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April 10, 2007
Porter and Kramer Framework Melding CSR with Business Strategy Wins Harvard Award
    by Bill Baue

The Harvard Business Review grants the 2006 McKinsey Award to an article arguing companies create competitive advantage by integrating social and environmental issues into core strategy.


The late free enterprise maven Milton Friedman crystallized the conventional wisdom of the traditional business community in his 1970 New York Times Magazine article, encapsulated in its title: "The Social Responsibility of Business is to Increase its Profits." On the other side of the coin, social responsibility advocates have long questioned whether capitalism's foundational dependence on perpetual profit growth pits it irrevocably against society and the environment and ultimately the company itself. The corporate social responsibility (CSR) movement has slowly shifted these two sides closer to common ground within the past decade or so.

Nongovernmental organizations (NGOs) that once campaigned against companies have developed inside/outside approaches of partnering with companies to promote best practices--while maintaining the threat of campaigning against poor practices. Companies have adopted CSR practices, first as window-dressing, then as patchwork policies, and now, thought-leaders are arguing the necessity of integrating CSR with core business strategy. The latest sign of this trend came last week when the Harvard Business Review announced the 2006 McKinsey Award winner for the year's most significant article in its pages: "Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility" (published in December.)

"This article clearly articulates that sustainability really lives at the intersection of the interests of society and the interests of business," said Gene Kahn, vice president of sustainable development at General Mills. He joined General Mills in 1999 when it acquired the organic food company he founded in 1972, Cascadian Farm. "It illustrates the potential and necessity for systemic change in the corporation and links it to the formation of competitive advantage."

"Personally, the article opened new horizons for me in my work at General Mills," Mr. Kahn told SocialFunds.com. "Yes, we can and need to reduce energy, water, and waste, but perhaps a more significant goal at General Mills is the promotion of human health. We can make a larger societal contribution thru activities that are intimately tied to our business activities. I believe that the integration of CSR into business strategy is the only approach that will result in achieving true social and environmental sustainability."

Authors Michael Porter, a Harvard business professor, and Mark Kramer, a senior fellow in the CSR Initiative at Harvard's Kennedy School of Government, propose a framework for shifting CSR from a paradigm pitting business against society to one leveraging their interdependence.

"Leaders in both business and civil society have focused too much on the friction between them and not enough on the points of intersection," they write. "The mutual dependence of corporations and society implies that both business decisions and social policies must follow the principle of shared value" (emphasis in original.)

"That is, choices must benefit both sides," they continue. "To advance CSR, we must root it in a broad understanding of the interrelationship between a corporation and society while at the same time anchoring it in the strategies and activities of specific companies."

The interdependence between business and society takes two forms in Porter and Kramer's framework: "inside-out linkages" where company operations impact society, and "outside-in linkages" where external societal forces impact companies. The framework also categorizes three general ways corporations intersect with society. First, "generic social issues" where a company's operations do not significantly impact society and the issue is not material to the company's long-term competitiveness. Second, "value chain social impacts" where a company's normal operations significantly impact society. And third, "social dimensions of competitive context," where social issues affect the underlying drivers of a company's competitiveness.

Porter and Kramer then divide these three categories into two primary modes. Responsive CSR addresses "generic social impacts" through good corporate citizenship and "value chain social impacts" by mitigating harm from negative corporate impacts on society. Strategic CSR transforms "value chain social impacts" into activities that benefit society while simultaneously reinforcing corporate strategy and also advances strategic philanthropy that leverages areas of competitiveness.

The framework draws its strength from applying corporate strategic thinking to both leverage positive social and environmental benefits and mitigate negative social and environmental impacts in ways that enhance competitive advantage.

"Efforts to find shared value in operating practices and in the social dimensions of competitive context have the potential not only to foster economic and social development but to change the way companies and society think about each other," Porter and Kramer state. "NGOs, governments, and companies must stop thinking in terms of 'corporate social responsibility' and start thinking in terms of 'corporate social integration.'"

A prime example of shared value and integration is the Ecomagination initiative GE launched in early 2005 to benefit society through environmentally beneficial products (such as compact fluorescent light bulbs) while benefiting the company's bottom line. The initiative boosted revenue on such products from $6.2 billion in 2004, before the initiative began, to $10.1 billion in 2005, over halfway to the goal of $20 billion by 2010. GE CEO Jeff Immelt is delivering the keynote address at the May 1 ceremony for the McKinsey Award, which will also feature a panel discussion on CSR and the future of competitive advantage.

 

 
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