Instrumental Theories of CSR

 

Instrumental theories are focusing on achieving economic objectives through social activities. The instrumental approaches are long-term maximizing shareholder value, strategies for competitive advantages, and CSR activities for marketing.

In this group in which it is assumed that the corporation is an instrument for wealth creation and that this is its sole social responsibility. Only the economic aspect of the interactions between business and society is considered. So any supposed social activity is accepted if, and only if, it is consistent with wealth creation. This group of theories could be call instrumental theories because they understand CSR of a corporation as a mere means to the end of profits. Three forms are prominent in this class of theories viz.. Maximising shareholder value, Strategies for achieving competitive advantage and Cause-related marketing. Strategies for achieving competitive advantage can be further divided into Social Investments in competitive conditions, Natural Resource-based view of the firm and its dynamic capabilities, strategies for the bottom of the pyramid.

1.1                         Maximising shareholder value

 

The shareholder value theory a perspective denoted by the Nobel Laureate Milton Friedman (1970) argues that the only social responsibility of business is to develop its profits while following legal norms. Neoclassical economists like Hayek assert that the function of business is doing business that contributes to society and economy and its function must not be confused with other social functions performed by not for profit organizations and governments. Otherwise, it is not the most effective way of allocating resources in a free market. Economists like agency theorists believe that the corporation owners are its managers and stakeholders as agents have a fiduciary duty to serve the shareholders interest rather than any others.

ShareholderValue Theory (SVT) or Fiduciary Capitalism holds that, the only social responsibility of business is making profits and, as the supreme goal, increasing the economic value of the company for its shareholders (Crane, et al. 2008). “To maximize shareholder wealth, management must generate, evaluate, and select business strategies that will increase corporate value" (Morin, Jarrel, 2001). Referred to as classical (Karake, 1998; Rugimbana et al, 2008) or fundamentalist (Curran, 2005) theory, shareholder theory holds that the firm is (and should be) managed in the interests of the firm’s shareholders (Cochran, 1994). According to this theory the purpose of the company is to provide return on investment for shareholders and thus corporations are seen as instruments of creating economic value for those who risk capital in the enterprise (Greenwood, 2001). Shareholder theory represents the classical approach to business, according to this theory a firm’s responsibility rests solely with its shareholders (Cochran, 1994). Corporate expenditure on social causes represents a violation of management responsibility to shareholders to the extent that the expenditure does not lead to higher shareholder wealth (Ruf et al., 1998). Any activity is justified if it increases the value of the firm to its shareholders and is not justified if the value of the firm is reduced (Cochran, 1994). This theory is precise, makes sense in a mechanistic way and provides clear guidelines for managerial behavior (Mudrack, 2007). According to Levitt (1958) such an approach enhances the long-term survival and success of the firm. Adherents of this view consider CSR as a threatening concept to shareholder profit maximization. According to this theory, the sole constituency of business management is the shareholders and the sole concern of shareholders is profit maximization. This view holds that, other social activities that organizations could engage in would be acceptable if they are prescribed by law or if they contribute to the maximization of shareholder value

Although maximizing the profit of shareholder is justified as the most significant or only corporate responsibility, corporate social obligations are regarded often as a strategic instrument for a corporate competitive benefit and more profit gain.

 

1.2                         Strategies for achieving competitive advantage

 

A comparative advantage occurs when a company can produce products more efficiently or at a lower cost than its competitors. A differential advantage is created when a company's product is viewed as different, or better, than a competing company's products. For example, think about generic medication versus brand name medication. Generic drugs often have a comparative advantage because they are cheaper than brand name drugs. However, brand name drugs typically have a differential advantage because many consumers assume that brand name drugs are superior in quality to generic drugs.

CSR is a type of self-regulation that goes above and beyond the rules set by a government agency to regulate an industry.

CSR strategies that can help a company gain a competitive advantage involve the following:

·         Meeting moral obligations that go beyond industry laws and regulations.

·         Building goodwill with governments, stakeholders, employees, and consumers by improving image and reputation

 

 

I.            Social Investments in competitive conditions

Companies can demonstrate social responsibility in a myriad of ways. They can donate funds to education, arts and culture, underprivileged children, or animal welfare, or they can make commitments to reduce their environmental footprint, implement fair hiring practices, sponsor events, and work only with suppliers with similar values. CSR can be practiced passively, through refraining from committing socially harmful acts, or actively, through performing activities that directly advance social goals. The below diagram shows the various ways that a company can invest in being socially responsible and the value those actions can bring to the company.

TheValue of CSR: This diagram shows the various ways that a company can invest in being socially responsible and the value those actions can bring to the company.

 

                II.            Natural Resource Based View of the firm and its dynamic capabilities

 

Hart’s (1995) natural-resource-based-view (NRBV) of the firm is presented in modern literature as an effective and innovative approach to sustainable operations. the NRBV is intended to deliver benefits for the firm with regards to cost, quality, efficiency and differentiation. (Hart, 1995; Russo & Fouts, 1997)

Teece(2007) divides dynamic capabilities into three categories: sensing activities that seek and shape opportunities; seizing activities that implement and manage new opportunities; and transforming activities that influence organisational evolution.

 A firm’s ability to integrate, build, andreconfigure internal and external competencies to respond to environmental changes is its dynamic capability. Implementation of CSR at the strategic level, i.e., strategic CSR (SCSR) that requires alignment between activities and organizational configuration and structure will contribute to a firm’s sustainability.

 

Drawing on the dynamic capabilities perspective, the deployment of three dynamic capabilities for CSR management, namely, scanning, sensing and reconfiguration capabilities can help firms to meet emerging CSR requirements by following a set of common management processes. The findings demonstrate that what is more important in CSR standardization is the identification and development of the underlying dynamic capabilities and the related organizational processes and routines, rather than the detailed operational activities.

 

             III.            Strategies for the Bottom of the Pyramid

 

 “Fortune at the bottom of the pyramid,” is a concept and phrase first introduced by Prahalad and Hart in 2002 and then expanded by Prahalad in 2005. The authors hold out the hope that by doing business with the most impoverished people around the world who make up the so-called bottom of the (economic) pyramid, or BOP, firms can not only make substantial profits but can “bring prosperity to the poor” and help to eradicate poverty across the globe (Vachani and Smith (2008) set the number of this population at 2.7 billion). This would be the quintessential win-win situation; it is an intriguing, promising, and seductive prospect. Quite understandably, these individuals and families who earn less than $2 per day have been largely ignored because, as a “market,” they have so little to spend and also because many of them are so difficult to reach.

In spite of their deplorably small per capita income the sheer number of these individuals makes up a potential market of trillions of dollars of disposable income.

Disruption in market share is caused by sheer volumes achieved in turnover due to changes in packaging, pricing, advertising and distribution strategies.

Engaging these poorest of the poor in such commerce will eventually turn the income distribution pyramid into a diamond pattern as hundreds of millions and ultimately billions of the poor move up the income distribution ladder and swell the ranks of the lower-middle and middle income tiers.

Corporations benefit further as the need for higher margin products are created over a period of time

 

1.3                         Cause-related marketing

 

 

Cause–related marketing(CrM) is defined as the process of formulating and implementing marketing activities that are characterised by contributing a specific amount to a designated non–profit effort that, in turn, causes customers to engage in revenue–providing exchanges (Mullen, 1997). In the USA, it is used as a corporate term for 'working together in financial concert with a charity … to tie a company and its products to a cause' (Ptacek & Salazar, 1997). It is a 'dramatic way to build brand equity … as it creates the most added value and most directly enhances financial performance' (Mullen, 1997). It (societal marketing) can generate the long–term value needed for a company to survive and achieve competitive advantage (Collins, 1993).

One of the prominent reasons cause marketing works is that it makes the consumer feel like they’re a part of something big, that could bring about a positive change in society

Key factors that increase customer loyalty with a cause-related marketing programme include aligning the cause with the company’s social responsibility statement. Equally important is a non-profit partnership that is effectively developed and managed. Finally, a long-term partnership shows more of a commitment to a cause than a short-term promo.