Sustainable Strategies
Session 3 - Sustainability Differentiators | Social Enterprises
11 February 2020, 15:00-17:45
McWilliams, A., & Siegel, D. 2011. Creating and capturing value: Strategic corporate social
responsibility, resource-based theory, and sustainable competitive advantage, Journal of
Management, 37(5): 1480-1495.
- This study considers the creation and capture of private and social value by firms that adopt
corporate social responsibility (CSR) strategies.
- To provide a roadmap for managers to accomplish strategic CSR, this study integrates the
resource-based theory (RBT) framework with concepts and tools from economics, such as
hedonic pricing, contingent valuation, and the new literature on the economics of industrial
organisation, where CSR is referred to as the private provision of public goods.
- By linking CSR, RBT, economic models of private provision of public goods, and pricing
models, this study reveals how RBT can provide a structure for determining the strategic value
of CSR. It then discusses the conditions under which CSR can contribute to sustainable
competitive advantage. In other words, the objective of this study is to extend RBT to help
quantify the strategic value to the company of engaging in CSR.
- The authors define Strategic CSR as any responsible activity that allows a firm to achieve a
sustainable competitive advantage, regardless of motive.
- Strategic CSR can be examined through the lens of RBT to calculate the private returns, or
those benefits that accrue to the firm.
- A firm’s provision of CSR as a social good is reminiscent of the consideration of positive
externalities associated with innovative activity.
- An externality is the impact of an economic agent’s actions on the well-being of a bystander.
For instance, pollution is a negative externality, while innovation (whose benefits cannot be
entirely appropriated by its creator) is a positive externality. While the private returns to
innovation (or those that accrue to the company) may be high, the social returns to innovation
(through the creation of new or improved products and processes) are likely to be even
greater. CSR activities can be argued similarly.
- Besides needing to understand the motivation for the provision of social benefits, we need
to understand how the provision of these goods, through strategic CSR, affects society. An
example of strategic CSR is when a firm links the provision of a public good to the sale of its
(private) products (e.g., eco-labeling). When measuring the value of CSR to society,
consumers often find it difficult to determine if a firm’s internal operations meet their moral
and political standards for social responsibility. The level of asymmetric information regarding
internal operations may be mediated by the firm itself or by activists. Some companies
publish annual CSR reports. Some consumers perceive this as a form of advertising, especially
Page 1 of 19
, Sustainable Strategies
for more general types of CSR... while other consumers perceive it as biased since it is filtered
through senior management. Given to the presence of asymmetric information, it is often
difficult to assess the determinants and outcomes of CSR.
- Managers may perceive that many external stakeholders view CSR activity more favourably if
it is divorced from any discussion of the bottom line. Thus, managers are not inclined to reveal
practical motives for engaging in CSR, such as new product development and promotion,
reducing labor costs, and enhancing the firm’s reputation. This lack of candid information has
made it difficult to distinguish and discuss the different motivations for CSR, which may be
private or social, or both.
- Analysis of the strategic implications of CSR is often driven by cross-country or cross-cultural
differences in the institutions that regulate market activity. Institutional differences lead to
different expectations and different returns to activity. For firms operating in multiple countries
or cultures, this complicates the process of determining which activities to engage in and how
much to invest.
- Empirical issues to be resolved → Problems with the measurement of the costs and benefits
of CSR activities continue to cloud our understanding of the private and social returns.
• Ideal level of CSR for the firm (i.e. level that maximises private return) can be determined by
cost-benefit analysis - yet, it is difficult to calculate these costs and benefits.
• While the costs of providing CSR attributes may be easy for managers to determine,
consumer demand (benefit) may not be. Consumer demand for CSR may be difficult to
measure because CSR attributes may constitute only a small percentage of all relevant
attributes of a product.
• e.g. A shampoo may have the CSR attribute that it is “not tested on animals.” However,
shampoo has additional attributes, such as brand name, scent, ingredients, and packaging.
• It difficult to separate out the demand for the CSR attribute, which affects the ability of
managers to conduct a cost-benefit analysis.
- The RBT has been widely accepted as a theory that explains the sources of competitive
advantage and informs managers on how to identify these sources. These sources of
competitive advantage will be resources controlled by the firm that are valuable, rare,
inimitable, and non-substitutable (i.e. VRIN). Here, if a resource is VRIN it may be a source of
sustainable competitive advantage (SCA) within the RBT.
- For the RBT, value is the difference between revenue generated by, or contributed to, the
resource and the cost to the firm of the resource. Two concepts of value will be analysed (i.e.
extending the RBT framework to CSR):
1. Value to consumers: determined by hedonic pricing and contingent valuation.
2. Value to the firm: determined by internal costs as well as externally determined price.
Page 2 of 19
, Sustainable Strategies
- Throughout research, CSR actions and attributes have been identified as RBT resources.
• Examples of CSR attributes: fair-trade coffee, non-animal-tested cosmetics, pesticide-free
produce, dolphin-free tuna, and alternative-fuel engines.
• Examples of CSR actions: recycling, pollution abatement, progressive work practices, and
support for local social services.
→ This article focuses on both CSR attributes and actions as resources that can lead to SCA
within the framework of the RBT.
- Hedonic pricing is a technique to determine the value to consumers of individual product
attributes. The intuition behind this technique:
• Decompose observed (explicit) market prices into implicit prices of a set of product or
service attributes or characteristics.
• Employ econometric methods to estimate the implicit or marginal prices of such attributes,
enabling a manager to determine how much the average consumer values a particular
characteristic.
• If the estimated implicit price of a particular attribute is significantly different from zero, then
the attribute is viewed as being valued by a customer.
→ This implicit price can provide useful information for decision making in the supply chain as
it allows managers to define their strategies according to the market value of the products
(whether to a consumer or an industrial buyer).
- Problems with the standard hedonic price theory:
• Assumes the firm has no market power
• Assumes perfect competition, meaning that the firm can sell all of its output at the market
price.
...If firms are charging the market price, there is no possibility of achieving or sustaining a
competitive advantage.
→ This issue has been addressed in a hedonic model that takes into account the markups in
pricing, that is, allowing the firm to develop its own pricing strategy. This allows for markups in
input prices, which are present in most industries.
- How customers value certain attributes can affect business-level strategy (on both the revenue
and cost sides):
1. Through the value proposition → knowing how much a customer is willing to pay (on
average) for a specific feature.
2. In the choice of market segments
3. How a firm positions itself within a segment to achieve SCA
- Contingent valuation addresses the question of how the manager determines the value of
the social good the firm produces. It is a survey-based technique that is used to determine the
value of social goods, or goods that are not traded in markets. This technique requires
Page 3 of 19
Session 3 - Sustainability Differentiators | Social Enterprises
11 February 2020, 15:00-17:45
McWilliams, A., & Siegel, D. 2011. Creating and capturing value: Strategic corporate social
responsibility, resource-based theory, and sustainable competitive advantage, Journal of
Management, 37(5): 1480-1495.
- This study considers the creation and capture of private and social value by firms that adopt
corporate social responsibility (CSR) strategies.
- To provide a roadmap for managers to accomplish strategic CSR, this study integrates the
resource-based theory (RBT) framework with concepts and tools from economics, such as
hedonic pricing, contingent valuation, and the new literature on the economics of industrial
organisation, where CSR is referred to as the private provision of public goods.
- By linking CSR, RBT, economic models of private provision of public goods, and pricing
models, this study reveals how RBT can provide a structure for determining the strategic value
of CSR. It then discusses the conditions under which CSR can contribute to sustainable
competitive advantage. In other words, the objective of this study is to extend RBT to help
quantify the strategic value to the company of engaging in CSR.
- The authors define Strategic CSR as any responsible activity that allows a firm to achieve a
sustainable competitive advantage, regardless of motive.
- Strategic CSR can be examined through the lens of RBT to calculate the private returns, or
those benefits that accrue to the firm.
- A firm’s provision of CSR as a social good is reminiscent of the consideration of positive
externalities associated with innovative activity.
- An externality is the impact of an economic agent’s actions on the well-being of a bystander.
For instance, pollution is a negative externality, while innovation (whose benefits cannot be
entirely appropriated by its creator) is a positive externality. While the private returns to
innovation (or those that accrue to the company) may be high, the social returns to innovation
(through the creation of new or improved products and processes) are likely to be even
greater. CSR activities can be argued similarly.
- Besides needing to understand the motivation for the provision of social benefits, we need
to understand how the provision of these goods, through strategic CSR, affects society. An
example of strategic CSR is when a firm links the provision of a public good to the sale of its
(private) products (e.g., eco-labeling). When measuring the value of CSR to society,
consumers often find it difficult to determine if a firm’s internal operations meet their moral
and political standards for social responsibility. The level of asymmetric information regarding
internal operations may be mediated by the firm itself or by activists. Some companies
publish annual CSR reports. Some consumers perceive this as a form of advertising, especially
Page 1 of 19
, Sustainable Strategies
for more general types of CSR... while other consumers perceive it as biased since it is filtered
through senior management. Given to the presence of asymmetric information, it is often
difficult to assess the determinants and outcomes of CSR.
- Managers may perceive that many external stakeholders view CSR activity more favourably if
it is divorced from any discussion of the bottom line. Thus, managers are not inclined to reveal
practical motives for engaging in CSR, such as new product development and promotion,
reducing labor costs, and enhancing the firm’s reputation. This lack of candid information has
made it difficult to distinguish and discuss the different motivations for CSR, which may be
private or social, or both.
- Analysis of the strategic implications of CSR is often driven by cross-country or cross-cultural
differences in the institutions that regulate market activity. Institutional differences lead to
different expectations and different returns to activity. For firms operating in multiple countries
or cultures, this complicates the process of determining which activities to engage in and how
much to invest.
- Empirical issues to be resolved → Problems with the measurement of the costs and benefits
of CSR activities continue to cloud our understanding of the private and social returns.
• Ideal level of CSR for the firm (i.e. level that maximises private return) can be determined by
cost-benefit analysis - yet, it is difficult to calculate these costs and benefits.
• While the costs of providing CSR attributes may be easy for managers to determine,
consumer demand (benefit) may not be. Consumer demand for CSR may be difficult to
measure because CSR attributes may constitute only a small percentage of all relevant
attributes of a product.
• e.g. A shampoo may have the CSR attribute that it is “not tested on animals.” However,
shampoo has additional attributes, such as brand name, scent, ingredients, and packaging.
• It difficult to separate out the demand for the CSR attribute, which affects the ability of
managers to conduct a cost-benefit analysis.
- The RBT has been widely accepted as a theory that explains the sources of competitive
advantage and informs managers on how to identify these sources. These sources of
competitive advantage will be resources controlled by the firm that are valuable, rare,
inimitable, and non-substitutable (i.e. VRIN). Here, if a resource is VRIN it may be a source of
sustainable competitive advantage (SCA) within the RBT.
- For the RBT, value is the difference between revenue generated by, or contributed to, the
resource and the cost to the firm of the resource. Two concepts of value will be analysed (i.e.
extending the RBT framework to CSR):
1. Value to consumers: determined by hedonic pricing and contingent valuation.
2. Value to the firm: determined by internal costs as well as externally determined price.
Page 2 of 19
, Sustainable Strategies
- Throughout research, CSR actions and attributes have been identified as RBT resources.
• Examples of CSR attributes: fair-trade coffee, non-animal-tested cosmetics, pesticide-free
produce, dolphin-free tuna, and alternative-fuel engines.
• Examples of CSR actions: recycling, pollution abatement, progressive work practices, and
support for local social services.
→ This article focuses on both CSR attributes and actions as resources that can lead to SCA
within the framework of the RBT.
- Hedonic pricing is a technique to determine the value to consumers of individual product
attributes. The intuition behind this technique:
• Decompose observed (explicit) market prices into implicit prices of a set of product or
service attributes or characteristics.
• Employ econometric methods to estimate the implicit or marginal prices of such attributes,
enabling a manager to determine how much the average consumer values a particular
characteristic.
• If the estimated implicit price of a particular attribute is significantly different from zero, then
the attribute is viewed as being valued by a customer.
→ This implicit price can provide useful information for decision making in the supply chain as
it allows managers to define their strategies according to the market value of the products
(whether to a consumer or an industrial buyer).
- Problems with the standard hedonic price theory:
• Assumes the firm has no market power
• Assumes perfect competition, meaning that the firm can sell all of its output at the market
price.
...If firms are charging the market price, there is no possibility of achieving or sustaining a
competitive advantage.
→ This issue has been addressed in a hedonic model that takes into account the markups in
pricing, that is, allowing the firm to develop its own pricing strategy. This allows for markups in
input prices, which are present in most industries.
- How customers value certain attributes can affect business-level strategy (on both the revenue
and cost sides):
1. Through the value proposition → knowing how much a customer is willing to pay (on
average) for a specific feature.
2. In the choice of market segments
3. How a firm positions itself within a segment to achieve SCA
- Contingent valuation addresses the question of how the manager determines the value of
the social good the firm produces. It is a survey-based technique that is used to determine the
value of social goods, or goods that are not traded in markets. This technique requires
Page 3 of 19
