOs and other organisations with issues surrounding CSR, the social consciousness of moral, ethical and environmentally friendly behaviour by firms is heightened. The trend is already with us, but does not yet seem particularly widespread. Blytt & Co have a small part to play in raising the social consciousness of sustainability and CSR. I will write more on sustainability in future blog entries.