by: David Wigder
In a recent Harvard Business Review article, “Strategy & Society” (Dec, 2006), Michael Porter and Mark Kramer present a strategic framework for linking strategy with corporate social responsibility (CSR).
This approach reinforces the interdependence of business and society based on “shared value”, making it clear that corporations should prioritize those social efforts that yield both mutual benefit and competitive advantage in the market. As such, businesses should focus on those social issues that are aligned with their strategic objectives, rather than dilute their efforts more broadly.
While this framework has broad application for businesses across social issues, climate change presents a unique case because its cause and potential effects are global in nature. Being a truly global social issue introduces new dimensions - universal impact and breadth of influencers - that need to be considered when prioritizing strategic objectives using this framework.
Porter and Kramer’s framework identifies three ways that social issues impact business:
- “Generic: Social issues that are not significantly affected by a company’s operations nor materially affect its long-term competitiveness
- Value Chain: Social issues that are significantly affected by a company’s activities in the ordinary course of business.
- Competitive Context: Social issues in the external environment that significantly affect the underlying drivers of a company’s competitiveness in the locations where it operates.”
Porter and Kramer provide a simplistic example to illustrate how this framework applies to climate change as a social issue. In their view, climate change is considered as a generic social issue by financial services companies such as Bank of America, a “negative” value chain issue for transportation companies such as UPS, and both a “value chain impact and competitive context issue” for Toyota, the leading hybrid car manufacturer.
Yet, climate change is a unique social issue that differs from most others in two ways:
- Universal Impact: It is unlikely that businesses will escape the impact of climate change as the remedies for climate change will involve all industries – directly or indirectly - across the value chain.
- Breadth of (Potential) Influencers: Climate change poses greater risk for abrupt change to existing competitive dynamics than most other social issues because potential instigators of change – consumers, businesses, NGOs and governments – are more numerous, diverse and global than for other social issues.
As such, climate change may impact the underlying competitive context (versus remaining purely a generic or value chain issue) for more companies and industries than the example would suggest. For instance, financial institutions such as Bank of America may find their loan portfolio at risk from exposure to climate change impact which may lead to changes in their investing strategy and product offering. Moreover, increased pressure on business to reduce carbon emissions may enable UPS to carve out a new competitive niche focused on carbon-neutral delivery services – perhaps charging a premium to do so.
Moreover, the breadth of influencers may accelerate changes with the existing competitive context. In fact, there are many examples where a rapid shift - accelerated by only a few influencers - has caught companies (and whole industries) off guard based on “issues they had not previously thought were part of their business responsibility”. Examples cited by Porter and Kramer include Nike for its labor practices in developing markets, Shell Oil for its proposed sinking of an “obsolete” North Sea oil rig and pharmaceutical companies for their seemingly lethargic response to the AIDS crisis in Africa. Given the global nature and broad number and diversity of potential influencers on climate change, it therefore could be argued that there may be an even greater likelihood of abrupt change due to global warming than for most other issues.
Indeed, competitive dynamics may already be shifting:
- Consumers are increasingly incorporating the impact of climate change into purchase decisions. One example is Toyota’s hybrid. Not only is Toyota rolling out hybrid engines in conventional models (in addition to the acclaimed Prius), but it has shifted its primary target from early technology adopters to more of a mass audience. One billboard tagline I recently noticed in New York says it all: “green is the new black”, leveraging a staple of every New Yorker’s wardrobe to sell cars. [Note: climate change, however, is just one reason why consumers are adopting hybrids in greater numbers].
- Businesses are increasingly expecting partners – both upstream and down – to make climate change impact a key consideration. UK-based B&Q, a global home supply chain, has adopted a Social Responsibility Policy with 12 core values that includes ensuring a sustainable supply chain across its product line. Porter and Kramer report that as part of this effort, B&Q “has begun to analyze systematically tens of thousands of products in its hundreds of stores…to determine which products pose potential social responsibility risks and how the company might take action before external pressure is brought to bear”. By doing so, B&Q has effectively shifted the competitive context in which its suppliers operate, providing incentives for companies to introduce innovative products and business models.
- Governments are increasingly mandating change. The clear example here is Kyoto which sets caps on carbon emissions and facilitated allowance trading under those caps.
For marketers and strategists, Porter and Kramer’s framework offers an invaluable starting point for thinking about the impact of climate change on competitive advantage. The unique dimensions of climate change as a social issue - universal impact and breadth of influencers – suggest, however, that more companies should think strategically about climate change and its potential impact on the competitive context in which they operate than the framework may initially suggest.