The evolution of theoretical thought on CSR can be viewed through three stages: philanthropy, evolution from philanthropy to value creation and shared value. The latest view of creating shared value can be regarded as the integration of CSR into corporate strategy. By conceptualizing CSR as a source of competitive advantage, Michael E. Porter and Mark R. Kramer developed one of the most influential theories on the importance of CSR.
Porter, Head of the Institute for Strategy and Competitiveness at Harvard Business School, is famous for his eponymous competitive strategy, Porter’s five forces. Kramer, a senior fellow at Harvard’s Kennedy School of Government, cofounded FSG – a global social impact consulting firm – along with Porter.
Aligning Corporate Strategy and CSR
Porter and Kramer criticized the conventional view of CSR for pitting business against the society when they are clearly interdependent and pressurizing companies to plan their CSR activities in generic ways instead of integrating it with its corporate strategy. They proposed a new framework focusing on the interconnections between business and society rather than treating corporate growth and social welfare as a zero-sum game.
While a healthy society creates expanding demands for businesses, no social program can compete with the business sector when it comes to creating jobs, wealth and innovation which are essential components for growing demand. Propounding on this inter-relation, Porter and Kramer developed a framework that nurtures the very society that the company reaps.
Identifying the points of intersection, they define two distinct forms of interdependence: (i) ‘inside out linkages’ through which a company creates either positive or negative social consequences during the normal course of its business and (ii) ‘outside-in linkages’ through which external social conditions affect the company for better or for worse.
Choosing Social Issues for CSR
Each company must select social issues it would address through its CSR initiatives. Porter and Kramer state the social issues to be pursued should intersect with its particular business. It should present an opportunity for a shared value that benefits the society which in turn is beneficial to the company. The framework classifies the issues that affect the company into three categories:
Generic social issues may be important to the society, however, they do not directly impact the company’s operations nor do they affect the company’s ability to operate.
Value chain social impacts are those that are significantly affected by the normal operations of a company.
Social dimensions of competitive context are external factors that significantly affect the underlying drivers of competitiveness in places where the company operates.
Each company should classify social issues in these categories and rank them as per their potential impact. Further, this classification will vary from business to business depending on their industry, nature of operations and location.
Building a CSR agenda
Classifying social issues into categories is just the means while the end is to devise a comprehensive CSR agenda. An agenda that aims to achieve social and economic benefits simultaneously. Porter and Kramer categorize the agenda into responsive CSR and strategic CSR.
A responsive CSR is aimed towards mitigating existing or potential adverse effects of the company’s activities and acting as a good corporate citizen by contributing towards mitigating the evolving social concerns of the community. Strategic CSR is in line with the company’s corporate strategy, leveraging their capabilities to improve their competitive advantage and benefit society simultaneously.
While responsive CSR is altruistic, strategic CSR is factored by ‘self-interest’. From the categories of social issues defined above, responsive CSR may involve generic social issues and value chain social impacts, while strategic CSR will concentrate its efforts on social dimensions of competitive context. However, the two approaches are not mutually exclusive but complementary. Porter and Kramer emphasize on allocating substantive corporate resources for truly strategic CSR.
The Principle of Creating Shared Value
At the core of Porter and Kramer’s framework is the principle of creating shared value through strategic CSR. The framework guides to identify potential avenues for business needs and societal needs to interact and formulate an agenda that is beneficial for both.
It provides possibilities to unlock shared values by investing in social aspects that strengthen the competitive context in which the company operates. Although, the conflicting space the framework aims to carve between the company’s self-interest and the community’s social needs is open for criticism. Porter and Kramer are ambitious about building a symbiotic relationship in which the company and the community mutually prosper.
Shunmuga Sundaram Yadav has previously worked for an Italian consulting firm promoting Italian businesses in developing countries and assisting them to participate in projects funded by Multilateral Development Banks. He has also worked on consulting projects for strategizing market entry of Italian brands in India. He has completed a course in Aircraft Maintenance Engineering and a Bachelor’s degree in Commerce. He is currently pursuing a Master’s Degree in Public Policy from Mumbai University.
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