Corporate Social Responsibility and Competitive Advantage

Running head: Corporate Social Responsibility and Competitive Advantage

Achieving Competitive Advantage through a Corporate Social Responsibility- Based Strategy Ahmad Bayoumi (S0900-498) The German University in Cairo

Corporate Social Responsibility and Competitive Advantage

Abstract New type of customers starts to exist in the market as a result of the continuous increase of societal, environmental and ethical concerns. Practically, companies today are under intense pressure to create public trust and stay competitive in such global economy. Accordingly firms create new type of communication strategy in order to interact with such phenomenon. This type of communication strategy is known by corporate social responsibility (CSR) activity. Although an exact definition of CSR still elusive, but the term is generally used to refer to a mode of business engagement and value creation, allowing to meet and even exceed legal, ethical, and public societal expectations. The purpose of this paper is to explore the impact of CSR based strategy on the firms competitive advantage.

Keywords: Competitive Advantage, Corporate Social Responsibility, Sustainability, Strategic CSR.

Corporate Social Responsibility and Competitive Advantage

Corporate Social Responsibility and Competitive Advantage Strategic management is all about achieving a sustainable competitive advantage; on one hand strategists are interested to keep searching for the different sources that will help them to achieve the required competitive advantage. On the other hand there is a steadily increasing societal concern about environmental, ethical, and social issues leads to the existence of a new type of customers, who used to apply this concern during the purchase process (Chen, 2010). This leads firms strategists and marketers to interact with this social phenomenon and try to create a way of exchanging relationships with this type of customer. This way is commonly known by corporate social responsibility based strategy. Abu Dhabi National Energy Company Taqa is one of the companies that are focusing on executing environmental, social, ethical programs to all of its stakeholders, including shareholders, employees, bondholders, the community and the environment. Taqa has joined the 3C initiative, a group of business leaders that aims to set global limits for temperature increases, and have specific emission reduction targets; accordingly they offered their employees to buy a hybrid low emissions car. Taqa started with its employees as it believes that changing individual behavior is the first step toward changing societies (Kotler, 2010). Having a deeper look on some famous firms strategies, it will be evidently clear that nowadays it becomes a matter of social responsibility and sustainability; McDonalds (recycled packaging), Home Depot (sustainable harvested wood) and Coke (sugar and packaging). This obviously states that If you dont manage your business with respect to environmental and social

Corporate Social Responsibility and Competitive Advantage

sustainability, your business will not be sustained (Ottman, 2008). Here comes out the importance of corporate social responsibility based strategies and its social role in the market for the consumers, and also its clear support for the business, and for the brand specifically. This paper will try to find out if there is a positive relation between corporate social responsibilities based strategy and the firms competitive advantage. In addition; this paper is structured as follows. First, we review prior literature on competitive advantages and its main sources, then literature on the corporate social responsibility. Second, we explore the relation between applying corporate social responsibility based strategy and the companys competitive advantage. Finally, we describe the conceptual frame work along with the thesis question.

Corporate Social Responsibility and Competitive Advantage

Literature Review

Competitive Advantage In todays aggressive market; each firm is trying to have its own special strategy in order to protect its position among competitors and also to uphold its market share in the market, some firms are trying to do something that rival competitors cannot do, other firms are trying to own something that rival firm desire. This shows clearly how much all firms are striving to gain and maintain competitive advantage, which can be defined as anything a firm does especially well compared to rival firms. (David, 2009:41). Moreover; and as cited by David (2009:41), CEO Paco Underhill says, Where it used to be a polite war, its now a 21st- century bar fight, where everybody is competing with everyone else for the customers money. For example we can see T.J. Maxx and Marshalls are taking customers from their competitors in the same mall, also Nordstrom is taking Neiman Marcuss customers, also Family dollar is targeting Wal-Marts revenues, accordingly gaining and keeping competitive advantage is nowadays essential target that all firms should always keep seeking for. As long as any competitive advantage can be simply imitated and undermined by rival firms, thus the firms target shall not be only to achieve competitive advantage, but to make every effort to achieve sustained competitive advantage. And as cited by (David, 2009), this can be achieved through continuous adaptation to external changes and making the best use of internal resources and capabilities, also through ongoing evaluation for strategies that get the most out of those internal resources and external factors.

Corporate Social Responsibility and Competitive Advantage

Sources of Competitive Advantage Strategists and researchers have been interested in understanding sources of competitive advantage for firms. Normally, they focused on studying relationship between a firm's internal strengths and weaknesses on one hand, and its environmental opportunities and threats on the other. This is actually known as SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, which traditional logic suggests that firms that use their internal strengths in taking advantage of external opportunities and reducing environmental threats, while avoiding internal weaknesses, are supposed to gain competitive advantages more than other rival firms (Barney, 1995). Moving beyond the SWOT analysis; the Resource Based View (RBV) and the Industrial Organization (I/O) are two major perspectives or frameworks that show how firms can capture and maintain sustainable competitive advantage. While the RBV approach argues that internal resources are the major sources for a firm to achieve and maintain competitive advantage, in contrast the I/O approach contends that the external factors are more important to achieve competitive advantage (David, 2009).

Resource Based View (RBV) Perspective The RBV perspective contends that the organizational performance will be first and foremost achieved through the firms internal resources (David, 2009), these resources and capabilities include all of the physical, financial, organizational and human assets used by a firm to

Corporate Social Responsibility and Competitive Advantage

produce, manufacture, and deliver products or services for customers. Physical resources include the manufacturing facilities, machines, and buildings the firms use during operations. Financial resources include equity, debt, retained earnings, and so forth. Organizational resources include the organizational culture, history, relationships along with a firm's formal reporting structure, and compensation policies. Human resources include all the knowledge, experience, judgment, risk taking, and wisdom of individuals associated with a firm (Barney, 1995). The main idea of the RBV is that the type and the mix of all the internal resources should be the first issues considered in developing strategies that can help to achieve sustainable competitive advantage, and the theory declare that it is advantageous for the firm to pursue a strategy that is not implemented and cannot be applied by rival firms (David, 2009). According to Barney (1995); In order to let the firm make the best out of its internal resources, managers shall answer four important questions about those resources: Question of value, Question of rareness, Question of imitation and finally Question of organization. As for the resources value, Manager should answer this question; Do a firm's resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats? (Barney, 1995:50), and for the resources rareness they also shall answer the following question; How many competing firms already possess these valuable resources and capabilities? (Barney, 1995:52), Moreover and as for the resources imitation, managers need to focus to know the following; Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it? (Barney, 1995:53) and finally for the resources organization, Is the firm organized to exploit the full competitive potential of its resources and capabilities? (Barney, 1995:56), finally RBV perspective emphasizes that when firm's resources

Corporate Social Responsibility and Competitive Advantage

and capabilities are rare, valuable, and hard to imitate, then those resources can be considered sources of sustained competitive advantage.

Industrial Organization (I/O) Perspective The I/O perspective contends that organizational outstanding performance will be achieved by industry forces, and that the external factors (the industry factors) are more important for a firm to be studied and analyzed to achieve the targeted competitive advantage (David, 2009), and we can see theorists such a Michael Porter supports this perspective through his five forces model, which emphasizes the competitive advantage can be achieved through analyzing the industry variables. This model requires analyzing five major forces that a firm will be concerned about within the competitive industry; these five forces are firms rivalry among existing firms, threats of potential entrants, and existences of substitutes, bargaining power of suppliers and bargaining power of buyers also. As cited by Wheelen et al (2010), The collective strength of these forces determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital (Porter, 2000).

In fact effective integration between both internal resources and external factors is the key for any firm to achieve and secure a sustainable competitive advantage (David, 2009)

Corporate Social Responsibility and Competitive Advantage

Corporate Social Responsibility (CSR) CSR has been used as a synonym for corporate philanthropy and also for business ethics. Moreover; CSR has also been used in describing corporate social performance and corporate citizenship, which usually highlight the corporate contribution to society through its business activities, and through it social investment. CSR and corporate sustainability are overlapping movements, though not identical (Milton, 2010). As per Siegel et al (2007) corporate social responsibility (CSR) occurs when firms join in any activity that advance a social agenda beyond that which is required by law. CSR is interrelated with complex issues such as environmental protection, health and safety at work, human resources management, relations with local communities, with suppliers and consumers (Branco et al, 2006). For example, a car manufacturer could produce hybrid vehicles, which extensively exceed government fuel efficiency requirements. CSR can be defined as situations where the firm goes beyond compliance and engages in actions that appear to further some social good, beyond the interests of the firm and that which is required by law (Mc Williams et al, 2006:1), of course this is one definition, noting that a lot of definitions have been proposed, but theres no clear chosen definition and this makes measurement process harder. Another definition of CSR relates it to the firms contribution in sustainable economic development, working with the staff and their families, in addition to local communities and society in general to improve the quality of life (Holme et al., 2000). In addition and as cited by Milton (2010), there is a classic description for CSR developed by Carol (1979), in which he

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mentioned that there are four categories for CSR activities, Economic responsibilities; the most important social responsibility of business in the production of goods and services and the generation of profits, Legal responsibilities: (that shows the corporate compliance with regulation, Ethical responsibilities a set of societal standards wider than the legal ones, and finally philanthropic responsibilities that shows the voluntary activities such as charity donations done by the corporate (Figure 1).

Figure (1)

Corporate Social Responsibility as a Strategy The notion of CSR and the view of strategic management for firms usually seem to be contradictory. Strategic Management usually aims generating and maximizing profits while CSRs main goal is ensuring that business earn a social license to operate (Milton, 2010). However; the term Strategic CSR appeared on the surface in 2001, when Mc Williams, Siegel and Baron plotted

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the model profit maximizing CSR. As Baron (2001:774) defined CSR as the private provision of a public good. In addition, Baron (2001) emphasizes that companies compete for socially responsible customers by clearly linking their social contribution with the sales of their product. Moreover, and as cited by Siegel (2007); McWilliams et al. (2001) identified a model in which two different firms sell identical goods, while one firm adds an extra social attribute to its product. This social attribute is valued by some socially responsible consumers who view CSR as a signal of firms reliability and honesty, and who believe that those firms will accordingly produce better products. Consequently, CSR can be considered as a form of product differentiation, and also a method for building brand loyalty. As cited by Sharma et al. (2011), A lot of firms identify CSR applications with their core strategy and policy based on the importance given to a) defining social action plan, b) amount of investment awarded to social programs, c) commitment of their human resources, d) Perceived impact of social programs on the firms competitive position, and e) measuring outcome of the social programs applied (Husted et al., 2007). Moreover; managers can conduct a cost/benefit analysis to determine the level of resources to be dedicated to CSR activities. Simply put, firms simultaneously assess the demand for CSR and the cost of satisfying this demand and then determine the optimal level of CSR to provide (Sharma et al, 2011). The CSR concept is regarded as a powerful tool for achieving sustainable competitive profit and also for achieving enduring value for the investors, stakeholders. CSR can be used as an opportunity for businesses, financial investors, and society. Proper implementation of CSR practices can shape the perception of customers, investors, local communities, governments, suppliers and competitors. Many multinationals, like the Tata Group, ITC, DuPont, etc., have managed to create a better social image in society by providing a better and healthier work

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environment to their employees and by providing the best services for their entire society (Sharma et al, 2011). As cited by (Sharma et al, 2011), the implementation of CSR practices calls for a strategic framework. And in order to put together the different perspectives of CSR design, planning, and implementation into one single strategic framework, we need to develop a preliminary model that helps in testing of all these practices, also suggests the required changes. Moreover; the organization shall align its CSR goals and its decisions along with its overall targets and strategies so that having corporate social responsibility becomes a natural in a day to day activity (Maon et al., 2008). There are various forces that also affect the implementation of CSR, as outlined in Figure 2.

Gov. Policies Philanthropy

Introduction of CSR
MNCs Ethical Consumerism

Figure (2)

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Drivers Pushing Business towards Corporate Social Responsibility According to Sharma et al (2011), there are different drivers that make business pushed toward CSR activities. These drivers shown in figure (3) are commonly affected by the firms main objectives.

In addition, Sharma et al added that when the businesses are implementing CSR, they will gain new business opportunities and may be business partners. Also the firms social image and reputation will be enhanced. This enhanced reputation will catch the attention of more customers, which in turn will increase profits. Finally, firms can cut costs and make good relations with stakeholders.

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Corporate Social Responsibility and Competitive Advantage Firms apply corporate social responsibility (CSR) activities as they consider that some kind of competitive advantage can be achieved. From a resource-based perspective CSR can be seen as a source of providing internal or external benefits for firms (Branco, 2006). In addition to the above and as cited by Branco (2006), we can distinguish two contrasting cases for CSR: the normative case, and the business case. The normative case suggests that firms should act in a socially responsible behavior because it is ethically correct to do so. The business case can be explained through the question of how companies see the possibility of advancing their economic growth by paying attention to SCR activities. Though the difference between these two perspectives is very clear, the reasons for a firm to hold CSR activities might reflect a mixture of them both (Smith, 2003). McWilliams et al. (2006) argued that we can examine how firms can benefit from engaging in CSR activities through the resource based perspective. The argument clarifies that firms generate sustainable competitive advantages through effective controlling for their resources and capabilities which are rare, valuable, cannot be simply imitated, and also cannot be substituted. Some of these resources and capabilities can be created and developed through engaging in CSR activities. Firms can be considered as contributors to sustainable development by managing their operations in such a way as to enhance economic growth and increase competitiveness whilst ensuring environmental protection and promoting social responsibility, including consumer interests (Branco et al, 2006).

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Moreover Branco (2006) cited that, there is an obvious change in the CSR debate from asking whether to make considerable commitments to CSR to questions of how such a commitment should be done (Smith, 2003). Several powerful authors began to identify the advantages of CSR. As they suggest that CSR activities help firms to increase financial performance (Porter et al, 1995). Some authors even argue that CSR decisions should be handled by managers precisely as they treat all investment decisions (Siegel et al., 2001:125) or that it should be considered as a form of strategic investment (McWilliams et al., 2006:4).

Internal benefits of corporate social responsibility Corporate social responsibility activities may have internal benefits for a firm through developing new resources and capabilities that are interrelated to corporate culture. As cited by Branco (2006), these internal benefits whether the outcomes or behaviors are irrelevant to the development of internal resources and organizational efficiency (Orlitzky et al., 2003). The RBV suggest that firms generate sustainable competitive advantages through managing and controlling their resources and capabilities that are rare, valuable, cannot be imitated, or substituted. Human resource activities that enhance employees attitude on workplace quality are considered as a base to fulfill these four characteristics (Ballou et al., 2003). Effective human resource programs can help in creating a competitive advantage through developing skilled personnel that carries out the firms business strategy efficiently, which will lead to improved financial performance. In addition effective human resource management can enhance workforce productivity. Thus, CSR can have positive effects on employees in terms of increasing their motives and morale as well as on reinforcing commitment and loyalty to their firm (Branco et al., 2006).

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Moreover, Branco et al. (2006) argued that in addition to the productivity benefits, firms also can save on costs for staffing and training of new employees. Firms with strong social responsibility commitment usually have additional ability to catch the attention of better job applicants, retain them upon hiring, and maintain their employee morale. Accordingly this leads to reduced recruitment and training costs and long with lower rate of turnover. Pollution avoidance along with the production processes reorganization, material flows and relationship with suppliers create opportunities for the firm to strategically modify production in terms of recycling or reusing raw material, substituting less environmentally harmful materials, etc This can be seen as competitive advantage. Firms that tend to apply proactive environmental policy often reorganize their production and delivery processes, also their physical resources in order to enhance the internal techniques for waste reduction and operational efficiency. A firm may have the benefit of a competitive advantage as long as the new processes are unique and can grant an opportunity that let the firm outperforms competitors. In addition, improved environmental performance also calls for a basic shift in a firms culture, human resources and also the organizational capabilities needed to manage them (Russo et al., 1997).

External benefits of corporate social responsibility Firms socially responsible activities have an obvious effect on corporate reputation. Firms with a superior social responsibility reputation may get better relations with external factors such as suppliers, customers, bankers, investors, and competitors. They may also catch the attention of better employees and may increase the current employees morale, loyalty and commitment to the firm. This, sequentially, may improve the firms financial performance. In addition; disclosure of

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information about firms performance and outcomes regarding CSR may help build a positive corporate image with all stakeholders (Branco et al., 2006). As Dowling et al. (2002) indicate corporate reputation is a general organizational attribute that reflects the extent to which external stakeholders see the firm as good and not bad. It has been recognized as one of the most important intangible assets that give a firm sustainable competitive advantage. As cited by Branco et al. (2006) that, According to Fombrun et al. (2000), firms can benefit from CSR and disclosure as it helps firms along with their employees to become socially integrated with the surrounding community, and give a hand for firms to build reputational assets that may improves their ability in negotiation with suppliers and governments, and also to charge premium prices for whatever they offer in terms of products or services. It also mitigates the risk of reputational losses that can end result from pushing away key stakeholders. By disclosing that they operate in accordance with ethical and social criteria, firms can build reputation. Some authors argue that the firms stock value can be increased through the involvement in corporate social initiatives. They depend on the ability to catch the attention of new investors and reduce exposure to risk. As cited by Branco et al (2006) that public declaration of environmental awards had a positive effect on the firms market valuation and also on the negative impacts immediately followed environmental crises, such as oil-spills (Klassen et al. 1996). CSR activities disclosure is thus mostly important in enhancing the corporate reputation. Hooghiemstra (2000) argues that social responsibility disclosure is a communication tool that can be used by firms to create, enhance their image and reputation. It can support the firm in the having a competitive advantage as creating a positive image may entail that people are prepared to buy the

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firms products or even do business with it. In addition it can be seen as a public relations vehicle, which aims to influence peoples perceptions about the firm.

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Thesis Statement Following the logic which clarifies that applying CSR based-strategy gives both internal and external benefits for the firm; these benefits appears in the firms internal resources and capabilities, along with the firms external image and reputation. Also applying the same logic which considers that there are two main sources for achieving sustainable competitive advantages; These sources are either internal sources (RBV) or external sources (I/O), then we can deduce that there is a positive relation between applying the CSR based-strategy and the firms competitive advantage.

H1: Firms corporate social responsibility-based strategy positively affects the firms competitive advantage.

CSR Based Strategy

Competitive Advantage

Our aim in this research is to explore the relationship between the CSR based strategy as an independent variable and the competitive advantage as a dependent variable. In addition we are going to answer the following research question:

Shall firms follow corporate social responsibility based strategies in order to achieve a sustainable competitive advantage?

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Conclusion CSR practices are becoming necessary for the endurance of every firm. As is evident from previous literature, foreign multinational firms are implementing CSR practices at higher levels; also customers prefer to buy their products more than the products produced by companies who dont apply CSR activities. This finding suggests that there is a great responsibility for firms to put a hand and adapt their strategies accordingly. The CSR model will help firms to get developed, and will help society to progress, and all sectors to flourish. So, it can be inferred that by selecting CSR based strategies, business corporations will be able to improve their social image and market reputation.

Although some progress achieved through integrating CSR into firms strategy in the field of theory and practice, this appears generally in western-centered, well-financed companies that have considered socially responsible activity a self-protective business philosophy typically in response to crisis. Even these successes are limited. Moreover, CSR practices may be perceived as being of limited use (or worse) in the majority of businesses the SME sector.

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