How does CSR affect competitive advantage

Topics: Economics

Introduction For many decades, corporate social responsibility (CARS) has been viewed as a waste of resources – money, labor, time, etc. – which conflicts with the firm’s responsibility to make profits in order to compensate its shareholders (Friedman, 1970; Henderson, 2001 ; Jensen, 2002; Levity, 1 958; Summary & Ninepin, 2004). On the contrary, especially during the last years, many supporters of CARS came up with the argument that CARS provides a company with a series of specific benefits that very often will outweigh the expenditures.

Some are even of the opinion that CARS is necessary for equines, both from an economic and a social point of view (Brown & Fraser, 2006; Trucker, 1984; Kettle & Lee, 2005; Meltzer, 1983; Porter & Kramer, 2006).

Screech (201 1 ) concludes by writing that the following two related conflicts could be solved by proving that CARS and profit-maximizing interests can go hand in hand: On the one hand, the argument that CARS is Just a waste of resources would be invalidated and on the other hand, CARS expenses could be Justified to the shareholders as compatible with the firm’s obligations and, thus, legitimate and economically beneficial.

Although great amount of literature is being published about the connection of CARS and the financial performance of firms, it still lacks empirical support and is therefore vulnerable to the criticism that this relation is not a grounded fact, but rather wishful thinking by Its proponents (Rollover, Schmidt & Runes, 2003; Screech, 2011). Therefore, this article aims at throwing light on the link between CARS and firm performance by assessing how CARS might influence a firm’s competitive advantage.

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Specifically, as many companies realize how important it is to attract highly skilled employees as a main component of their competitive advantage (Prefer, 1994; Tech, 1998; Turban & Greening, 1997), the focus will be on the link between CARS and human resources. This article will start with a review of previous studies and research in this area, followed by an in depth analysis of relevant and underlying theories that describe how CARS affects competitive advantage via a firms human resources.

Ultimately, this article will give Implications for Important future research and the mall findings will be concluded. Previous Research and Studies Although “CARS has emerged as an Inescapable priority for business leaders in every entry (Porter & Kramer. 2006), there Is no general agreement about whether CARS does contribute to the financial performance of firms or not. A lot of research has been conducted in order to prove the positive relationship between corporate financial performance (COP) and corporate social performance (SSP).

Wood (1991 : 693) defines SSP as “a business organization’s configuration of principles of social responsibility, processes of social responsiveness, and policies, programs, and observable outcomes as they relate to the firm’s societal relationships. ” However, the exults of these studies have been inconclusive at best (Donaldson, 1999; Jones & Wicks, 1999; McMillan & Siegel, 2001; Roman, Hybrid & Eagle, 1999).

Other studies tried to find conceptual explanations for the lack or the existence of a relationship between SSP and COP, but could not provide answers (McMillan & Siegel, 2001 ; society and business need each other now more than ever before. Companies depend on a healthy society, including health care, education, and equal opportunity, but also good government and property rights. These requirements are essential for productive workforce and will furthermore create an expanding demand for business.

Simultaneously, this healthy society is also in the need of successful firms. Apart from creating Jobs and wealth, they are the main innovators that improve the standards and quality of living (Porter & Kramer, 2006). Hence, it should be in the interest of every firm to conduct CARS, regardless of the possible relationship between SSP and COP. Firms behaving in a socially responsible manner benefit through the subsequent reputation, another topic with a huge body of literature.

The reputation f a firm that is built on its social consciousness will not Just temper criticism by the public in case of a crisis (Porter & Kramer, 2006), but will also help building a positive relationship to stakeholders, such as investors, suppliers, bankers, and customers (Bombers & Channel, 1990). Again, from a financial perspective, reputation plays an extremely important role.

Not only will it facilitate access to capital through the emanating positive relationship to investors, but with respect to SSP, reputation also has a higher correlation with COP than any other variable – even corporate environmental performance (Brown & Perry, 1994; Rollicks et al. , 2003). The return from reputation is, thus, the key to reaping benefits from SSP (Roberts & Dowling, 2002). One way of reaping benefits from corporate reputation is by attracting a high quality workforce (Greening & Turban, 2000; Turban & Greening, 1997).

However, the attraction of good employees is not the only channel through which good reputation through CARS affects a firm’s human resources, possibly leading to a competitive advantage. Research suggests that it also increases the goodwill of current employees towards their employer, which in turn can improve the company’s financial outcomes (Davis, 1973; McGuire, Sundered & Schneider, 1988; Haddock & Graves, 1997). Furthermore, firms can turn instruments such as sponsoring of sports or cultural events into a competitive advantage by improving the morale of their employees and boosting productivity (Porter & Kramer, 2002).

Supplementary, it has been proved that scandals in regards to CARS will negatively influence employee morale and, thus, the firm’s performance (Screech, 2011). During the last decades, undress and thousands of articles about CARS have been published, many of them with a strong focus on financial aspects such as the relationship of SSP and COP. Surprisingly few dealt with the influence of CARS on human resources. Greening & Turban (2000: 276) analyzed and confirmed that Job applicants “will attempt to interview with firms, and will have a higher probability of accepting a Job offer from” firms with positive SSP reputation.

However, their study is based on a survey of only 39 students and did not focus on what exactly attracts employees and how these causes can be used to create a competitive advantage. Furthermore, a lot has changed during the last years, not only the importance of but also the ways companies pursue CARS. Therefore, these will be the main aspects in the remainder of this article. Theory and Implications for Future Research This section will introduce the most important theories that are relevant for an analysis of the relationship between CARS and competitive advantage.

As this article section will start with an explanation of the importance of a quality workforce. Afterwards, theories will be presented which focus on how CARS can influence prospective (via firm’s attractiveness) or current employees. Quality Employees as a Source of Competitive Advantage There is a reason why statements like “our employees are our strength” can be found on the homepages and on promoting materials of many companies nowadays.

The attraction of superior human resources and retaining them in the firm can provide firms with a sustained competitive advantage (Load & Wilson, 1994; Prefer, 1994; Wright, Ferris, Hillier & Karol, 1995). Additionally, especially in fields with labor shortage, such as IT or engineering, the attraction of quality applicants is becoming more and more important for the success of companies Jackson & Schuler, 1990; Freeman & Gowning, 1990).

Those organizations that are able to attract the greater applicant pool of top-quality applicants can better utilize their selection system which results in a potential competitive advantage (Load & Wilson, 1994; Turban & Greening, 1997). As research suggests that employee attraction to a large extent is based on perceptions of the corporate image, which in turn is influenced by the firm’s SSP (Bombers & Channel, 1990), the explanation is given of why many firms promote e. G. Their environmental or philanthropic programs in brochures for prospective applicants (Poe & Courier, 1995). They want to demonstrate how socially responsible they act.

That this can be successful is confirmed by the finding of Bauer and Amman- Smith (1996) that firms with a stance towards the natural environment are seen as more attractive firms than those without such a stance. The reason why companies should focus more on their employees is that researchers agree that a quality workforce has become more important than other sources of competitive advantage (Greening & Turban, 2000). Previously, the success of firms was often attributed to their access to financial markets, product and process technology, patents, the placement of learning curves and economies of scale, etc.

However, scholars have noted that the importance of those sources of success has decreased over time, while the selection and management of high quality employees has become a critical factor to success (Prefer, 1994; Snell, Wounds & Wright, 1996). Knowledge-Based Theory Similarly, another body of literature suggests that a firm’s ability to create, manage and transfer knowledge is the key to its success (Feline & Westerly, 2007; Grant, 1996), which also points out the importance of a quality workforce as one key to a nominative advantage.

Authors suggest that intelligence, motivation, vision, experience, creativity, analytical abilities and commitment are some of the characteristics of quality employees (Tech, 1998). A firm’s success in the future depends largely on how well it can capture value from those knowledge assets (Tech, 1998). Hence, in order to succeed, a firm must take advantage of its workforce and be able to manage its knowledge. Although high quality employees can be viewed as a necessary condition for success in a modern knowledge economy, it is not a sufficient one (Greening & Turban, 2000).

The firm has to be able to develop the knowledge and talent into skills and competencies which are valuable, rare, inimitable by competitors, and unsustainable in order to develop a competitive The role of human resources in developing a firm’s competitive advantage is consistent with the resource-based theory of the firm. This theory suggests that every organization is simply a collection of unique capabilities and resources providing the foundation for the strategy of the organization and being the primary source of its competitive advantage and profitability (Barney, 1991/ 2011; Grant, 1991; Meyer, 1991).

It assumes that firms acquire and develop these unique resources and capabilities over time and emphasizes that resources may not be mobile across companies, or easily imitable by other companies (Grant, 1991). As mentioned above, apart from physical resources, also human resources, such as talented managers or high quality employees, are highly important resources for firms (Barney, 1991; Meyer, 1991) and in a global economy, the skills of an organization’s workforce are increasingly critical to the development of sustained competitive advantages (Throw, 1992). Additionally, SSP can be viewed as an organizational resource.

Investments in SSP may assist firms in developing new capabilities, resources and competencies that are manifested in a firm’s structure, culture, technology and human resources (Barney, 1991; Russo & Bouts, 1997; Heartfelt, 1984). For instance, SSP can help management to develop better processes, scanning skills, or information systems which will better prepare an organization for turbulence’s, external changes, or crises (Russo & Bouts, 1997). The channels through which a companies’ SSP can affect these resources, especially the human resources, will be subject of discussion later in this article. Signaling Theory

Another theory that may be relevant for understanding how a firm’s SSP may influence human resources, especially the attraction of quality employees, is the signaling theory. There exists a classical information asymmetry between the applicants and the employer. The applicant does not really know how working conditions, corporate culture, etc. Look like in the companies he or she is applying for. Signaling theory suggests that, due to the incomplete information about the company, applicants interpret all the information they receive as “signals” about e. G. The working conditions in the organization (Greening & Turban, 2000).

Organizational attributes, for example, provide prospective employees with information about how it would be like to be part of this organization. For instance, a firm’s formal social programs or policies towards stakeholders or developing political and social issues may attract applicants by serving as signals of the firm’s goals and commitment. Likewise, the policy to provide day care facilities or to manage diversity has an influence on organizational attractiveness as an employer, because it signals willingness to attract women and minorities and to treat them in a fair manner Greening & Turban, 2000; Williams & Bauer, 1994).

Potential employees might interpret a company’s SSP as a signal about its organizational values and norms. These values and norms affect the applicant’s perceptions of the working conditions and therefore also the company’s attractiveness as an employer. Additionally, according to the person-organization fit theory (Kristin, 1996), it is expected “that the prospective Job applicant’s specific values will influence the extent to which a firm’s SSP influences that attraction” (Greening & Turban, 2000: 259).

Social Identity Theory influences human resources as well. This theory emphasizes that people classify themselves into specific social categories on the basis of different factors, as for example the organization they work for, and that the fact of being a member in those social categories influences people’s individual self-concept (Dutton, Dickered & Hairball, 1994; Turban & Greening, 1997). Hence, the self-image of employees is influenced by the reputation and the image of the employer.

As mentioned earlier, a firm’s reputation is affected to a large extent by its corporate social performance. Consequently, social identity theory suggests that employees working for a firm with strong SSP will experience positive outcomes, such as an enhanced self-concept, just by being employed in this socially responsible firm (Greening & Turban, 2000). Furthermore, as potential employees might expect to experience this enhanced self- concept, the attractiveness of firms that put a strong focus on acting socially responsible is positively affected as well.

Definition of Research Gaps After having presented theories that suggest that the right employees can lead to a sustained competitive advantage and that there is relationship between CARS activities of an organization and its human resources, this article will now focus on issues where more research is needed in order to fully understand these relationships. Generally, there exists an almost inexhaustible amount of literature that analyzes the relationship of a firm’s SSP and its COP. A far smaller body of literature focuses on the link between SSP and human resources.

Most of these articles build up theories and make suggestions, but not that much empirical research has been conducted yet to actually prove these theories or to contradict them. Research suggests that potential applicants are very aware of a company’s SSP and that companies with a good CARS rating have a competitive advantage, because hey attract a larger amount of applicants and applicants that are of high quality. However, these studies by Greening and Turban (2000) and Turban and Greening (1997) are based on a survey of 39 students or even Just 34, respectively.

Also, it can be assumed that those students were aware of the purpose of the study and, thus, were biased in regards to their answers. A study on a large scale needs to be conducted in order to get valuable results. Additionally, it needs to be conducted in different geographical regions of the world, as CARS plays completely different roles in the various societies. While it, for instance, is of great importance in most Western European or the Nordic countries, this is not necessarily the case in many South American or Asian countries.

Furthermore, the ways how organizations pursue CARS has changed or at least become broader during the last years. Partnerships of business firms with non-governmental organizations (Nags) had been unthinkable a few decades ago, but have become an important issue nowadays. Many firms grant their employees a certain amount of days off, so that they can engage in Nags they support. Microsoft, for example, allows its employees to take three days off for this repose every year (Thomson, 2012). How do those CARS activities affect the attractiveness of firms?

Which CARS activities affect a firm’s attractiveness the most? Since scholars argue that a quality workforce is becoming an increasingly important source for competitive advantage, these questions need to be addressed by future research. However, CARS does not Just affect a firm’s human resources via the employer’s SSP as well. In the framework of Mitchell, Eagle and Wood (1997), employees are seen as a crucial component to success and as a scarce resource. Therefore, they have power, legitimacy and some urgency, and are thus “salient” takeovers of the firm.

It is a logical consequence that they are affected as well, when a firm aims at multiple stakeholders by pursuing CARS. According to Screech (201 1), the idea is that employees will be much more satisfied, if they feel that the beneficiaries of SSP are they, rather than some other external recipients of charitable contributions. Employee satisfaction, in turn, will help retain the employees and reduce turnover (Labeling & Freeman, 2000), or positively influence the organization’s operational efficiency (Branch & Rodriguez, 2006), which can be the source of a competitive advantage.

Future research might analyze how and which SSP strategies affect employee satisfaction or investigate if there are moderators that influence this relationship. Conclusion This article suggests that CARS and a firm’s human resources are interlinked with each other in many different ways. The analysis indicates that a quality workforce is becoming a crucial factor for gaining a competitive advantage and that quality employees can be attracted by a firm’s SSP. Furthermore, SSP positively influences the employee satisfaction which in turn might lead to a competitive advantage by boosting productivity and efficiency.

However, this article aims at showing up areas in which more research has to be conducted in order to fully grasp the influence of corporate social responsibility on the human resources of firms. Especially, empirical research is needed to confirm the theories that have been proposed until now. But also in regards to the constantly changing ways of how companies pursue CARS, it is important to investigate which of them have the greatest impact on employees and their morale. Only then will it be possible for firms to capture the largest benefit of their CARS activities: the creation of a sustained competitive advantage.

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How does CSR affect competitive advantage. (2017, Nov 26). Retrieved from

How does CSR affect competitive advantage
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