Managing Director & Senior Partner, Chairman of the BCG Henderson Institute
San Francisco - Bay Area
Most companies now understand the necessity of maintaining a social license to operate. But the increasing interdependence between business and society magnifies strategic risks and opportunities alike—and calls for new approaches.
The impact of business on the natural and social environment has grown and become more visible. Citizens and nongovernmental organizations have higher expectations for the social role of business and are better informed, engaged, and able to mobilize when they feel that business has overstepped its social contract. Investors are beginning to augment financial metrics such as total shareholder return with measures of social performance and risk when assessing long-term investment potential. In the wake of the global financial crisis, there has been a shift of legitimacy and influence away from business and toward national governments, arguably ushering in a period of greater activism directed at business. The need for clear thinking on business and social strategy has never been greater.
We define “social advantage” as a company’s ability to generate value and achieve competitive advantage by sustainably aligning its business model with its broader social and ecological context. This article offers an integrated framework for realizing such alignment.
Many companies have struggled with the ambiguities of “corporate social responsibility,” “corporate responsibility,” and “sustainability” and have failed to achieve the advantage that is possible by integrating the business and social aspects of strategy.
Some common traps that companies fall into include the following:
Companies can avoid the traps described above and create social advantage by better aligning their business and social strategies. The first step is to acknowledge and understand the broader context in which the business is embedded. A company conducts its affairs within a social setting, which is regulated by a political and institutional system—all, in turn, rooted in a natural environment. Mapping and understanding the various stakeholder groups and their aspirations and interests in each of these interdependent layers is an important prerequisite to developing strategies for managing social and business value.
The second step is to determine how value flows between the company and each of these layers. Positive flows such as providing useful products and services, replenishing scarce resources, and building trust and inclusiveness—as well as negative flows such as depletion, spoilage, and marginalization—must be identified, calibrated, and projected. This enables the identification of both tacit risks and untapped opportunities.
In the third step, the company can identify integrated strategies that align and maximize the flow of value between the business and its social context. There are three broad ways to achieve this:
Finally, to ensure long-term success in these efforts, a company must constantly monitor the changing environment and identify new opportunities for action.
Some companies have succeeded in building social advantage by combining, in different ways, the three mechanisms described above. For example, the refuse disposal industry has often been censured for degrading the environment. Waste Management, however, a market leader in waste collection and recycling in the United States, has built businesses that not only promote environmental values but also generate attractive returns. Its Wheelabrator business turns refuse into electricity and addresses public concerns about both energy conservation and waste disposal. Wheelabrator generated 12.5 percent of the company’s 2009 income from operations, despite bringing in only 7 percent of revenues. Thus, Waste Management is blending all three mechanisms to create social advantage: conserving resources, being paid to meet the ecological aspirations of its customers, and establishing profitable new markets in the process.
The video game industry has also come under increasing fire for fostering sedentary and asocial lifestyles among youth. In response, Nintendo, the video game company, created the Wii Fit, which addresses public skepticism about the social value of video games by promoting exercise and personal fitness. The Wii Fit combines aspects of game play with a fitness routine designed to help users get into shape. The product has expanded the company’s reach well beyond its traditional youth market into segments that previously had little experience with gaming. Today, it is the second-best-selling video game of all time and is used in physiotherapy facilities worldwide. Thus, Nintendo combined the second and third mechanisms for achieving social advantage: getting paid for satisfying an unmet social need, and in so doing creating a new market for video-assisted exercise.
Finally, Cemex—one of the world’s largest cement producers—created a business model to profitably address socially marginalized consumers. Nearly 40 percent of Cemex’s home market in Mexico consists of low-income do-it-yourself homebuilders, who frequently struggle to meet their housing needs. Some ten years ago, Cemex launched Patrimonio Hoy, a program that addresses problems of affordability, limited distribution, and safe building standards. The program allows low-income families to pay a small weekly amount in exchange for materials, warehousing services, and technical support. Patrimonio Hoy has reached more than 250,000 families to date and contributed to better living conditions, increased net worth for program participants, and improved savings habits. Furthermore, Patrimonio Hoy is a profitable and growing business for Cemex. The social and business value that Cemex has generated with this program in Mexico is only the tip of the iceberg—the company is expanding Patrimonio Hoy internationally.
For many companies, achieving social advantage will require fundamentally rethinking their social and business strategy. Executives who want to lead their organizations into this unfamiliar territory might begin by posing the following questions to their management teams:
As the economy begins to recover, companies might be tempted to think that they can return to business as usual. If they do, they may overlook the need to respond to rising expectations for social legitimacy, and fail to align their social and business purposes. Equally important, they may miss out on opportunities for long-term value creation and advantage. Structurally aligning a business with its social contributions results not only in more sustainable, rewarded, and broadened business models but also in a seat at the table in shaping the political and social context. Social advantage, once attained, becomes self-reinforcing.