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Monday, April 18, 2011

Strategic CSR - Porter & Kramer

By now, you will probably have read about Michael Porter and Mark Kramer’s latest foray into CSR—‘Creating Shared Value.’ If not, here is their front cover story of the first HBR issue of 2011, with accompanying video, humbly titled How to fix Capitalism—The Big Idea:

A pdf of the full article is available from HBR at:

Ultimately, the argument that Porter and Kramer are building (and this is now their third HBR CSR article, following on from ‘The Competitive Advantage of Corporate Philanthropy’ in 2002 and ‘Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility’ in 2006) is that firms should identify issues containing both economic and social goals, and then utilize their expertise to generate market-based solutions. In this way, both economic value and social value are maximized.

The reaction of the CSR community has been to point out that, while they are very welcome to join the party and can do much to push CSR up the agenda of many unpersuaded CEOs, they are late and somewhat behind the times:

The idea Porter and Kramer present, as I understand it, is similar to Bill Gates and Muhammad Yunus’ work on “caring capitalism”—essentially a re-branding of the ideas behind social entrepreneurship (Issues: Social Entrepreneurship, p189). My criticism of the idea, therefore, is the same—that, while the idea sounds good in theory, in reality, the potential reach of this business model is limited. A good example is Product (RED) (Case-studies: Product (RED), p352), which is very successful as a cause-related business, but has fallen well short of the game-changing solution its founders were hoping for.

What I find funny about the new Porter/Kramer article is where they lay the blame for the current myopic view of business, without the slightest hint of irony:

In understanding the business environment, managers have focused most of their attention on the industry, or the particular business in which the firm competes. … Companies have failed to grasp the importance of the broader business environment surrounding their major operations.

Now, I wonder whose ideas and models taught widely in business schools would have encouraged managers to focus “most of their attention on the industry, or the particular business in which the firm competes”……..???

What we argue in Strategic CSR is that firms should focus on identifying problems for which there is a clear market-based solution and then deliver that solution in an efficient and socially responsible manner. The idea of CSR as an integrated component of strategy focuses on firms’ areas of expertise throughout all aspects of operations, but de-emphasizes actions that stray outside a firm’s areas of expertise for which there either may not be a market solution, or the firm is not well-suited to deliver. That is how long term shareholder value is maximized—by operating in a way that seeks to meet the needs and demands of the firm’s stakeholders, broadly defined. In other words, the focus of business remains the same; it is the way you go about it that is different with a CSR perspective.

Porter and Kramer, however, want to change the focus. As they put it in their introduction:

The purpose of the corporation must be redefined as creating shared value, not just profit per se.

In some instances, these two perspectives (caring capitalism and strategic CSR) will produce the same behavior, but the motivating force is different and this is important because it will ultimately lead to different outcomes in terms of the success or failure of the venture. For example, Starbucks should not form partnerships with shade-grown coffee farmers in Guatemala because they recognize those farmers face an uncertain future and there is an insufficient welfare net in place to support them if they go out of business (a social goal), but because Starbucks needs to secure a stable supply of high quality coffee beans and supporting these farmers in a sustainable manner is the best way to guarantee that supply (an economic goal). In other words, Starbucks should form stable and lasting partnerships with these key suppliers not because they are seeking to fill a social need, they should do it because these farmers produce a raw material that is essential to their business. As such, Starbucks is incentivized to protect that raw material in a sustainable way, rather than ruthlessly exploit it. If those Guatemalan farmers are not producing a product that is in demand (i.e., if the business logic is not there), the argument that Starbucks should get involved is difficult to make.

Ultimately, although for-profit firms can help with the first perspective (caring capitalism), they are much better suited to the second perspective (market capitalism). Ideally, it is the role of effective governmental and nonprofit sectors to focus on those areas that the market ignores or cannot solve. In contrast, Porter and Kramer argue that social goals should be considered equally with economic goals and firms should then utilize their market-based skills and expertise to solve that problem—In other words, that they should become less like for-profit firms and more like social entrepreneurs, government agencies, or nonprofit organizations. While well-intentioned, I believe that this is not an effective plan for “how to fix capitalism” and, instead, is a misunderstanding of the value of for-profit firms in our society (and of the role that a CSR perspective brings in maximizing that value). As argued in the article in the url below:

In her 2009 book SuperCorp, … Rosabeth Moss Kanter warned of the pitfalls for companies that make "social commitments that do not have an economic logic that sustains the enterprise by attracting resources". More companies are learning to reap commercial benefits from strategies that have a wider social value. That's great. But the basic job of coaxing capitalism in the right direction is the same as it always has been: find ways to harness society's needs to companies' self-interest and hope the two stay together.

Take care

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Society and the right kind of capitalism
Hill, Andrew
724 words
22 February 2011
Financial Times
London Ed1