Why Do Organisations Engage in Corporate Social Responsibility - Essay Example

Companies engage in CSR because they think it will be good for their profit margins BY YOU YOUR SCHOOL INFO HERE HERE TABLE OF CONTENTS 0 Introduction 2.0 Why do organisations engage in CSR? 3.0 Socially-responsible case studies 4.0 The issues of ethics and the shareholder 5.0 Conclusion References Companies engage in CSR because they think it will be good for their profit margins 1.0 Introduction Corporate social responsibility involves a company meeting high standards of ethical principles in all aspects of business operations whilst also working diligently to advance social utility (McWilliams and Siegel 2001). CSR is a corporate activity that is integrated throughout the entire business model (Wood 1991) in which the firm ensures that employees comply with established regulatory frameworks and create monitoring systems to control ethical behaviours of organisational members. Further elements of a CSR program include ensuring fair treatment of employees and other stakeholders (Dahlsrud 2008) whilst also engaging in activities that promote corporate benevolence to the social order. Companies engage in CSR as there is a general belief that such activities will improve profit margins. This is a fair assessment, as there is ample evidence that companies maintaining a focus on social issues and ensuring ethical business norms internally achieve greater profitability and organisational performance. This report’s methodology is qualitative, consisting of consultation with a variety of secondary research sources with the aim of determining whether real-world organisations that regularly engage in CSR actually achieve positive profit gains as a result of this conduct. The study’s objectives are to determine what market-driven factors might contribute to lending support to the contention that CSR achieves higher profitability and to identify what specific aspect of operations most contributes to these profit gains in contemporary business organisations. 2.0 Why do organisations engage in CSR? It would be overly-optimistic to believe that all organisations in global society engage in corporate social responsibility as a product of legitimate values and beliefs that improving the social order is an obligation of all members of society. However, most organisations develop CSR campaigns and strategies in order to improve profitability. There is a growing body of research literature recognising a new phenomenon related to consumer behaviour known as ethical consumption. Ethical consumption, by its most practical definition, is a trend where consumers tend to favour products that promote an ethical stance (Bezencon and Blili 2010; DePelsmacker, Driesen and Rayp 2005; Carrigan and Attalla 2001) and where consumers will engage in what is known as moral boycotts for companies that do not maintain an ethical perspective. According to Globe Scan (2009), many consumers today are beginning to punish organisations that do not promote high ethical behaviours and standards. The sports apparel company, Nike, faced consumer backlash and special interest group boycotts of Nike-branded products after the firm faced allegations of engaging in unethical business behaviour (Carrigan and Attalla 2001), hence this would point toward a business risk to profitability if a company does not maintain high standards of moral attitude and engage in CSR activities. In fact, a study of 5,000 disparate consumers indicated that over 30 percent of respondents would be willing to pay a high, premium price for products if these participants understood that the producing company had high ethical standards (Grande 2007). Additionally, Oh and Yoon (2014) conducted a survey involving 343 consumers and found that when a company promotes altruistic behaviours, the participants maintained more favourable impressions of the product distributed by these companies. Hence, there is ample empirical data which supports that companies who engage in corporate social responsibility can actually achieve higher profit margins. When consumer markets have the perception that a company forbids unethical or immoral behaviours, the probability that they will prefer the more ethical competitor’s products increases. This phenomenon of modern consumer behaviour, this being ethical consumption, would then theoretically improve a firm’s revenues and give them a competitive advantage in terms of brand identity in an established marketplace. One company that has found greater profitability through CSR is General Motors, a large multinational automaker. In 2011, GM recycled 2.6 million metric tons of raw or finished product waste instead of shipping this material to landfills (General Motors 2012). Gm further was awarded the American-based Energy Star Award for having facilities that produced 35 percent less greenhouse gas discharges and 35 percent less electricity consumption as compared to other manufacturing facilities of comparable size and scope (General Motors 2012). GM’s emphasis on CSR in aspects of recycling and other environmentalism policies have been incorporated into the company’s business model which required operational process reorientation and change in order to achieve these milestones and improve the environment. What has contributed to GM’s profitability as a result of these operational changes is the methodology by which the company promotes its achievements. Using press releases and other marketing-based promotions, the public becomes more aware of how GM is improving the environmental condition around the world and therefore sees GM products as being quality. Why is this? Servaes and Tamayo (2013) indicate that when consumers are educated about a company’s CSR objectives and achievements, it serves as a signal of quality related to the product manufactured and distributed by the ethically-oriented organisation. GM illustrates to customers that, in relation to competition, the firm is far ahead of the competitive curve when it comes to environmental sustainability as an objective of the firm’s CSR initiatives. GM’s success is aligned with the theory and phenomenon of ethical consumption and a real-world example of where engaging in CSR (and promoting it effectively) achieves greater consumer interest and, long-term, profitability enhancement. When considering GM as an example of where profit can be achieved through corporate social responsibility, it should be recognised that this is a primary method of differentiating the firm from competition amidst a highly saturated, globally-competitive auto industry. Michael Porter (1987) identifies his Generic Strategies Model which illustrates that differentiation is one key methodology for gaining competitive advantage. Differentiation is the process of identifying a unique and non-imitable business competency or benefit that does not exist with competitors and then effectively exploiting this capability to gain market dominance or create a better competitive image in a variety of target consumer segments (Boone and Kurtz 2007). Whilst other automakers may look toward becoming a low cost leader as a strategic methodology to improve its competitive edge, GM recognises that differentiation through ethical behaviour and social responsibility gives the firm an edge in terms of satisfying ethically-minded consumer segments. The case study of General Motors is only one illustration of why companies engage in CSR: it gives firms the ability to stand out among competition and alter consumer perceptions about the firm’s product and service outputs. There is recognition in marketing theory that illustrates when consumers are satisfied, they have more favourable impressions of the firm and the product brand (Farris, Bendle, Pfeifer, Reibstein 2010). GM manages to appeal to the values and beliefs of consumer segments by promoting its internal CSR objectives and achievements, which, in turn, assists the business in selling more finished product. Schiffman and Kanuk (2010) indicate that the socio-psychological aspects of consumer values are enduring and influence consumers’ perceptions of value when a product brand aligns its characteristics directly to the consumer. Tam (2004) supports this notion, stating that when consumers perceive higher value in a product, it is directly correlated with an increase in consumer belief about product quality. The holistic ability of a firm to use CSR to build a connection with consumers related to their ethical values whilst influencing consumer values is what achieves greater profit margins for the ethical firm. Hence, there is substantial evidence that CSR as a corporate norm is the primary objective for firms as a method of achieving profitability as having a better competitive reputation also contributes to greater sales revenues. Employee and manager resistance to change serves as the primary barrier for implementing CSR in a firm (Lozano 2013). Contemporary literature on change management illustrates that managers are often the victims of irrational and emotionally-charged responses that conflict change efforts at a firm (Ford, Ford and D’Amelio 2008). However, effective leadership can gain commitment and employee dedication if utilising role modelling behaviours and visionary/inspirational strategies to motivate employees and managers to adopt a highly-ethical CSR focus. When profit is on the line, this barrier cannot be dismissed and must be confronted. This becomes part of continuous improvement in terms of enhancing leadership competency for those charged with implementing and controlling change efforts at the firm. 3.0 Socially-responsible case studies Yet another example of a company that has improved its profit margin as a result of engaging in CSR is the multi-national coffeehouse, Starbucks. Starbucks has actually created a mission that illustrates to consumers the ethical and human-focused stances of the business. The mission is to “inspire and nurture the human spirit” (Starbucks 2013, p.1). This is Starbucks’ corporate level strategy that works to correlate internal structure and behaviour directly with the mission of the corporation as a means of satisfying stakeholders and improving its marketing image. However, how exactly does Starbucks engage in CSR? Starbucks has a plethora of established coffee vendors that it can select from which would, if selected, give the business considerable buying power as a purchaser along the supply chain. Instead, Starbucks has established a disparate supply chain methodology that consists of smaller and less-established foreign coffee producers. This procurement methodology enhances the lifestyle of farmers and labourers that work in smaller production facilities by ensuring these foreign individuals receive adequate wages and enduring contracts for supply to Starbucks. In essence, Starbucks abandons the ability to become a low-cost leader by enhancing its buying power in the coffee supply chain and taking advantage of discounts and other foreign currency exchange advantages that would be provided by selecting more dominant international growers. Hence, the company improves its brand image to consumers by aligning real-world activities with its highly-promoted mission statement, thus satisfying ethically-minded stakeholders. Additionally, Starbucks generates many different grants and financial loans to smaller coffee growers around the world, which gives these foreign individuals more capital to expand their operations, improve community education, and even enhance production and agricultural know-how and capacity (Starbucks 2006). These loan and grant commitments have exceeded $6 million USD and works to give the company a positive, differentiated image pertaining to its commitment to legitimate corporate social responsibility. In the case of Starbucks, it is absolutely not a necessity for the firm to be so engaged in positive CSR activities and ideologies. In fact, Starbucks would not only improve its buying power along the supply chain by selecting a more established supply network, the firm could invest in developing its own, wholly-owned production facilities as a means of driving out smaller coffee producer competition around the world. Starbucks maintains adequate capital resources and credit capability to achieve establishment of a production and distribution network that would substantially rival small producers. Instead, Starbucks sacrifices this ability to dominate and control the supply chain internationally in order to build better communities, enhance foreign relations, and even improve the lifestyle utility of foreign producers. In 2011, Ethisphere Magazine listed Starbucks as one of the most highly ethical companies in the world in comparison to other organisations in over 38 different sectors (Environmental Leader 2011). When referring to the Starbucks CSR example, it would appear that promotion as a part of operations in marketing is one of the most viable channels by which ethically-oriented companies achieve greater brand-related differentiation over that of competition in these companies’ established markets. There are many charitable organisations and special interest organisations that actively seek out companies that have created better social conditions as a result of their CSR objectives and strategies. This serves as a low-cost, yet highly effective promotional tool that changes consumer attitudes about a product or service created by the ethical company, thus giving consumers more incentive to select the awarded organisation over that of other companies that have less ethical intentions. This is why companies engage in CSR: brand differentiation, altered consumer perceptions and the existence of valuable public relations mediums to promote CSR achievements that ultimately leads to greater revenues. Yet another example of a company that has engaged in CSR is Sainsbury’s, one of the more dominant supermarkets in the United Kingdom. Sainbury’s operates in a highly saturated and competitive market, forced to compete against such giants as Tesco, Morrison’s, Iceland and ASDA (to name only a handful of competitors). Many of these supermarket chains offer similar products that are difficult to differentiate in order to build more consumer loyalty, inclusive of organic products, gourmet products, and generalised consumer household food items that are procured over similar supply chain networks. Sainsbury’s, in an effort to differentiate (as described by Porter’s Generic Strategies Model), determined that having a new focus on corporate social responsibility would make this organisation stand out in a very competitive and saturated market environment. In recent years, Sainsbury’s radically restructured its existing corporate governance model to include a variety of steering groups that would have responsibility for coordinating ethical business activities, monitoring their success and scope whilst also serving as promoters of how Sainsbury’s outperforms competition in relation to corporate social responsibility. These steering groups consist of a Climate Change Steering Group, Community Steering Group and Internal Human Resources Steering Groups (Sainsbury 2012). Through bi-annual consultation with senior corporate leaders, the company discusses and promotes procurement sustainability, improvement of customer service ideologies, and better internal employee relationship improvements. Improving leadership through decentralised participative leadership, enhancing horizontal communications, and allowing for shared decision-making are three relevant practices by Sainsbury’s as part of this internally-oriented CSR program. Further, through press releases and other marketing mediums as operational strategy, this alters consumer perceptions of the brand, differentiates the organisation from competition, and achieves more consumer loyalty for this ethical and moral dedication. Whilst other competitors develop strategic direction through cost leadership (such as Tesco), Sainsbury’s illustrates that it remains committed to improving the lives of employees and a plethora of other stakeholders to build brand preference for consumer segments that alter their consumption behaviours related to ethical stance of this supermarket. Hence, Sainsbury’s serves as another example of a company that follows the differentiation model, as part of the marketing function, to achieve greater competitive advantage. When consumers of Sainsbury’s recognise this focus, they are more likely (according to marketing theory) to select this particular grocer over that of competition that is currently struggling to build demand using other strategic policies and directions. As iterated by Johnson, Whittington and Scholes (2011) strategic direction is setting long-term objectives that not only profits shareholders, but setting other corporate objectives to achieve greater competitive advantage. Sainsbury recognises that CSR achievements and maintaining internal focus on coordinating these efforts, when blended with marketing promotion, underpins an effective strategic direction for the firm in an effort to outperform the existing brand personality of other UK supermarkets. Lynch (2009) describes strategic direction as the emergent initiatives that a company undertakes to enhance the holistic performance of firms as a response to the external environment, inclusive of proper utilisation of resources to achieve this competitive advantage. This is why Sainsbury’s engages in CSR: to establish, as operational strategy, a positive marketing-based identity in its competitive, oligopolistic external market that is unique and exclusive to the Sainsbury’s brand. Loyalty established by consumer segments that genuinely adhere to ethical consumption theory creates better sales revenues, thus enhancing profit margins for this firm. In the case of Sainsbury’s, much like that of Starbucks, corporate social responsibility is neither an obligation nor is it mandatory to achieve enhanced profitability. In fact, Sainsbury’s has the ability to select a diversification strategy as a means of competing with such organisations as Tesco and Morrison’s. Sainsbury’s maintains a positive cash flow and available financial capital to introduce new business models, such as financial lending or even non-food retail products, to gain competitive advantage. Sainsbury’s has established positive brand equity in many disparate consumer segments which could allow the firm to expand its business presence in non-food categories. Brand equity is achieved when a firm’s market position becomes highly positive and competitive when the firm maintains a respected and recognised brand name. Companies that have large brand recognition provide the firm with the ability to improve revenues as compared to organisations in the competitive market with a less-recognised brand identity (Keller 2003). Consumer segments that have trust and confidence in Sainsbury’s would be more willing, as a result of this brand equity, to trust new service models or products offered by the firm if it were to select a diversification strategy as a means of achieving competitive advantage. Instead, Sainsbury’s stays focused on CSR (which is not an inexpensive venture) which helps align the firm’s values with consumer values in a way that is meaningful to buyers. 4.0 The issue of ethics and the shareholder It is also recognised in business literature that when a company sustains an internal culture that is focused on ethical behaviour, the firm experiences much less ethical trouble compared to competitors (Bartels 1998). Hence, there are not only profit advantages to engaging in CSR, there is the ability to establish a culture that remains legitimately committed to ethical behaviour that reduces liability risks to the organisation. A company with an ethically-oriented organisational culture has built established social norms and vision that creates cohesion with all organisational members that ultimately can lead to human capital-related competitive advantages. Concurrently, there is also profit-related advantages to building such an ethical culture that can reduce risks to the business. Literature recognises that investors are more interested in providing funds to companies that have strong and unified organisational cultures (Very, Lubatkin, Calori and Veiga 1997). These types of organisations are considered to be high prestige and more valuable for long-term financial investment than other companies that do not have a highly unified, ethically-inclined organisational culture. This is another reason why some companies engage in CSR at the internal level: it improves employee relationships, hence making organisational contributors more motivated and productive which, in turn, can provide a firm with substantial competitive advantage. Sainsbury’s is one example of this where the Internal Human Resources Steering Group works diligently to create better employee work environments and enhance human capital talents through training, mentoring and development. Building an ethically-oriented organisational culture is neither an obligation of a firm nor is it in any way mandatory, especially for businesses that do not rely on investor capital to improve their business models. However, companies that do engage in this form of internally-focused social responsibility have the opportunity of showing important shareholders that the firm invites less risk (such as in the case of Nike that was boycotted for alleged unethical activity), thereby making the firm more attractive for investment. Boycotts and angry stakeholders in society that believe a firm is acting unethically can lead to revenue losses or even loss of marketing-related brand preference which has significant financial implications for the firm. In fact, Lys, Naughton and Wang (2013) found that when a company has higher ethical standards, it ultimately leads to enhanced firm profitability. These authors conducted a primary study showing that when shareholder expectations are surpassed in relation to total expenditures placed on CSR, it provides greater stock value (Lys, et al.). There is a general belief with shareholders that firms which emphasise ethical attitudes and behaviours leads to higher return on investment (Lys, et al.). This would tend to suggest that if businesses began to reduce their total labour-related and financial-related expenditures on CSR, the firm might witness capital depletions in the long-term. The study conducted by Lys, et al. (2013) would tend to reinforce that, at least in some dimension, engaging in CSR is somewhat of a mandatory activity, especially if the firm is publicly traded and reliant on investor sentiment and capital infusions. If the majority of shareholders genuinely believe that ethical and socially-minded activities and programs increase the long-term value of the firm, then engaging in CSR might be one of the most fundamental methodologies of ensuring shareholder interest in the firm. Capital that stems from stock-related investments not only provide a firm with the ability to improve its business model, but also expand operations without reliance on external lenders (i.e. banks) which charge large interest rates for loans and for credit lending. Hence, it would be, at a profit perspective, much more advantageous for the firm to place a moderate volume of labour and financial expenditure into a well-developed and relevant CSR program simply to ensure shareholder investment that is critical to some firms in different industries and markets. 5.0 Conclusion This study conducted analyses of several different organisations that actively engage in corporate social responsibility in an effort to determine whether such motives are profit-related or whether there is some other pull force that takes companies in this direction. In nearly every instance, as supported by literature and existing corporate case studies, the argument supports that profit margin increases are the primary motivations for CSR program development and direction. The study illustrated that Starbucks achieves greater profit through brand improvement by enhancing the loyalty of consumers that have an ethical stance. The same can be said for General Motors and Sainsbury’s, which emphasises that when it comes to engaging in corporate social responsibility, the most primary function of the investing firms’ value chains that enhances profit potential is the marketing function in operations. The availability of modern media as a means of promoting company objectives and successes in relation to CSR build potent socio-psychological connections between company brand and consumer lifestyle that ultimately equates to higher profitability. Whilst CSR is definitely not a mandatory activity, this study has shown ample support that it is highly beneficial and thus should be explored by contemporary firms. It would appear that to forgo the process of attempting to enhance employee relationships, engage in philanthropy, or otherwise enhance the social condition could seriously undermine the competitive advantage of a firm or lessen its market presence and relevancy. As a result, this study concludes that the primary underpinning rationale for engaging in CSR is to improve profit margins and there is considerable support for this contention as described by the study’s results. Many companies, such as Starbucks, have many other options to improve their profitability without necessarily engaging in corporate social responsibility. As this study has shown, Starbucks could dramatically improve its bargaining power in the supply chain by negating more socially-minded CSR initiatives. However, as in the case of Nike, Starbucks faces a risk if consumers feel that this highly profitable firm is not giving back to society as a reward for consumer loyalty. In this case, consumers could potentially select other coffeehouses to fulfil their needs which would dramatically impact profitability. Hence, it should be recognised that whilst CSR is neither mandatory or an obligation of all firms operating in disparate markets, it is a valuable profit tool for organisations that do select this strategic direction and is the most practical and logical reason for why companies actually engage in CSR strategy. References Bartels, L.K. (1998). The relationship between ethical climate and ethical problems within human resource management, Journal of Business Ethics, 17, pp.799-804. Bezencon, V. and Blili, S. (2010). Ethical products and consumer involvement: what’s new?, European Journal of Marketing, 44(9-10), pp.1305-1321. Boone, L. and Kurtz, D. (2007). Contemporary marketing, 12th edn. United Kingdom: Thompson South Western. Carrigan, M. and Attalla, A. (2001). The myth of the ethical consumer – Do ethics matter in purchase behaviour?, Journal of Consumer Marketing, 18(7), pp.560-577. Dahlsrud, A. (2008). How corporate social responsibility is defined: an analysis of 37 definitions, Corporate Social Responsibility and Environmental Management, 15, pp.1-13. De Pelsmacker, P., Driesen, L. and Rayp, G. (2005). Do consumers care about ethics? Willingness to pay for fair-trade coffee, Journal of Consumer Affairs, 39(2), pp.363-385. Environmental Leader. (2011). Ford, Starbucks among most ethical companies. [online] Available at: http://www.environmentalleader.com/2011/03/17/ford-starbucks-among-most-ethical-companies/ (accessed 18 July 2014). Farris, P.W., Bendle, N.T., Pfeifer, P.E. and Reibstein, D.J. (2010). Marketing metrics: the definitive guide to measuring marketing performance. Pearson Education, Inc. Ford, J.D., Ford, L.W. and D’Amelio, A. (2008). Resistance to change: the rest of the story, Academy of Management Review, 33(2), pp.362-377. General Motors. (2012). GM reaches century mark in land-fill free facilities. [online] Available at:http://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2012/Jun/0619_landfill_free.html (accessed 17 July 2014). General Motors. (2012). Second GM facility receives energy star certification. [online] Available at:http://media.gm.com/media/us/en/gm/news.detail.html/content/Pages/news/us/en/2012/Jun/0619_energystar.html (accessed 18 July 2014). GlobeScan. (2009). CSR in the economic crisis. [online] Available at: http://www.globescan.com/news_archives/salon_lon-0109/ (accessed 20 July 2014). Grande, C. (2007). Ethical consumption makes mark on branding, The Financial Times. [online] Available at: http://www.ft.com/cms/s/2/d54c45ec-c086-11db-995a-000b5df10621.html#axzz2kT95cwFY (accessed 19 July 2014). Johnson, G., Whittington, R. and Scholes, K. (2011). Exploring strategy: text and cases, 9th edn. Harlow: FT Prentice Hall. Keller, K.L. (2003). Brand synthesis: the multidimensionality of brand knowledge, Journal of Consumer Research, 29(4), pp.595-600. Lozano, R. (2013). Are companies planning their organizational changes for corporate sustainability? An analysis of three case studies on resistance to change and their strategies to overcome it, Corporate Social Responsibility and Environmental Management, 20(5), pp.275-295. Lynch, R. (2009). Strategic management, 5th edn. Harlow: FT Prentice Hall. McWilliams, A. and Siegel, D. (2001). Corporate social responsibility: a theory of the firm perspective, Academy of Management Review, 26, pp.117-127. Oh, J. and Yoon, S. (2014). Theory-based approach to factors affecting ethical consumption, International Journal of Consumer Studies, 38(3), pp.278-288. Sainsbury. (2012). Corporate governance. [online] Available at: http://www.j-sainsbury.co.uk/investor-centre/corporate-governance/ (accessed 16 July 2014). Schiffman, L.G. and Kanuk, L. L. (2010). Consumer behaviour, 10th edn. Prentice-Hall International. Servaes, H. and Tamayo, A. (2013). The impact of corporate social responsibility on firm value: the role of customer awareness, Management Science, 59(5), pp.1045-1061. Starbucks. (2006). Corporate social responsibility – fiscal 2006 annual report. [online] Available at: http://assets.starbucks.com/assets/4dd6216d0fd0400f8689eceba0497e04.pdf (accessed 19 July 2014). Starbucks. (2013). Our Starbucks mission statement. [online] Available at: http://stageaten.starbucks.com/about-us/company-information/mission-statement (accessed 18 July 2014). Tam, J. (2004). Customer satisfaction, service quality and perceived value: an integrative model, Journal of Marketing Management, 20, pp.897-917. Very, P., Lubatkin, M., Calori, R. and Veiga, J. (1997). Relative standing and the performance of recently acquired European firms, Strategic Management Journal, 18(8). Wood, D. (1991). Corporate social performance revisited, The Academy of Management Review, 16(4). Read More