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TOWARD A MODEL OF CORPORATE SOCIAL STRATEGY FORMULATION
BRYAN W. HUSTED Instituto Tecnologico y de Estudios Superiores de Monterrey
and Instituto de Empresa
Mailing address: ITESM/EGADE Ave. Eugenio Garza Sada 2501 Sur
Col. Tecnologico C.P. 64849 Monterrey, N.L., MEXICO
Tel.: 52-8358-1400, ext. 6163
Fax: 52-8-328-4413 E-mail: [email protected]
DAVID B. ALLEN Instituto de Empresa Maria de Molina, 12
28006 Madrid Spain
Tel.: 341-563-9318 Fax: 341-561-0930
E-mail: [email protected]
Paper presented at the Social Issues in Management Division, Academy of Management
August 2001
The research for this paper was funded in part by a grant from the Consejo Nacional de Ciencia y Tecnología.
2
Submission #31581
TOWARD A MODEL OF CORPORATE SOCIAL STRATEGY FORMULATION
ABSTRACT
This paper explores the conditions that foster a positive relationship between
corporate social responsibility and financial performance by developing a model of
corporate social strategy. The paper defines corporate social strategy and elaborates a
typology of generic social strategies extant in the literature: differentiation, cost leadership,
and strategic interaction. It then develops a framework for formulating social strategy by
exploring the relationship of industry structure, firm resources, corporate values and
ideology, and stakeholders to the generic strategies in order to create competitive
advantages that are valuable, rare and imperfectly imitable.
Key words: corporate social responsibility, strategy formulation, resource-based view
3
TOWARD A MODEL OF CORPORATE SOCIAL STRATEGY FORMULATION
One of the great preoccupations of the social issues in management literature has
been the study of the relationship between corporate social responsibility (CSR) and its
variants (corporate social responsiveness, corporate citizenship, etc.) and financial
performance (Waddock & Graves, 1997; Griffin & Mahon, 1997; Preston & O’Bannon,
1997; Russo & Fouts, 1997). However, the results of these studies have been inconclusive,
sometimes indicating a direct relationship, an inverse relationship, and sometimes no
relationship at all (Griffin and Mahon, 1997). As a result, there is a growing interest in
discovering the conditions that foster a positive relationship between corporate social
responsibility and financial performance (Burke & Logsdon, 1996; Reinhardt, 1999;
Rowley & Berman, 2000). This paper builds on these prior approaches by developing a
model of corporate social strategy. It argues that what distinguishes cases where CSR leads
to positive financial performance from cases where it does not is the design of CSR as
strategy (Liedtka, 2000).
Traditionally, social responsibility and business strategy have been viewed
separately, each one contributing to either the economic or social objectives of the firm.
Some theorists have postulated that there do exist linkages between social responsibility
and the creation of competitive advantage, but have not specified the nature of those
linkages (see Rowley & Berman (2000) as an exception). Typically, the argument goes that
doing good works for society or engaging in ethical behavior builds support from
stakeholders that is necessary to firm survival (Clarkson, 1995) and creates competitive
advantage by reducing agency and transaction costs (Jones, 1995). The relationship
4
between social responsibility and financial performance thus is postulated to occur in a
manner similar to that depicted in Table 1-A. In contrast, we argue that these links do not
occur as a matter of chance by simply including a CSR program, but must be carefully
designed. It is this element of design that distinguishes the traditional approach to the social
responsibility-financial performance relationship from the integrated approach postulated
between social strategy and business strategy in Table 1-B.
In order to investigate the relationship between corporate social responsibility,
business strategy, and corporate performance, we develop a framework for formulating
corporate social strategy based on four elements: 1) industry structure, 2) firm resources, 3)
corporate ideology and values, and 4) stakeholders. We begin by defining corporate social
strategy and sketching three generic social strategies. We then explore the relationship of
the four determinants of social strategy to the selection of a generic strategy and its impact
on the creation of competitive advantage for the firm.
--------------------------------
Insert Table 1 about here
--------------------------------
CORPORATE SOCIAL STRATEGY
Prior Models
A number of initiatives in the literature have been developed to address the links
between different kinds of CSR activity and competitive advantage. Let us briefly review
some of the models that take a strategic approach to this relationship.
Murray & Montanari (1986) developed what they called the marketing approach to
responsive management by conceiving of the social impacts of the firm as social
5
products—goods and services—that can be managed in the same ways that marketing
manages ordinary products. In this model, the firm identifies social product markets and
determines the marketing mix variables (product, place, price, and promotion) for each
relevant stakeholder group. It then formulates and implements a social responsibility
program to satisfy needs in those social product markets, and finally evaluates the ability of
the firm to satisfy societal expectations.
Work on corporate citizenship is very closely related and refers “to activities
undertaken by businesses to concretely meet social demands responsibly” (Maignan,
Ferrell, & Hult, 1999). This focus goes beyond mere social responsibility to incorporate
concerns about the long-run profitability of citizenship activities (Fombrun, 1996).
Preliminary research has found that corporate citizenship does have a positive impact on
the development of both customer and employee loyalty (Maignan, Ferrell, & Hult, 1999).
McGowan (1997) and Mahon & McGowan (1998) develop a model of social and
political strategy based on Porter’s (1980) model of competitive strategy. In Mahon &
McGowan’s (1998) approach, the product of the social strategy model is the social issue.
The theater of the transaction shifts from the product market in Porter’s model to the issue
arena, and the unit of exchange shifts from money to influence. Similar to Porter’s five
forces model, Mahon and McGowan (1998) postulate five forces that affect social and
political strategy: stakeholders, issues, political rivalry, substitute issues, and audience. A
successful social and political strategy involves a correct positioning with respect to these
forces, although Mahon and McGowan (1998) do not specify how fit can be achieved and
how competitive advantage can be created.
Strategic stakeholder management consists of a body of work that examines how
firm attention to stakeholder relationships can have positive consequences for financial
6
performance (Freeman, 1984; Jones, 1995; Berman, Wicks, Kotha, & Jones, 1999).
Preliminary research has found that proper management of employee and customer
relationships is especially important to the firm in contributing to its financial performance
(Berman, Wicks, Kotha, & Jones, 1999).
Finally, Burke and Logsdon (1996) have developed a concept of strategic CSR, but
stopped short of elaborating a comprehensive framework. Building on work in the area of
strategic management, Burke and Logsdon (1996) identify five dimensions of CSR activity
that allow the activity to serve the firm’s economic interests as well as the interests of its
stakeholders. They postulate that those CSR activities characterized by higher centrality,
specificity, proactivity, voluntarism, and visibility are more likely to create value for the
firm.
Taken together, these different initiatives provide the theoretical building blocks for
a comprehensive approach to corporate social strategy, which we begin to develop in this
paper.
Definition
In this paper, strategy refers to the plans, investments, and actions taken to achieve
sustainable competitive advantage and both superior economic and social performance. We
use the term business strategy when we refer to economic issues and social strategy when
treating social issues. Corporate strategy encompasses both the economic (corporate
business strategy) and non-economic (corporate social strategy) objectives of the firm. This
approach modifies current strategic management terminology in consonance with the
advances achieved by the resource-based view (RBV). Traditionally, the terms business
(business unit) strategy and corporate strategy have been used to identify different levels of
7
analysis: business strategy has been defined as the search for economic rents via the
achievement of competitive advantage(s) in specific customer-product-market segments,
and corporate strategy as the selection of the industries in which to compete (Andrews,
1967; Porter, 1980; Grant, 1995; Hax and Majluf, 1996; Segev, 1997).
The resource-based view effectively eliminates this distinction by defining
competitive advantage as the creation of unique resources and capabilities (Peteraf, 1993)
that leverage organizational routines across different business units (Nelson and Winter,
1982). In fact, the main objective of Prahalad and Hamel’s (1990) influential “The Core
Competence of the Corporation” was to warn against the limitations of business unit
strategy in favor of the development of firm-wide, frequently intangible, competencies that
most strategic management researchers now believe are the cornerstone to sustainable
competitive advantage. As a result, strategic management research has turned once again to
the challenge of investigating “soft” behavioral issues that are difficult to operationalize
(Papadakis, Lioukas, Chambers, 1998), including those of corporate values and ethics
central to our concept of corporate social strategy.
As a result, we define corporate social strategy as the firm’s positioning with respect
to social issues in order to achieve long-term social objectives and create competitive
advantage. Let us examine each of the elements of this definition more closely.
First, a social issue refers to:
(a) an [opportunity/risk] based on one or more expectational gaps (b) involving management perceptions of changing legitimacy and other stakeholder perceptions of changing cost/benefit positions (c) that occur within or between views of what is and/or what ought to be corporate performance or stakeholder perceptions of corporate performance and (d) imply an actual or anticipated resolution that creates significant, identifiable present or future impact on the organization (Wartick & Mahon, 1994: 306).
8
Although complicated, this definition solidly builds on others that have been used in the
literature (Ackerman, 1973; Post, 1990). Significantly, this definition contemplates the
possibility that expectational gaps may occur within management as well as between
management and other stakeholders. It thus has both an internal and an external focus.
Consequently, this definition is probably the most complete one within the literature and
amply serves the needs of this paper. The careful reader will note that we have slightly
altered the original Wartick and Mahon (1994) definition to focus on “opportunities/risks”
rather than “controversial inconsistencies,” which allows us to avoid an unnecessary
antagonism between the firm and its stakeholder environment and uses the vocabulary of
strategic management to express the opportunities implicit in such situations. As social
issues arise, the firm responds by taking a position with respect to these issues.
Social objectives refer to all those goals not directly related to creating value added
for the customer or maximizing shareholder wealth. These social objectives are closely
related to the notion of corporate social performance, which has been defined as “the
satisfaction of stakeholders’ expectations regarding the firm’s behavior as it relates to the
firm’s societal relationships with those stakeholders” (Husted, 2000). This definition is
simple and fits well with the notion of social issue developed by Wartick and Mahon,
1994). The firm’s positioning allows it to achieve its social objectives by reducing the
expectational gaps that occur between the firm and its stakeholders. Generally speaking one
would expect that the use of social strategy would have a positive impact on corporate
social performance by reducing expectational gaps between the firm and its stakeholders,
thus increasing stakeholder satisfaction.
In addition to achieving social objectives, social strategy must create competitive
advantage by developing unique capabilities that have a positive impact on the firm’s
9
profitability. Competitive advantage is the core concept of strategic management, just as
natural selection is the core concept of evolutionary biology. Both concepts have as their
aim the explication of why some organizations (organisms) succeed while others do not. In
strategic management, competitive advantage has consistently been defined as a function of
profit (Porter, 1980; 1985). “When two firms compete ... one possesses a competitive
advantage over the other when it earns a higher rate of profit...” (Grant, 1995, 124).
Research indicates that capabilities and resources create competitive advantage when they
are valuable, rare, and imperfectly imitable (Barney, 1986b). The greatest concern of this
paper deals with the ways in which social strategy can create value for stockholders
(Bureke & Logsdon, 1996).
Two caveats should be added with reference to this definition of social strategy.
First, social strategy normally involves the investment of capital, whether financial or
human, in order to achieve social objectives. It is difficult to conceive of social strategy
where such investments are not made. Second, although not essential to the definition of
social strategy, we are particularly concerned with specific actions or plans to design social
strategy (Liedtka, 2000). Contemporary intellectual theories treat intentions and plans with
considerable skepticism (Lyotard, 1984), with the knowledge that operationalizing
intentions and plans is likely to be extraordinarily difficult. Nonetheless, we believe that
there is much to be gained by considering the announced social strategies of firms and the
plans made to implement these social strategies. At this early stage of research into
corporate social strategy, we must begin with those firms that deliberately create social
strategies and plans so that we can begin the task of building models that can be tested.
Moreover, the logical nexus between corporate learning, distinctive competencies,
sustainable competitive advantage, and strategic planning is crucial to developing a
10
corporate social strategy concept that provides practitioners with tools to analyze social
strategy and motivates them to create and implement such strategies.
Generic Social Strategies
Currently, there exists no generally accepted typology of corporate social strategies.
Three different generic social strategies typically emerge from the literature: product
differentiation, cost leadership, and strategic interaction between the firm and its regulators
(either government or industry) (Porter, 1980; Reinhardt, 1998, 1999). These three generic
strategies permit an integration of the economic and social objectives of the firm by using
social action to create value for stockholders.
In the case of product differentiation, the social objectives of the firm allow it to
extract a price premium from the customer by differentiating existing products or
developing new products and markets. Generally speaking, such product differentiation
may only occur under conditions where customers are willing to pay for social products,
credible information about social products exists, and protection against imitators is
available (McWilliams & Siegel, 2001; Reinhardt, 1998). The availability of a product
differentiation social strategy depends upon the existence of consumers sensitive to
environmental and social issues and whose purchasing decisions are affected by corporate
behavior in these areas (Zalka, Downes, & Paul, 1997).
A cost leadership social strategy occurs where firms discover cost savings that are
available through process innovation (Porter & van der Linde, 1995; Hart, 1995). Although
much debate exists as to the possibility of finding such “free lunches” (Palmer, Oates, &
Portney, 1995), there does appear to exist considerable evidence of the capacity of firms to
innovate in response to social opportunities and threats (Kanter, 1999). Such cost leadership
11
may occur through the ability of a firm to attract and maintain an effective labor force
based on its commitment to the firm’s social products (O’Reilly & Pfeffer, 2000; Greening
& Turban, 2000). Other mechanisms for cost savings may occur through the wise
management of relationships with suppliers (Husted, 1994; Dyer & Singh, 1998), who are
committed to similar social objectives.
Finally, the strategic interaction social strategy involves the strategic use of
regulation and/or self-regulation in order to create rent-seeking opportunities for the firm.
Researchers have demonstrated that firms can use government and industry regulation as a
means to obtain competitive advantage with respect to other firms that are less well
positioned to comply with such standards (Leone, 1986; Shaffer, 1995a; Shaffer, 1995b;
Schuler, 1996). Where compliance with a standard, such as avoiding the use of sweatshop
labor, may increase costs, regulation may be a way for a firm with a particular cost
advantage relative to competitors to exploit that advantage in a way that creates value for
stockholders. Without invoking some sort of regulation, such cost advantages may not be
available. It should be pointed out that these three generic social strategies are not mutually
exclusive, and may be used in combination.
DETERMINANTS OF CORPORATE SOCIAL STRATEGY
Industry structure
The influence of industry structure on social strategy raises difficult questions that
have vexed strategy researchers for the last two decades (Eisenhardt, 2000a). We are faced
with firm heterogeneity, permeable industry boundaries, dynamic capabilities and
12
managerial perception of industry structure (Sutcliffe and Huber, 1998), which raise
important challenges for understanding industry impact on firm business and social
strategy.
Accordingly, two approaches to industry structure are necessary. First, top
management perceptions of the environment need to be assessed with regard to instability,
munificence, complexity, hostility and controllability (Sutcliffe and Huber, 1998). These
five dimensions of firm environment are indicators of the perceived power a firm holds in
relationship to its principal stakeholders. Second, industry characteristics are evaluated:
market concentration, product attribute differentiation, and industry growth rates (Bain,
1959; Porter, 1981; Robinson & McDougall, 1998). Robinson and McDougall (1998) find
that specific adaptations of industry structural elements using multiple measures provide
support for the significance of the impact of industry characteristics on firm performance.
Together, we link managerial (internal) and industry (external) indicators of the firm’s
relationship to its competitors in order to evaluate the ability of the firm to create and
sustain competitive advantage.
Applying this approach to social strategy, we find that just as with business strategy,
competitive advantage is realized through achieving superiority in one or more of six
competitive factors: product attributes, product image, design, price, service, or corporate
reputation (Kotha and Vadlamani, 1995). Just as in the case of business strategy, a
differentiation social strategy is successful when customers are willing to pay a premium
for social products and entry barriers to competitors are created (Reinhardt, 1998). Though
the causal relationships between the competitive factors and social strategies is frequently
complex (see Figure 1), they create real and measurable competitive advantages. In fact,
13
the path determined, casually ambiguous nature of social strategy may provide stronger
opportunities for inimitability (Barney, 1986; Peteraf, 1993).
The possibility of a differentiation social strategy exists because of demanding
consumers who make purchase decisions based on both the environmental (Brown &
Wahlers, 1998; Menon, Menon, Chowdhury & Jankovich, 1999) and social (Zalka,
Downes, & Paul, 1997) performance of the firm. In addition, entry barriers may exist, for
example, where environmentally safe products are protected by patents or socially sound
processes (e.g., avoidance of sweatshop labor) are based upon trust relationships with
suppliers that are rare and inimitable (Barney, 1986b).
The Body Shop put into practice a differentiation social strategy in such a
competitive environment. At time of entry, the health and beauty care industry was
dominated by product image and cost competitors. The Body Shop reenacted the
competitive environment by providing women with health and beauty care products
consistent with social values of self-respect and animal rights. In order to do so, the firm
had to redefine all six of the competitive factors, thus creating a “temporary monopoly,”
until competitors began to imitate the redefined factors because of the low entry barriers.
Proposition 1: The greater the perceived bargaining power of customers in a given
market, the greater the impact of a differentiation social strategy on the creation of
competitive advantage.
A cost leadership social strategy is possible where innovation offsets reduce costs
associated with stricter social and environmental standards (Porter & van der Linde, 1995).
Often such process innovation does not occur because of the failure of information to flow
freely between the firm and its suppliers in imperfectly competitive markets. The existence
14
of strong suppliers that are themselves competitive at global levels can foster innovation
within the firm (Porter, 1990). Supplier influence increases under conditions where firms
deal with fewer suppliers and each supplier has bargaining power with respect to the firm
because of relation-specific assets invested in the relationship (Pfeffer & Salancik, 1978).
Such investments greatly enhance the possibility of the creation of competitive advantage
through cooperative innovation by the customer and supplier (Dyer & Singh, 1998).
Proposition 2: The greater the perceived bargaining power of the suppliers in a
given market, the greater the impact of a cost leadership social strategy on the creation of
competitive advantage.
Some industries are characterized by considerable cost asymmetries that provide
one firm with a cost advantage in providing social products that comply with higher
environmental or social standards than its competitors (Reinhardt, 1999; Shaffer, 1995b). If
monitoring is possible in order to detect free riders who fail to comply with high standards,
it may make sense for the firm to use a strategic interaction social strategy to influence
public policy so that the regulator imposes such standards on the entire industry. Such
strategies often provide policy makers with information about new policy or build
constituencies to support such initiatives (Hillman & Hitt, 1999). After the new standard is
enacted, the firm may then exploit its cost advantage with respect to its competitors.
Proposition 3: The greater the perceived cost asymmetries that characterize
compliance with social and environmental standards in an industry, the greater the impact
of a strategic interaction social strategy on the creation of competitive advantage.
Firm resources
15
The resource-based view (RBV) has had a significant impact on how we regard firm
resources and capabilities, in particular intangible resources. The emergence of intangible
resources as a major component of firm capital, often overshadowing traditional capital
(Barney, 1991; Peteraf, 1993; Rao, 1994; Hitt et., al, 2001), has contributed to refocusing
strategic management on “organizational advantage” (Ghoshal and Moran, 1996). As a
result, the firm has been redefined as “a social community specializing in speed and
efficiency in the creation and transfer of knowledge” (Kogut and Zander, 1996).
Knowledge, according to Kogut and Zander (1996), has been the principle firm
resource. While this may be an overstatement of the case, RBV research has been working
hard to establish a theory to support the overwhelming importance of intangible resources.
Where traditional economic theory emphasized “the importance of external market
factors in determining firm success” (Hansen and Wernerfelt, 1989), RBV theory, grounded
in the work of Penrose (1959); Selznick, (1957), Polayni (1967), argues that organizational
competitive advantage depends on the dynamic relationship between innovation and
managerial behavior by which organizational resources and capabilities are developed.
Adapting concepts from economics, sociology and cognitive psychology, RBV attempts to
systematize causally ambiguous (Rumelt, 1984), path dependent (Nelson and Winter, 1982;
Rosenberg, 1990) and socially complex (Barney 1986b) processes by which firms develop
firm specific competitive advantages that are difficult to copy.
In the context of social strategy, the complex evolutionary relationships outlined by
RBV are especially important. Firm resources include not only the traditional tangible
resources (physical and financial assets), but also intangible resources (human capital,
social capital and reputational capital (Grant, 1996; Nahapiet and Ghoshal, 1998). These
16
resources are developed over time as the firm interacts with all its stakeholders. The
application of these resources to market and social opportunities represents for each firm a
unique, dynamic positioning (Eisenhardt, 2000a).
Credibility is a particularly important resource needed for the development of a
differentiation social strategy. Without credible information, customers are unlikely to pay
premium prices for social products (Reinhardt, 1998). Such credibility is an essential
element of a corporate reputation that is only developed through consistent effort in the
long-run and contributes to the firm’s financial performance (Fombrun & Shanley, 1990;
Fombrun, 1996; Miles & Covin, 2000). The development of a reputation for credibility lies
in part on the willingness of a firm to disclose information about environmental and social
impacts (Szwajkowski, 2000; Hart, 1995). Such activity is quite rare. Sharma &
Vredenburg (1998: 740) explain that “trust and credibility developed by proactive
companies… is a path-dependent strategic capability that cannot be easily imitated by
competitors.” In addition, the consistency of a policy of credibility, required both over time
and across issues, is difficult to imitate. As a result, it is likely that a firm with such
resources will be more effective in the development of a differentiation social strategy.
Proposition 4: The greater the degree to which a firm possesses credibility with its
stakeholders, the greater the impact of a differentiation social strategy on the creation of a
competitive advantage.
Cost leadership is particularly difficult to achieve in highly competitive markets and
depends upon the ability of a firm to innovate (Porter & van der Linde, 1995). Stakeholder
integration and continuous innovation have been identified by both Hart (1995) and Sharma
and Vredenburg (1998) as essential firm resources that permit the development of creative
17
solutions to environmental and social problems. Stakeholder integration refers to the ability
of the firm to develop collaborative, problem-solving relationships with a variety of
stakeholders (Sharma and Vredenburg, 1998). As previously mentioned, supplier-buyer
cooperation can facilitate innovation leading to cost leadership, but such cooperation can
occur only if the firm has well developed resources for stakeholder integration as well as
continuous innovation. In addition, the integration of employee perspectives and ideas is
also vital to innovation (O’Reilly & Pfeffer, 2000). Christman’s (2000) study of chemical
companies found that capabilities related to process innovation were essential to the
creation of cost advantages for firms that implement environmental best practices.
Proposition 5: The greater the degree to which a firm possesses resources of
stakeholder integration and continuous innovation, the greater the impact of a cost
leadership social strategy on the creation of competitive advantage.
A final resource that is particularly relevant to the development of a strategic
interaction social strategy is political acumen (Leone, 1986). Russo and Fouts (1997: 540)
define this resource as “the ability to influence public policies in ways that confer a
competitive advantage.” This kind of political savvy is a rare and inimitable resource that
allows a firm to effectively pursue public policy change. Starik and Rands (1995) discuss
how effectively the political capability of Cummins Engine Company was applied to the
adoption of laws extending clean air legislation to diesel truck engines, which gave
Cummins a significant advantage with respect to its competitors.
Proposition 6: The greater the degree to which the firm possesses the resource of
political acumen, the greater the impact of a strategic interaction social strategy on the
creation of competitive advantage.
18
Corporate values and ideology
Corporate culture consists in part in the values, both implicit and explicit, of the
firm. The explicit values are captured by the concept of corporate ideology (Pettigrew,
1979), which is particularly relevant to the formulation of corporate social strategy.
Considerable controversy over the nature of ideology exists within the management
literature. In the more narrow, interest-driven approach to ideology, the concept is defined
simply as the study of the origin of ideas, where the origin is usually explained by the
political interests served by those ideas (Weiss & Miller, 1987). Other scholars have argued
for a broader use of the term ideology, which may in some cases serve specific political
interests, but not always (Beyer, Dunbar, & Meyer, 1988). We adopt this broader usage of
the term and follow Trice and Beyer (1993: 33) who define corporate ideology as “shared,
relatively coherently interrelated sets of emotionally charged beliefs, values, and norms that
bind some people together and help them to make sense of their worlds.” Corporate
ideology in this second sense has been referred to as philosophy orientation or business
philosophy by some authors and consists of the stated values of the firm (Goll &
Sambharya, 1990; Alvesson & Berg, 1992). Corporate ideology is related to strategy,
performance, and social responsibility because ideology affects the decisions made by
managers based on their goals, objectives, and beliefs about how the world works (Simons
& Ingram, 1997).
There is evidence that corporate ideology has at least three dimensions: progressive
decision-making, social responsibility, and organicity (Goll & Zeitz, 1991). Subsequent
research has confirmed the validity of these dimensions (Goll, 1991; Goll & Sambharya,
1995). Progressive decision-making emphasizes a proactive search for opportunities,
participation, analytic decision tools, and open communication channels. Social
19
responsibility refers to a company’s commitment to participating in the solution of social
problems. Finally, organicity deals with the firm’s informality and ability to adjust to new
circumstances (Goll & Sambharya, 1995). This framework is not exhaustive. Of special
interest is Miles’ (1987) work on corporate ideologies dealing with business-government
collaboration. Miles (1987) describes two distinct ideologies in the insurance industry: the
institution philosophy and the enterprise philosophy. The institution philosophy
acknowledges the legitimate claims of society on the firm and the responsibility of the firm
to respond to those claims by collaborating with governmental regulators. The enterprise
philosophy holds that the insurance firm only owes a responsibility to its policyholders and
generally supports an adversarial relationship with regulators.
Corporate ideology affects strategy by helping to channel available firm responses
to opportunities and threats. Specifically, ideology shapes the formulation and
implementation of strategy by influencing the manager’s evaluation of the environment by
limiting his or her vision through processes of selective perception (Goll & Sambharya,
1990). We know that strategic choice and performance levels are determined in part by the
values and background characteristics of the top management team (Hambrick & Mason,
1984). These values and beliefs, embodied in that aspect of culture referred to as ideology,
can be a source of competitive advantage for the firm (Barney, 1986a).
There is some evidence that ideology does affect financial performance. Initial
research suggests that companies that believe in rational decision-making, involving a
search for alternatives, evaluation, selection, and implementation, demonstrate poorer
financial performance than those firms that do not share such beliefs (Goll & Sambharya,
1990). In addition, conglomerates with high organicity (emphasis on flexibility) and
20
progressive decision-making have better financial performance than conglomerates with
low organicity and little progressive decision-making (Goll & Sambharya, 1995).
There appears to be a clear nexus between certain corporate ideologies and social
strategy. The social responsibility dimension of ideology channels the kinds of responses
that managers make to social threats and opportunities. A strong commitment to social
responsibility provides a set of values that is not easily imitable by competitors (Barney,
1986a; O’Reilly & Pfeffer, 2000). Research indicates that managerial values act as a frame
for recognizing and evaluating the importance of social issues (Kahneman & Tversky,
1984; Sharfman, Pinkston, & Sigerstad, 2000) and the salience of stakeholders (Agle,
Mitchell, & Sonnenfeld, 1999).
These managerial interpretations of social and environmental issues directly affect
the selection of social strategies (Sharma, Pablo, & Vredenburg, 1999; Sharma, 2000;
Bansal & Roth, 2000). The social responsibility ideology of a firm is especially important
for its customers who play an essential role by their willingness to pay a price premium for
differentiated social products (Menon & Menon, 1997; Berman, Wicks, Kotha, & Jones,
1999; Maignan, Ferrell, & Hult, 1999). Without such a clear ideology, it is impossible to
create differentiated social products.
Proposition 7: The greater the social responsibility orientation of a firm, the greater
the impact of a differentiation social strategy on the creation of competitive advantage.
A progressive decision-making orientation is especially relevant to the cost
leadership social strategy because this orientation includes a commitment to the
participation of employees in decision making. Theorists argue that the participation of
employees is the key for an effective cost-leadership strategy to work because it fosters
process innovation (Sharma & Vredenburg, 1998). Generally, a cost leadership social
21
strategy can only be effective if information flows more freely among employees within the
firm than it does within competing firms (Reinhardt, 1999).
Proposition 8: The greater the progressive-decision making orientation of the firm,
the greater the impact of a cost leadership social strategy on the creation of competitive
advantage.
An additional element of corporate ideology is the attitude that a firm has with
respect to collaboration with the government. Miles (1987) found that the institution-
oriented philosophy was associated with a collaborative/problem-solving approach to
regulators. On the other hand, an enterprise philosophy was associated with an
individualistic/adversarial approach. The collaborative/problem-solving strategy was
characterized by maintaining open lines of communication between the firm and its
regulators. In addition, Miles (1987) showed that there was a relationship between
management philosophy and corporate social performance. Specifically, he found that firms
with an institution-oriented philosophy were more likely to be more highly evaluated by
independent third parties in terms of their social performance than firms with an enterprise-
oriented philosophy. Thus, an effective strategic interaction strategy requires a
predisposition to work effectively with the government.
Proposition 9: The greater the governmental collaboration orientation of the firm,
the greater the impact of a strategic interaction social strategy on the creation of
competitive advantage.
Stakeholders
Freeman’s (1984: 46) now classic definition of the stakeholder broadly includes all
persons or groups that “can affect or [are] affected by the achievement of an organization’s
22
objectives.” However, his definition is widely debated and numerous other definitions have
been offered (Mitchell, Agle, & Wood, 1997). Stakeholder research has often been divided
among both normative and descriptive streams as scholars attempt to distinguish among
those groups that should be considered stakeholders and those groups that managers
actually treat as stakeholders (Donaldson & Preston, 1995).
These stakeholders form the fabric of the social structure in which firms operate and
determine to whom the firm is responsible. The interaction of stakeholders create social
issues, which provide the opportunities and threats with respect to which firms position
themselves through their social products. However, not all stakeholders receive the same
attention from firms because attention is a limited resource that must be allocated
efficiently (Simon, 1976). A firm’s attention and response to a stakeholder depends largely
on that stakeholder’s salience.
Stakeholder salience refers to “the degree to which managers give priority to
competing stakeholder claims” (Mitchell, Agle, & Wood, 1997: 854). According to the
theory of stakeholder salience developed by Mitchell, Agle, and Wood (1997), salience is
itself a function of the power and legitimacy of the stakeholders as well as of the urgency of
the claims made by stakeholders upon the firm. Stakeholder power is the inverse of the
firm’s dependence on the stakeholder (Pfeffer & Salancik, 1978). Empirical research has
confirmed that a high correlation exists between power, legitimacy, and urgency on the one
hand and stakeholder salience on the other (Agle, Mitchell, & Sonnenfeld, 1999). Highly
salient stakeholders represent both a potential opportunity for cooperation and a potential
threat to the firm (Savage, Nix, Whitehead, & Blair, 1991).
As the salience of a stakeholder group increases, due especially to increased power,
firms tend to either develop a collaborative strategy in which they work together jointly
23
with the stakeholder or a defensive strategy in which they reduce dependence on that
stakeholder (Freeman, 1984; Savage, Nix, Whitehead, & Blair, 1991). Since the section on
industry structure has dealt with the impact of market stakeholders on social strategy, we
shall now examine the implications of dependence of the firm on certain non-market
stakeholders for the formulation of strategy.
A product differentiation strategy is particularly effective in situations characterized
by high salience of NGOs and community stakeholders. In these situations, groups that
represent a variety of interests in the community or society at large make demands upon the
firm. Such demands create additional constraints on firm performance. Such constraints, in
and of themselves, imply greater costs for the firm (Palmer, Oates, & Portney, 1995). The
best option for the firm to respond to such demands is by creating a social product that
commands a price premium from its customers. The firm thus needs to differentiate its
products and create new markets for these products as have firms like the Body Shop,
which has been very sensitive to the demands of animal rights groups.
Proposition 10: The greater the salience of NGO stakeholders, the greater the
impact of a product differentiation social strategy on the creation of competitive advantage.
Where employees are a particularly salient stakeholder, there exists greater
opportunities to reduce actual costs through innovation. Employees are the key to
increasing firm productivity (O’Reilly & Pfeffer, 2000). The innovation offsets that Porter
and van der Linde (1995) suggest are available to firms depend upon these productive kinds
of employees. Certainly firms for which employees are not a particularly salient
stakeholder, possibly because their processes require low levels of technical skill and thus
face an abundant supply of labor, would not be able to develop a cost leadership social
strategy.
24
Proposition 11: The greater the salience of employees, the greater the impact of a
cost leadership social strategy on the creation of competitive advantage.
Finally, strategic interaction of a firm with regulators depends in large part upon the
existence of a government or regulatory authority with the power to affect a particular
industry. Where governments do not have that kind of power, a strategic interaction social
strategy will not be effective. Unfortunately, governments are frequently subject to
regulatory failure (Breyer, 1982). Sources of regulatory failure include technical and
information shortcomings, jurisdictional mismatches, and public distortions (Esty, 1999).
One common cause of regulatory failure, although certainly not the only one, is corruption,
which undermines the ability of governments to effectively monitor and enforce public
policy (Abaroa, 1999). A strategic interaction social strategy will only function where the
government is an effective and, therefore, powerful stakeholder.
Proposition 12: The greater the salience of the government, the greater the impact
of a strategic interaction social strategy on the creation of competitive advantage.
CONCLUSION
This paper contributes to a change in the focus of the CSR literature by examining
the conditions under which firm social strategies will have a positive impact upon financial
performance. It has drawn on the literatures of strategic management, corporate social
responsibility, environmental management, and political strategy to create a model of the
formulation of social strategy. Certainly it is not exhaustive, but it is illustrative of the
direction that research might take in order to make a greater contribution to the practice of
management. The model itself can be extended fairly simply by incorporating other aspects
of industry structure, firm resources, corporate values, and stakeholder relationships. By
25
taking a realistic view of the firm as a profit maximizer, this approach should move forward
an agenda of incorporating the concerns of social responsibility into the strategic plans of
business firms.
The aim of incorporating social strategies into the CSR literature coincides with the
historical objective of the field: building a more comprehensive theory of the firm that
accounts in a richer way for firm behavior. This requires developing a more complete
definition of stakeholders, one in which the multiple objectives of those affected by firm
behavior are accurately reflected in the strategic formulation and implementation processes.
We must remember that shareholders are not only shareholders—they may have social
objectives, they may be managers or employees, they may be members of community
organizations that seek to influence firm behavior. All stakeholders stand somewhere
between a 100% social orientation and a 100% profit orientation, with short, medium, and
long-term objectives that may be ambiguous or contradictory. Creating a theory of firm
behavior that incorporates these varying perspectives is the “ultimate” objective of our
research agenda. Building a theoretical model of social strategy formulation is a first step.
26
Table 1-A
Traditional View of Business Strategy and Social Responsibility
`
Table 1-B
Integrated View of Business and Social Strategy
Industry Structure
Stakeholders
Corporate values and ideology
Resources
Social Responsibility
Social Performance
Financial Performance
CompetitiveAdvantage
Business Strategy
Industry Structure
Resources
Corporate values and ideology
Stakeholders
Social Strategy
Business Strategy
Social Performance
Competitive Advantage
Financial Performance
27
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