The Profit Impact of Market Strategy (“PIMS”) analysis was developed at General Electric in the 1960’s and is now maintained by the Strategic Planning Institute. The PIMS database provides evidence of the impact of various marketing strategies on business success.
The most important factor to emerge from the PIMS data is the link between profitability and relative market share. PIMS found (and continues to find) a link between market share and the return a business makes on its investment. The higher the market share – the higher the return on investment. This is probably as a result of economies of scale. Economies of scale due to increasing market share are particularly evident in purchasing and the utilisation of fixed assets.
Case Study on Market Share – Dixons (UK example – it is an electrical retailer like Harvey Norman)
Dixons is widely regarded as the dominant electrical retailer in the UK. What does dominant mean? It refers to the fact that Dixons (which is the market leader) has a very high relative market share. In other words, it is substantially bigger than the next largest competitor. This can be illustrated by the chart below which lists the leading UK electrical retailers in 2000.
How might Dixon’s market dominance enable it to further increase its market share? Many retail analysts believe that the electrical retailing market provides advantages to larger businesses. In recent years, Dixons, along with the number two Comet, has been able to thrive while other retailers have suffered. The reasons for the advantages of size include:
Buying advantage: An ability to use size to source product more cheaply is a clear advantage in an industry that faces rapidly declining consumer prices
Volume advantage: As a low-margin business, retailers that can sell in high volumes are in the best position to gain market share
Access to new products: The largest retailers typically have first-mover advantage in stocking new “in demand” products that have just been released
Advertising scale: As a price-led business, access to national advertising provides the ability to keep customers regularly informed of the latest product deals. This helps to reinforce customer perception of value, in addition to strengthening the Dixons Group brands
Access to retail property: With the continuing trend towards out-of-town, larger destination stores that offer a broader range of choice, and with restrictive planning laws limiting opportunities, the larger electrical retailers have both the financial and operational capacity to secure such important new sites.
The view that a business can have obligations that extend beyond economic role is not new in many respects. Throughout recorded history the roles of organizations producing goods and services for the marketplace were frequently linked with and include political, social, and/or military roles. For example, throughout the early evolutionary stages of company development in England (where organizations such as the Hudson Bay Company and the East India Company received broad mandates), there was a public policy understanding that corporations were to help achieve societal objectives such as the exploration of colonial territory, setting up settlements, providing transportation services, developing bank and financial services, etc.
During the nineteenth century, the corporation as a business form of organization evolved rapidly in the US. It took on a commercial form that spelled out responsibilities of the board of directors and management to shareholders (i.e. fiduciary duty). In this later evolutionary form, public policy frequently addressed specific social domains such as health and safety for workers, consumer protection, labour practices, environmental protection, etc. Thus, corporations responded to social responsibilities because they were obligated to be in compliance with the law and public policy. They also responded voluntarily to market demands that reflected consumer morals and social tastes. By the mid-point of the twentieth century, corporate social responsibility was being discussed in the US by business management experts such as Peter Drucker and in business literatures CSR emerged and continues to be a key business management, marketing, and accounting concern in the US, Europe, Canada, and other nations.
Traditionally in the United States, CSR has been defined much more in terms of a philanthropic model. Companies there made profits unhindered except by fulfilling their duty to pay taxes. Then they donated a certain share of the profits to charitable causes. It is seen as tainting the act for the company to receive any benefit from the giving. The first generation of CSR this way showed how companies can be responsible in ways that do not detract from and may contribute to commercial success. Corporate philanthropy is the practice of companies of all sizes and sectors making charitable contributions to address a variety of social, economic and other issues as part of an overall corporate citizenship strategy.
The second generation is now developing where companies and whole industries see CSR as an integral part of the long term business strategy. Now a days lot of companies are taking it seriously for good of business. From a progressive business perspective, CSR usually involves focusing on new opportunities as a way to respond to inter-related economic, societal and environmental demands in the marketplace. Many firms believe that this focus provides a clear competitive advantage and stimulates corporate innovation.
In the last decade, CSR and related concepts such as corporate citizenship and corporate sustainability have expanded. This has perhaps occurred in response to new challenges such as those emanating from increased globalization on the agenda of business managers as well as for related stakeholder communities. It is now more a part of both the vocabulary and agenda of academics, professionals, non governmental organizations, consumer groups, employees, suppliers, shareholders, and investors.
A third generation of CSR is needed in order to make a significant contribution to addressing poverty and environmental degradation. This will go beyond voluntary approaches by individual companies and will involve leadership companies and organizations influencing the market in which they operate and how it is regulated to re-mould whole markets towards sustainability.
- Globalization and the associated growth in competition
- Increased size and influence of companies
- War for talent, companies competing for expertise
- Increased importance of intangible assets
1. Improved Financial Performance:
While it remains difficult to determine a direct causal relationship between increased accountability and financial performance, a variety of studies suggest that such a link exists. For example, according to 2002 Global Investor Opinion Survey released by McKinsey & Company, a majority of investors are prepared to pay a premium for companies exhibiting high governance standards. Premiums averaged 12-14 percent in North America and Western Europe; 20-25 percent in Asia and Latin America; and over 30 percent in Eastern Europe and Africa. The study also found that more than 60 percent of investors state that governance considerations might lead them to avoid individual companies with poor governance.
Companies that demonstrate a willingness to provide information that is credible, verifiable, and accessible can garner increased trust among stakeholders. Forthright and candid reporting about company achievements as well as performance shortfalls helps companies create a public reputation for honesty. At the same time, companies that make a public commitment to increase accountability and transparency need to ensure that they have robust systems for implementation, lest the company risk negative public backlash for failing to live up to its commitments.
3. Reduced Costs:
The enhanced communication that is often part of corporate accountability efforts can help build trust between companies and stakeholders, which can reduce costly conflict and improve decision-making. Companies that proactively and effectively engage shareholders and address their concerns can reduce the costs associated with shareholder proposals. In addition, social and environmental reporting efforts can help identify the effectiveness of various programmes and policies, often improving operating efficiencies and reducing costs. Reporting information can also help identify priorities to ensure that company is achieving the greatest possible impact with available resources.
4. Increased Attractiveness to Investors:
Investors — whether shareholders invested in socially responsible funds that screen companies for social and environmental attributes, or large institutions — welcome the increased disclosure that comes with corporate accountability. A growing number of investors are including non-financial metrics in their analysis of the quality of their investments. New metrics cover labour and environmental practices; board diversity, independence, and other corporate governance issues; and a wide variety of other social and environmental criteria. Research suggests investors may be willing to pay higher prices for the stock of companies considered to be accountable. For example, a 2000 survey of 200 large institutional investors conducted by McKinsey & Co., the World Bank, and Institutional Investor’s regional institutes found that three-quarters of stackholders consider board practices as important as financial performance when evaluating companies for investment. The study also found that more than 80 percent of investors would be willing to pay more for the shares of a well-governed company than for a poorly governed company with comparable financial performance.
5. Improved Relationships with Stakeholders:
Companies that make an effort to be transparent and accountable for their actions and decisions are better able to build trust among their stakeholders. This engagement helps companies understand how community groups and other stakeholders perceive them, and educates them about future issues and concerns that may affect their operations. The information gained can help companies better define priorities and ensure business activities align with professed business principles or ethical codes. Many government agencies and stakeholders look favourably at companies that self-identify and publicly disclose accountability challenges and demonstrate that they are working to solve them. Best practice solutions include the development of management systems that reduce the likelihood of recurrence.
6. Early Identification of Potential Liabilities:
The strategic information that can come from efforts to develop a more accountable company — including social and environmental auditing and reporting and stakeholder dialogue — can identify practices or situations that could pose liabilities to a company. Early identification can provide companies with the opportunity to resolve problems before they result in costly legal actions or negative public exposure. Issues that might surface more quickly in an accountable company include: environmental problems that could endanger public health, workplace discrimination or harassment that could result in lawsuits, marketing practices that do not price products or services equitably, or hiring practices that inadvertently give unfair advantage to certain populations. Social and environmental auditing and reporting can also identify where company practices may be in violation of government regulations or the standards or expectations of key stakeholder groups.
7. Marketplace Advantages:
Accountability can make entry and success in new markets easier by helping establish direct relationships with key customers and business partners. These relationships can contribute to innovation in product development or delivery, help mitigate potential negative media coverage, and enhance market presence. Some companies have used dialogue with stakeholders to help make decisions on overseas investments and operations, or to overcome the challenges of operating in markets with different cultures, laws, and languages. For example, Unilever’s Indian subsidiary, Hindustan Lever, has worked with local stakeholders to develop a new delivery system for laundry detergent in Indian villages. The company was experiencing difficulty in selling its product until it was suggested by stakeholders that the company package its product in single-use quantities that would be affordable to local residents with limited disposable incomes.
8. Improved Overall Management:
Many companies that have developed clear CSR performance and accountability systems inside their organizations report experiencing an improvement in their management practices overall. Increasingly, companies are finding that the impact of systems designed to increase accountability for CSR performance is not limited to the CSR realm, but can also impact performance in other areas as the culture of the organization undergoes change. An analysis of Fortune 500 companies conducted at the Boston College, Carroll School of Management found that companies judged as treating their stakeholders well are rated by peers as also having superior management.
9. Improved Organizational Effectiveness:
The process of self-assessment and evaluation, which is part of increasing accountability can have beneficial impact on company operations. For example, social and environmental auditing and reporting give companies the opportunity to assemble and assess more comprehensive information on operations and impacts. This information can help coordinate and maximize efficiencies and collaborations across departments, facilities, and business units. Through this process, companies compile examples of successful programmes from various parts of their organizations and share the learnings throughout the company, leading to more effective and efficient policies and practices. Dialogue and partnerships with stakeholder groups can help companies build skills and competencies, or align company operations with overarching mission and values.
10. Decreased Risk of Adverse Publicity:
Accountable companies may be better prepared to address the concerns of customers or other stakeholders who might otherwise take negative action on social issues. For example, by engaging in a dialogue with stakeholders about their interests and concerns, and addressing those concerns in business implementation processes, companies may be able to head off or minimize the impacts of boycotts organized by consumer groups. Similarly, companies that proactively address the concerns of shareholders can reduce the risk of adverse publicity stemming from high-profile shareholder disputes.
In an era of no free lunches , the attraction that the business centric model of CSR holds is obvious. But if more Indian Companies are to adopt that, some other things , too, need to change besides mindsets and developmental needs. The links between good CSR and good business have to be established clearly. Sure even overseas there is still no way that the capital markets reward good CSR practices directly or are willing to ovelook other flaws in lieu of good CSR. But experience shows that substantial benefits do flow in different ways.
- Legitimate concerns of business as a social institution and it frames the analytical view of the interrelationship between business and society.
- Public responsibility concerns of the individual firm and its processes and outcomes within the framework of its own principles.
- Managerial discretion whereby managers and other organisational members are moral actors. Within every domain of corporate social responsibility, they are obliged to exercise such discretion as is available to them, towards socially responsible outcomes.
- Business Environment Scanning: indicates the informational gathering arm of the business and the transmission of the gathered information throughout the organization.
- Stakeholder Management: A stakeholder is defined as any group or individual who can affect or is affected by the achievement of the firm’s objectives. For example, owners, suppliers, employees, customers, competitors, governments; nonprofit organizations, environmental and consumer protection groups and others. Stakeholder Management refers to mapping the relationships of stakeholder to the firm (and among each other) whilst finding, listening and meeting their expectations and seeking to balance and meet legitimate concerns as a prerequisite of any measurement process.
- Having identified the motivating principles of a firm and having determined the identities, relationships, and power of stakeholders, attempt then is to turn to the main issues which concern stakeholders.
External stakeholder effects concern the impact of corporate actions on persons or groups outside the firm. This might involve such things as the negative effects of a product recall, the positive effects of community related corporate philanthropy, or assuming the natural environment as a stakeholder, the effects of toxic waste disposal.
- Increasing inconsistencies between corporate actions and stated CSR commitments; companies will become astute at shielding their actual performance.
- CSR will be a technical fix.
- Real substantive issues won’t be addressed by CSR.
- The business case will not be clear enough for companies to take up en masse,unless it is legislated or there are other incentives.
- CSR will not be on the public’s radar screen and there won’t be any clarity about what CSR is and why it is important.
- CSR will become too prescriptive and get labeled as needless red tape increasing the cost of business.
- Companies that once embraced CSR will lose interest and pursue other objectives.
- Those engaged in CSR shift to minimal CSR activities, never moving beyond baseline CSR.
- Pressures on business to cater to shareholders at the expense of all other stakeholders will continue if not increase; the imbalance of power will not change unless the membership on company boards changes to include stakeholder interests or until government legislation is brought to bear.
- In the future a significant number of companies will be convinced it’s in their strategic interest to incorporate CSR substantively into their operations.
- There is a crisis in industrial capitalism, which lacks in trust and social responsibility. Therefore, a rethinking should be done to decide the role of companies in society.
- CSR is at crossroads, in a time of real discontinuity, enormously in flux.
- The crisis in global markets is broadening the discussion of accountability and transparency – in this climate there is more openness to CSR ideas. CSR will be seen as good corporate governance.
- There will be pressure through competition for better CSR performance – this will impact on suppliers, etc.
- A small group of companies will be moving ahead quickly.
- There will be differentiation between different models and levels of CSR as a result of continuous improvement and quality assurance.
- CSR will advance, but it will advance inconsistently across sectors, depending on a company’s economic performance, economic downturns, competitiveness of the market, etc.
- Underlying structural drivers will impact large scale companies, such as the value of knowledge workers and other intangible assets, driving companies to take different issues into account.
- We see only a few companies committed to CSR because we are at the beginning of a long path on this journey; the shift toward sustainable capitalism is a long term trend and in 5 – 10 years only a few companies will be moving in this direction.
- Increasingly businesses will see CSR as resulting in increased competitiveness and profitability.
- CSR is part of a search for a new social contract between business and society. This new social contract will not necessarily be through the creation of a set of rules, but about a new set of norms arrived at through experimentation.