Social Advantage

By Martin ReevesTom Lewis, and Dieter Heuskel

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.

Obstacles to Integration

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:

  • Financial Focus. Some companies assume that if their financial metrics are healthy, they have captured their business’s net benefit to society. But such a narrow approach fails to explicitly address social risks and opportunities, thus undermining the sustainability of the business model.
  • Marketing and Lobbying Focus. Other companies attend to social issues mainly through public messaging or by lobbying governments to prevent unfavorable action or legislation. These activities can temporarily mitigate threats, but they fail to address underlying tensions and contradictions. Marketing campaigns promoting lofty social values unaccompanied by action can precipitate mistrust and consumer or governmental sanctions, such as boycotts or new regulations.
  • Separation from the Core Business. Another common approach is to make well-intentioned and visible contributions to social causes that are unconnected with the core business. Even when such contributions are in business-relevant domains, they are often driven through a separate staff function and are based on policies that are unrelated to the fundamental business strategy. Such efforts rarely address critical social issues or generate advantage.
  • Misaligned Incentives. Finally, as we have seen recently in the widespread public disapproval of the investment banking sector, misaligned incentives can, over time, pervert good intentions and undermine the sustainability of a company’s business model.

Aligning Social and Business Dimensions

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:

  • Replenish scarce resources or goodwill. Every company’s business model depends on specific depletable resources. These can be physical or intangible resources. Trust, for example, is critical to a business’s sustainability. Although it is often treated as a mere sentiment, it has economic value and can be systematically developed and enhanced through transparency, repeated interaction, contracts, appropriate incentives, and verification mechanisms. To avoid depletion of shared physical resources, it may be necessary to develop strategies at an industry level. By promoting smart regulation and collective restraint, businesses can avoid the “tragedy of the commons” and thereby uphold the sustainability of their business models.
  • Get paid to do the right things. By identifying the social and ecological values of customers, treating these values as unmet needs, and building business models to respond to them, companies can effectively be rewarded for doing the right thing. The resulting incremental increase in price or market share can be thought of as an “ethical premium.
  • Create new markets. Creating new markets for marginalized consumers through innovative products and services provides companies with access to new value pools, in addition to generating social value. Similarly, creating new markets and business models around alternative and renewable resources is another way of aligning business and social vectors.

Finally, to ensure long-term success in these efforts, a company must constantly monitor the changing environment and identify new opportunities for action.

Creating Social Advantage

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.

Starting the Journey

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:

  • What are the social and ecological costs generated by our current business model?
  • Who bears these costs and what are the likely consequences? How sustainable is our current business model?
  • How structurally robust is the level of trust that we inspire in our employees, customers, suppliers, and regulators?
  • To what degree are our company’s social contributions integrated into our core business mission and purpose?
  • Where are the opportunities to renew critical resources or goodwill, to profitably meet the social expectations of our customers, and to address new social markets?
  • What obstacles are impeding these opportunities and what traps could we fall into?
  • Where can our company shape the industry ecosystem and gain social—and business—advantage?

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.