Competitive advantage and corporate social responsibility

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Strategy & Society

The Link Between Competitive Advantage and Corporate Social Responsibility

by Michael E. Porter and Mark R. Kramer

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Included with this full-text

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The Idea in Brief—the core idea

The Idea in Practice—putting the idea to work

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Article Summary

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Strategy & Society: The Link Between Competitive Advantage and

Corporate Social Responsibility

A list of related materials, with annotations to guide further

exploration of the article’s ideas and applications

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The Idea in Brief The Idea in Practice

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Many firms’ corporate social responsibility (CSR) efforts are counterproductive, for two reasons: They pit business against so-ciety, when the two are actually interde-pendent. And they pressure companies to think of CSR in generic ways, instead of crafting social initiatives appropriate to their individual strategies.

CSR can be much more than just a cost, constraint, or charitable deed. Approached strategically, it generates opportunity, in-novation, and competitive advantage for corporations—while solving pressing so-cial problems.

How to practice strategic CSR? Porter and Kramer advise pioneering innovations in your offerings and operations that create distinctive value for your company

and

so-ciety. Take Toyota. The company’s early re-sponse to public concern about auto emis-sions gave rise to the hybrid-engine Prius. The Prius has not only significantly reduced pollutants; it’s given Toyota an enviable lead over rivals in hybrid technology.

To practice strategic CSR:

1. Identify points of intersection between your company and society.

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In what ways does your organization affect society? For example, do you provide safe working conditions and reasonable wages? Do your operations create envi-ronmental hazards?

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How does society affect your competitive-ness? For instance, do countries where you operate protect intellectual property? Sup-ply enough talented workers? Encourage outside investors?

2. Select social issues to address.

Given your company’s and society’s impact on each other, how might you address social needs in ways that create shared value—a meaningful benefit for society that also adds to your com-pany’s bottom line?

Example:

By addressing the AIDS pandemic in Africa, a mining company such as Anglo American would not only improve the standard of liv-ing on that continent; it would also im-prove the productivity of the African labor force on which its success depends.

3. Mount a small number of initiatives that generate large and distinctive benefits for society

and

your company.

Example:

To enter the Indian market, Nestlé needed to establish local sources of milk from a large, diversified base of small farmers. It re-ceived government permission to build a dairy in the district of Moga. But in Moga, farmers were impoverished, failed crops led to a high death rate in calves, and lack of re-frigeration prevented farmers from ship-ping milk or keeping it fresh.

Nestlé built refrigerated dairies as milk col-lection points in each Moga town and sent its trucks to the dairies to collect the milk.

With the trucks went veterinarians, nutri-tionists, agronomists, and quality assurance experts. Farmers learned that milk quality hinged on adequate feed crop irrigation. With financing and technical assistance from Nestlé, farmers dug deep-bore wells. The consequent improved irrigation re-duced calves’ death rate 75%, increased milk production 50-fold, and allowed Nestlé to pay higher prices to farmers than those set by the government.

With steady revenues, farmers could now obtain credit. Moga’s standard of living im-proved: More homes had electricity and telephones; more towns established pri-mary, secondary, and high schools; and Moga had five times the number of doc-tors as neighboring regions. Meanwhile, Nestlé gained a stable supply of high-quality commodities—without having to pay middlemen—and saw demand for its products increase in India.

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Strategy & Society


by Michael E. Porter and Mark R. Kramer

harvard business review • december 2006 page 2

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Governments, activists, and the media havebecome adept at holding companies to ac-count for the social consequences of their ac-tivities. Myriad organizations rank companieson the performance of their corporate socialresponsibility (CSR), and, despite sometimesquestionable methodologies, these rankingsattract considerable publicity. As a result, CSRhas emerged as an inescapable priority forbusiness leaders in every country.

Many companies have already done muchto improve the social and environmental con-sequences of their activities, yet these effortshave not been nearly as productive as theycould be—for two reasons. First, they pit busi-ness against society, when clearly the two areinterdependent. Second, they pressure compa-nies to think of corporate social responsibilityin generic ways instead of in the way most ap-propriate to each firm’s strategy.

The fact is, the prevailing approaches to CSRare so fragmented and so disconnected frombusiness and strategy as to obscure many of thegreatest opportunities for companies to benefit

society. If, instead, corporations were to analyzetheir prospects for social responsibility using thesame frameworks that guide their core businesschoices, they would discover that CSR can bemuch more than a cost, a constraint, or a chari-table deed—it can be a source of opportunity,innovation, and competitive advantage.

In this article, we propose a new way to lookat the relationship between business and soci-ety that does not treat corporate success andsocial welfare as a zero-sum game. We intro-duce a framework companies can use to iden-tify all of the effects, both positive and negative,they have on society; determine which ones toaddress; and suggest effective ways to do so.When looked at strategically, corporate socialresponsibility can become a source of tremen-dous social progress, as the business applies itsconsiderable resources, expertise, and insightsto activities that benefit society.

The Emergence of Corporate Social Responsibility

Heightened corporate attention to CSR has

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not been entirely voluntary. Many companiesawoke to it only after being surprised by pub-lic responses to issues they had not previouslythought were part of their business responsi-bilities. Nike, for example, faced an extensiveconsumer boycott after the

New York Times

and other media outlets reported abusive laborpractices at some of its Indonesian suppliers inthe early 1990s. Shell Oil’s decision to sink the

Brent Spar,

an obsolete oil rig, in the North Sealed to Greenpeace protests in 1995 and to in-ternational headlines. Pharmaceutical compa-nies discovered that they were expected to re-spond to the AIDS pandemic in Africa eventhough it was far removed from their primaryproduct lines and markets. Fast-food and pack-aged food companies are now being held re-sponsible for obesity and poor nutrition.

Activist organizations of all kinds, both onthe right and the left, have grown much moreaggressive and effective in bringing public pres-sure to bear on corporations. Activists maytarget the most visible or successful companiesmerely to draw attention to an issue, even ifthose corporations actually have had little im-pact on the problem at hand. Nestlé, for ex-ample, the world’s largest purveyor of bottledwater, has become a major target in the glo-bal debate about access to fresh water, despitethe fact that Nestlé’s bottled water sales con-sume just 0.0008% of the world’s fresh watersupply. The inefficiency of agricultural irriga-tion, which uses 70% of the world’s supplyannually, is a far more pressing issue, but itoffers no equally convenient multinationalcorporation to target.

Debates about CSR have moved all the wayinto corporate boardrooms. In 2005, 360 dif-ferent CSR-related shareholder resolutionswere filed on issues ranging from labor condi-tions to global warming. Government regula-tion increasingly mandates social responsi-bility reporting. Pending legislation in theUK, for example, would require every publiclylisted company to disclose ethical, social,and environmental risks in its annual report.These pressures clearly demonstrate the ex-tent to which external stakeholders are seek-ing to hold companies accountable for socialissues and highlight the potentially large fi-nancial risks for any firm whose conduct isdeemed unacceptable.

While businesses have awakened to theserisks, they are much less clear on what to do

about them. In fact, the most common corpo-rate response has been neither strategic noroperational but cosmetic: public relations andmedia campaigns, the centerpieces of whichare often glossy CSR reports that showcasecompanies’ social and environmental gooddeeds. Of the 250 largest multinational corpo-rations, 64% published CSR reports in 2005, ei-ther within their annual report or, for most, inseparate sustainability reports—supporting anew cottage industry of report writers.

Such publications rarely offer a coherentframework for CSR activities, let alone a strate-gic one. Instead, they aggregate anecdotes aboutuncoordinated initiatives to demonstrate a com-pany’s social sensitivity. What these reportsleave out is often as telling as what they in-clude. Reductions in pollution, waste, carbonemissions, or energy use, for example, may bedocumented for specific divisions or regionsbut not for the company as a whole. Philan-thropic initiatives are typically described in termsof dollars or volunteer hours spent but almostnever in terms of impact. Forward-lookingcommitments to reach explicit performancetargets are even rarer.

This proliferation of CSR reports has beenparalleled by growth in CSR ratings and rank-ings. While rigorous and reliable ratings mightconstructively influence corporate behavior,the existing cacophony of self-appointed score-keepers does little more than add to the confu-sion. (See the sidebar “The Ratings Game.”)

In an effort to move beyond this confusion,corporate leaders have turned for advice to agrowing collection of increasingly sophisti-cated nonprofit organizations, consulting firms,and academic experts. A rich literature on CSRhas emerged, though what practical guidanceit offers corporate leaders is often unclear. Ex-amining the primary schools of thought aboutCSR is an essential starting point in under-standing why a new approach is needed to in-tegrating social considerations more effectivelyinto core business operations and strategy.

Four Prevailing Justifications for CSR

Broadly speaking, proponents of CSR haveused four arguments to make their case: moralobligation, sustainability, license to operate,and reputation. The moral appeal—arguingthat companies have a duty to be good citizensand to “do the right thing”—is prominent in

Michael E. Porter

is the Bishop William Lawrence University Professor at Har-vard University; he is based at Harvard Business School in Boston. He is a fre-quent contributor to HBR, and his most recent article is “Seven Surprises for New CEOs” (October 2004).

Mark R. Kramer

([email protected]) is the managing director of FSG Social Impact Advisors, an international nonprofit con-sulting firm, and a senior fellow in the CSR Initiative at Harvard’s John F. Kennedy School of Government in Cambridge, Massachusetts. Porter and Kramer are the cofounders of both FSG Social Impact Advisors and the Center for Effective Philanthropy, a nonprofit re-search organization.

mailto:[email protected]

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the goal of Business for Social Responsibility,the leading nonprofit CSR business associa-tion in the United States. It asks that its mem-bers “achieve commercial success in ways thathonor ethical values and respect people, com-munities, and the natural environment.” Sus-tainability emphasizes environmental andcommunity stewardship. An excellent defini-tion was developed in the 1980s by NorwegianPrime Minister Gro Harlem Brundtland andused by the World Business Council for Sus-tainable Development: “Meeting the needs ofthe present without compromising the abilityof future generations to meet their ownneeds.” The notion of license to operate de-rives from the fact that every company needstacit or explicit permission from governments,communities, and numerous other stakehold-ers to do business. Finally, reputation is usedby many companies to justify CSR initiativeson the grounds that they will improve a com-

pany’s image, strengthen its brand, enlivenmorale, and even raise the value of its stock.These justifications have advanced thinking inthe field, but none offers sufficient guidancefor the difficult choices corporate leaders mustmake. Consider the practical limitations ofeach approach.

The CSR field remains strongly imbued witha moral imperative. In some areas, such as hon-esty in filing financial statements and operat-ing within the law, moral considerations areeasy to understand and apply. It is the natureof moral obligations to be absolute mandates,however, while most corporate social choicesinvolve balancing competing values, interests,and costs. Google’s recent entry into China, forexample, has created an irreconcilable conflictbetween its U.S. customers’ abhorrence of cen-sorship and the legal constraints imposed bythe Chinese government. The moral calculusneeded to weigh one social benefit against an-other, or against its financial costs, has yet tobe developed. Moral principles do not tell apharmaceutical company how to allocate itsrevenues among subsidizing care for the indi-gent today, developing cures for the future,and providing dividends to its investors.

The principle of sustainability appeals to en-lightened self-interest, often invoking the so-called triple bottom line of economic, social,and environmental performance. In otherwords, companies should operate in ways thatsecure long-term economic performance byavoiding short-term behavior that is sociallydetrimental or environmentally wasteful. Theprinciple works best for issues that coincidewith a company’s economic or regulatory in-terests. DuPont, for example, has saved over$2 billion from reductions in energy use since1990. Changes to the materials McDonald’suses to wrap its food have reduced its solidwaste by 30%. These were smart business deci-sions entirely apart from their environmentalbenefits. In other areas, however, the notion ofsustainability can become so vague as to bemeaningless. Transparency may be said to bemore “sustainable” than corruption. Good em-ployment practices are more “sustainable”than sweatshops. Philanthropy may contributeto the “sustainability” of a society. Howevertrue these assertions are, they offer little basisfor balancing long-term objectives against theshort-term costs they incur. The sustainabilityschool raises questions about these trade-offs

The Ratings Game

Measuring and publicizing social perfor-mance is a potentially powerful way to influence corporate behavior—assuming that the ratings are consistently mea-sured and accurately reflect corporate social impact. Unfortunately, neither condition holds true in the current pro-fusion of CSR checklists.

The criteria used in the rankings vary widely. The Dow Jones Sustainability Index, for example, includes aspects of economic performance in its evalua-tion. It weights customer service al-most 50% more heavily than corporate citizenship. The equally prominent FTSE4Good Index, by contrast, contains no measures of economic performance or customer service at all. Even when criteria happen to be the same, they are invariably weighted differently in the final scoring.

Beyond the choice of criteria and their weightings lies the even more perplexing question of how to judge whether the cri-teria have been met. Most media, non-profits, and investment advisory organi-zations have too few resources to audit a universe of complicated global corporate

activities. As a result, they tend to use measures for which data are readily and inexpensively available, even though they may not be good proxies for the social or environmental effects they are intended to reflect. The Dow Jones Sustainability Index, for example, uses the size of a com-pany’s board as a measure of community involvement, even though size and in-volvement may be entirely unrelated.

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Finally, even if the measures chosen accurately reflect social impact, the data are frequently unreliable. Most ratings rely on surveys whose response rates are statistically insignificant, as well as on self-reported company data that have not been verified externally. Companies with the most to hide are the least likely to re-spond. The result is a jumble of largely meaningless rankings, allowing almost any company to boast that it meets some measure of social responsibility—and most do.

1. For a fuller discussion of the problem of CSRratings, see Aaron Chatterji and David Levine,“Breaking Down the Wall of Codes: EvaluatingNon-Financial Performance Measurement,”

Cali-fornia Management Review,

Winter 2006.

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Mapping Social Opportunities

The interdependence of a company and society can be analyzed with the same tools used to analyze competitive posi-tion and develop strategy. In this way, the firm can focus its particular CSR ac-tivities to best effect. Rather than merely acting on well-intentioned impulses or reacting to outside pressure, the organi-zation can set an affirmative CSR agenda that produces maximum social benefit as well as gains for the business.

These two tools should be used in dif-ferent ways. When a company uses the value chain to chart all the social conse-quences of its activities, it has, in effect, created an inventory of problems and

opportunities—mostly operational issues—that need to be investigated, prioritized, and addressed. In general, companies should attempt to clear away as many negative value-chain social im-pacts as possible. Some company activi-ties will prove to offer opportunities for social and strategic distinction.

In addressing competitive context, companies cannot take on every area in the diamond. Therefore, the task is to identify those areas of social context with the greatest strategic value. A company should carefully choose from this menu one or a few social initia-tives that will have the greatest shared

value: benefit for both society and its own competitiveness.

Looking Inside Out: Mapping the Social Impact of the Value Chain

The

value chain

depicts all the activities a company engages in while doing business. It can be used as a frame-work to identify the positive and nega-tive social impact of those activities. These “inside-out” linkages may range from hiring and layoff policies to greenhouse gas emissions, as the par-tial list of examples illustrated here demonstrates.

InboundLogistics

(e.g., incoming material

storage, data, collection, service,

customer access)

Operations(e.g.,

assembly, component fabrication,

branch operations)

OutboundLogistics(e.g., order processing,

warehousing,report

preparation)

Marketing & Sales

(e.g., sales force,

promotion, advertising,

proposal writing, Web

site)

After-Sales Service

(e.g., installation, customer support,

complaint resolution, repair)

Su

pp

ort

Act

ivit

ies

Pri

mar

y A

ctiv

itie

s

Firm Infrastructure(e.g., financing, planning, investor relations)

Human Resource Management(e.g., recruiting, training, compensation system)

Technology Development(e.g., product design, testing, process design, material research, market research)

Procurement(e.g., components, machinery, advertising, & services)

• Relationships with universities

• Ethical research practices (e.g., animal testing,GMOs)

• Product safety

• Conservation of raw materials

• Recycling

• Procurement & supply chainpractices (e.g., bribery, childlabor, conflict diamonds,pricing to farmers)

• Uses of particular inputs(e.g., animal fur)

• Utilization of natural resources

• Transportationimpacts (e.g.,emissions, con-gestion, loggingroads)

• Emissions & waste

• Biodiversity & ecological impacts

• Energy & waterusage

• Worker safety &labor relations

• Hazardous materials

• Packaging useand disposal (McDonald’sclamshell)

• Transportation impacts

• Marketing & advertising(e.g., truthful advertising,advertising to children)

• Pricing practices (e.g.,price discriminationamong customers, anticompetitive pricingpractices, pricing policyto the poor)

• Consumer information

• Privacy

• Financial reporting practices

• Government practices

• Transparency

• Use of lobbying

• Education & job training

• Safe working conditions

• Diversity & discrimination

• Health care & other benefits

• Compensation policies

• Layoff policies

• Disposal of obsoleteproducts

• Handling ofconsumables(e.g., motoroil, printingink)

• Customer privacy

Source: Michael E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance, 1985

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without offering a framework to answer them.Managers without a strategic understandingof CSR are prone to postpone these costs,which can lead to far greater costs when thecompany is later judged to have violated itssocial obligation.

The license-to-operate approach, by con-trast, is far more pragmatic. It offers a concreteway for a business to identify social issues thatmatter to its stakeholders and make decisionsabout them. This approach also fosters con-structive dialogue with regulators, the local cit-izenry, and activists—one reason, perhaps,that it is especially prevalent among compa-nies that depend on government consent, such

as those in mining and other highly regulatedand extractive industries. That is also why theapproach is common at companies that rely onthe forbearance of their neighbors, such asthose, like chemical manufacturing, whose op-erations are noxious or environmentally haz-ardous. By seeking to satisfy stakeholders, how-ever, companies cede primary control of theirCSR agendas to outsiders. Stakeholders’ viewsare obviously important, but these groups cannever fully understand a corporation’s capabili-ties, competitive positioning, or the trade-offsit must make. Nor does the vehemence of astakeholder group necessarily signify the im-portance of an issue—either to the company

Looking Outside In: Social Influences on Competitiveness

In addition to understanding the social ram-ifications of the value chain, effective CSR requires an understanding of the social di-

mensions of the company’s competitive context—the “outside-in” linkages that af-fect its ability to improve productivity and execute strategy. These can be understood using the

diamond framework,

which shows

how the conditions at a company’s locations (such as transportation infrastructure and honestly enforced regulatory policy) affect its ability to compete.

Context for Firm Strategy

and RivalryThe rules and incentives that

govern competition

Local DemandConditionsThe nature and

sophistication of local customer

needs

Related andSupportingIndustries

The local availability of supporting

industries

• Fair and open local competition (e.g., the absence of trade barriers,fair regulations)

• Intellectual property protection

• Transparency (e.g., financial report-ing, corruption: Extractive IndustriesTransparency Initiative)

• Rule of law (e.g., security, protection of property, legal system)

• Meritocratic incentive systems (e.g., antidiscrimination)

• Availability of human resources (Marriott’s jobtraining)

• Access to research institutions and universities (Microsoft’s Working Connections)

• Efficient physical infrastructure

• Efficient administrative infrastructure

• Availability of scientific and technological infrastructure (Nestlé’s knowledge transfer to milk farmers)

• Sustainable natural resources (GrupoNueva’s water conservation)

• Efficient access to capital

• Availability of local suppliers (Sysco’s locally grown produce; Nestlé’s milk collection dairies)

• Access to firms in related fields

• Presence of clusters instead of isolated industries

• Sophistication of local demand (e.g.appeal of social value propositions:Whole Foods’ customers)

• Demanding regulatory standards(California auto emissions &mileage standards)

• Unusual local needs that can beserved nationally and globally (Urbi’s housing financing, Unilever’s“bottom of the pyramid” strategy)

Factor (Input)Conditions

Presence of high-quality, specialized

inputs available to firms

Source: Michael E. Porter, The Competitive Advantage of Nations, 1990

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or to the world. A firm that views CSR as a wayto placate pressure groups often finds that itsapproach devolves into a series of short-termdefensive reactions—a never-ending public re-lations palliative with minimal value to societyand no strategic benefit for the business.

Finally, the reputation argument seeks thatstrategic benefit but rarely finds it. Concernsabout reputation, like license to operate, focuson satisfying external audiences. In consumer-oriented companies, it often leads to high-profile cause-related marketing campaigns. Instigmatized industries, such as chemicals andenergy, a company may instead pursue socialresponsibility initiatives as a form of insurance,in the hope that its reputation for social con-sciousness will temper public criticism in theevent of a crisis. This rationale once again risksconfusing public relations with social and busi-ness results.

A few corporations, such as Ben & Jerry’s,Newman’s Own, Patagonia, and the BodyShop, have distinguished themselves throughan extraordinary long-term commitment to so-cial responsibility. But even for these compa-nies, the social impact achieved, much less thebusiness benefit, is hard to determine. Studiesof the effect of a company’s social reputationon consumer purchasing preferences or onstock market performance have been inconclu-sive at best. As for the concept of CSR as insur-ance, the connection between the good deedsand consumer attitudes is so indirect as to beimpossible to measure. Having no way toquantify the benefits of these investments putssuch CSR programs on shaky ground, liable tobe dislodged by a change of management or aswing in the business cycle.

All four schools of thought share the sameweakness: They focus on the tension betweenbusiness and society rather than on their inter-dependence. Each creates a generic rationalethat is not tied to the strategy and operationsof any specific company or the places in whichit operates. Consequently, none of them is suf-ficient to help a company identify, prioritize,and address the social issues that matter mostor the ones on which it can make the biggestimpact. The result is oftentimes a hodgepodgeof uncoordinated CSR and philanthropic activ-ities disconnected from the company’s strategythat neither make any meaningful social im-pact nor strengthen the firm’s long-term com-petitiveness. Internally, CSR practices and initi-

atives are often isolated from operating units—and even separated from corporate philan-thropy. Externally, the company’s social impactbecomes diffused among numerous unrelatedefforts, each responding to a different stake-holder group or corporate pressure point.

The consequence of this fragmentation is atremendous lost opportunity. The power ofcorporations to create social benefit is dissi-pated, and so is the potential of companies totake actions that would support both theircommunities and their business goals.

Integrating Business and Society

To advance CSR, we must root it in a broadunderstanding of the interrelationship be-tween a corporation and society while at thesame time anchoring it in the strategies andactivities of specific companies. To say broadlythat business and society need each othermight seem like a cliché, but it is also the basictruth that will pull companies out of the mud-dle that their current corporate-responsibilitythinking has created.

Successful corporations need a healthy soci-ety. Education, health care, and equal opportu-nity are essential to a productive workforce.Safe products and working conditions not onlyattract customers but lower the internal costsof accidents. Efficient utilization of land, water,energy, and other natural resources makesbusiness more productive. Good government,the rule of law, and property rights are essen-tial for efficiency and innovation. Strong regu-latory standards protect both consumers andcompetitive companies from exploitation. Ulti-mately, a healthy society creates expanding de-mand for business, as more human needs aremet and aspirations grow. Any business thatpursues its ends at the expense of the society inwhich it operates will find its success to be illu-sory and ultimately temporary.

At the same time, a healthy society needs suc-cessful companies. No social program can rivalthe business sector when it comes to creating thejobs, wealth, and innovation that improve stan-dards of living and social conditions over time.If governments, NGOs, and other participantsin civil society weaken the ability of business tooperate productively, they may win battles butwill lose the war, as corporate and regionalcompetitiveness fade, wages stagnate, jobs dis-appear, and the wealth that pays taxes and sup-ports nonprofit contributions evaporates.

The prevailing

approaches to CSR are so

disconnected from

business as to obscure

many of the greatest

opportunities for

companies to benefit

society.

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Leaders in both business and civil societyhave focused too much on the friction be-tween them and not enough on the points ofintersection. The mutual dependence of cor-porations and society implies that both busi-ness decisions and social policies must followthe principle of

shared value

. That is, choicesmust benefit both sides. If either a business ora society pursues policies that benefit its in-terests at the expense of the other, it will finditself on a dangerous path. A temporary gainto one will undermine the long-term prosper-ity of both.

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To put these broad principles into practice,a company must integrate a social perspectiveinto the core frameworks it already uses tounderstand competition and guide its busi-ness strategy.

Identifying the points of intersection.

The interdependence between a company andsociety takes two forms. First, a company im-pinges upon society through its operationsin the normal course of business: These are

inside-out linkages

.Virtually every activity in a company’s value

chain touches on the communities in whichthe firm operates, creating either positive ornegative social consequences. (For an exampleof this process, see the exhibit “Looking InsideOut: Mapping the Social Impact of the ValueChain.”) While companies are increasinglyaware of the social impact of their activities(such as hiring practices, emissions, and wastedisposal), these impacts can be more subtleand variable than many managers realize. Forone thing, they depend on location. The samemanufacturing operation will have very differ-

ent social consequences in China than in theUnited States.

A company’s impact on society also changesover time, as social standards evolve and sci-ence progresses. Asbestos, now understood asa serious health risk, was thought to be safe inthe early 1900s, given the scientific knowledgethen available. Evidence of its risks graduallymounted for more than 50 years before anycompany was held liable for the harms it cancause. Many firms that failed to anticipate theconsequences of this evolving body of researchhave been bankrupted by the results. Nolonger can companies be content to monitoronly the obvious social impacts of today. With-out a careful process for identifying evolvingsocial effects of tomorrow, firms may risk theirvery survival.

Not only does corporate activity affect soci-ety, but external social conditions also influ-ence corporations, for better and for worse.These are

outside-in linkages

.Every company operates within a competi-

tive context, which significantly affects itsability to carry out its strategy, especially in thelong run. Social conditions form a key part ofthis context. Competitive context garners farless attention than value chain impacts but canhave far greater strategic importance for bothcompanies and societies. Ensuring the healthof the competitive context benefits both thecompany and the community.

Competitive context can be divided into fourbroad areas: first, the quantity and quality ofavailable business inputs—human resources,for example, or transportation infrastructure;second, the rules and incentives that govern

Prioritizing Social Issues

Social Dimensionsof CompetitiveContextSocial issues in the external environmentthat significantly affectthe underlying drivers of a company’scompetitiveness inthe locations where it operates.

Value ChainSocial Impacts

Social issues thatare significantly affected by acompany’sactivities in theordinary course of business.

Generic SocialIssues

Social issues that are not significantlyaffected by acompany’soperations normaterially affect its long-termcompetitiveness.

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competition—such as policies that protect in-tellectual property, ensure transparency, safe-guard against corruption, and encourage in-vestment; third, the size and sophistication oflocal demand, influenced by such things asstandards for product quality and safety, con-sumer rights, and fairness in government pur-chasing; fourth, the local availability of sup-porting industries, such as service providersand machinery producers. Any and all of theseaspects of context can be opportunities forCSR initiatives. (See the exhibit “Looking Out-side In: Social Influences on Competitiveness.”)The ability to recruit appropriate human re-sources, for example, may depend on a num-ber of social factors that companies can influ-ence, such as the local educational system, theavailability of housing, the existence of dis-crimination (which limits the pool of work-ers), and the adequacy of the public healthinfrastructure.

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Choosing which social issues to address.

No business can solve all of society’s problemsor bear the cost of doing so. Instead, each com-pany must select issues that intersect with itsparticular business. Other social agendas arebest left to those companies in other indus-tries, NGOs, or government institutions thatare better positioned to address them. The es-sential test that should guide CSR is notwhether a cause is worthy but whether it pre-sents an opportunity to create shared value—that is, a meaningful benefit for society that isalso valuable to the business.

Our framework suggests that the social is-sues affecting a company fall into three catego-ries, which distinguish between the manyworthy causes and the narrower set of socialissues that are both important and strategic forthe business.

Generic social issues

may be important to so-ciety but are neither significantly affected bythe company’s operations nor influence thecompany’s long-term competitiveness.

Valuechain social impacts

are those that are signifi-cantly affected by the company’s activities inthe ordinary course of business.

Social dimen-sions of competitive context

are factors in the ex-ternal environment that significantly affect theunderlying drivers of competitiveness in thoseplaces where the company operates. (See theexhibit “Prioritizing Social Issues.”)

Every company will need to sort social issuesinto these three categories for each of its busi-ness units and primary locations, then rankthem in terms of potential impact. Into whichcategory a given social issue falls will vary frombusiness unit to business unit, industry to in-dustry, and place to place.

Supporting a dance company may be a ge-neric social issue for a utility like SouthernCalifornia Edison but an important part ofthe competitive context for a corporation likeAmerican Express, which depends on thehigh-end entertainment, hospitality, and tour-ism cluster. Carbon emissions may be a ge-neric social issue for a financial services firmlike Bank of America, a negative value chain

Generic SocialImpacts

Corporate Involvement in Society: A Strategic Approach

Value ChainSocial Impacts

Good citizenship Mitigate harmfrom value chainactivities

Social Dimensionsof CompetitiveContext

Strategic philanthropythat leverages capa-bilities to improve salient areas of competitive context

Transform value-chain activities tobenefit societywhile reinforcingstrategy

Strategic CSR

Responsive CSR

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impact for a transportation-based companylike UPS, or both a value chain impact and acompetitive context issue for a car manufac-turer like Toyota. The AIDS pandemic in Af-rica may be a generic social issue for a U.S. re-tailer like Home Depot, a value chain impactfor a pharmaceutical company like Glaxo-SmithKline, and a competitive context issuefor a mining company like Anglo Americanthat depends on local labor in Africa for itsoperations.

Even issues that apply widely in the econ-omy, such as diversity in hiring or conserva-tion of energy, can have greater significancefor some industries than for others. Healthcare benefits, for example, will present fewerchallenges for software development or bio-technology firms, where workforces tend tobe small and well compensated, than forcompanies in a field like retailing, which isheavily dependent on large numbers of lower-wage workers.

Within an industry, a given social issue maycut differently for different companies, owingto differences in competitive positioning. Inthe auto industry, for example, Volvo has cho-sen to make safety a central element of its com-petitive positioning, while Toyota has built acompetitive advantage from the environmen-tal benefits of its hybrid technology. For anindividual company, some issues will prove tobe important for many of its business unitsand locations, offering opportunities for strate-gic corporatewide CSR initiatives.

Where a social issue is salient for manycompanies across multiple industries, it canoften be addressed most effectively throughcooperative models. The Extractive IndustriesTransparency Initiative, for example, includes19 major oil, gas, and mining companies thathave agreed to discourage corruption throughfull public disclosure and verification of allcorporate payments to governments in thecountries in which they operate. Collectiveaction by all major corporations in these in-dustries prevents corrupt governments fromundermining social benefit by simply choos-ing not to deal with the firms that disclosetheir payments.

Creating a corporate social agenda.

Categorizing and ranking social issues is justthe means to an end, which is to create an ex-plicit and affirmative corporate social agenda.A corporate social agenda looks beyond com-

munity expectations to opportunities to achievesocial and economic benefits simultaneously.It moves from mitigating harm to finding waysto reinforce corporate strategy by advancingsocial conditions.

Such a social agenda must be responsive tostakeholders, but it cannot stop there. A sub-stantial portion of corporate resources and at-tention must migrate to truly strategic CSR.(See the exhibit “Corporate Involvement inSociety: A Strategic Approach.”) It is throughstrategic CSR that the company will make themost significant social impact and reap thegreatest business benefits.

Responsive CSR.

Responsive CSR comprisestwo elements: acting as a good corporate citi-zen, attuned to the evolving social concerns ofstakeholders, and mitigating existing or antici-pated adverse effects from business activities.

Good citizenship is a sine qua non of CSR,and companies need to do it well. Many wor-thy local organizations rely on corporate con-tributions, while employees derive justifiablepride from their company’s positive involve-ment in the community.

The best corporate citizenship initiatives in-volve far more than writing a check: They spec-ify clear, measurable goals and track resultsover time. A good example is GE’s program toadopt underperforming public high schoolsnear several of its major U.S. facilities. Thecompany contributes between $250,000 and$1 million over a five-year period to eachschool and makes in-kind donations as well.GE managers and employees take an activerole by working with school administratorsto assess needs and mentor or tutor students.In an independent study of ten schools in theprogram between 1989 and 1999, nearly allshowed significant improvement, while thegraduation rate in four of the five worst-performing schools doubled from an averageof 30% to 60%.

Effective corporate citizenship initiativessuch as this one create goodwill and improverelations with local governments and other im-portant constituencies. What’s more, GE’s em-ployees feel great pride in their participation.Their effect is inherently limited, however.No matter how beneficial the program is, it re-mains incidental to the company’s business,and the direct effect on GE’s recruiting and re-tention is modest.

The second part of responsive CSR—

The vehemence of a

stakeholder group does

not necessarily signify the

importance of an issue—

either to the company or

to the world.

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mitigating the harm arising from a firm’s valuechain activities—is essentially an operationalchallenge. Because there are a myriad of possi-ble value chain impacts for each business unit,many companies have adopted a checklist ap-proach to CSR, using standardized sets of so-cial and environmental risks. The Global Re-porting Initiative, which is rapidly becoming astandard for CSR reporting, has enumerated alist of 141 CSR issues, supplemented by auxil-iary lists for different industries.

These lists make for an excellent startingpoint, but companies need a more proactiveand tailored internal process. Managers ateach business unit can use the value chain as atool to identify systematically the social im-pacts of the unit’s activities in each location.Here operating management, which is closestto the work actually being done, is particularlyhelpful. Most challenging is to anticipate im-pacts that are not yet well recognized. Con-sider B&Q, an international chain of homesupply centers based in England. The companyhas begun to analyze systematically tens ofthousands of products in its hundreds of storesagainst a list of a dozen social issues—from cli-mate change to working conditions at its sup-pliers’ factories—to determine which productspose potential social responsibility risks andhow the company might take action beforeany external pressure is brought to bear.

For most value chain impacts, there is noneed to reinvent the wheel. The companyshould identify best practices for dealing witheach one, with an eye toward how those prac-tices are changing. Some companies will bemore proactive and effective in mitigating thewide array of social problems that the valuechain can create. These companies will gain anedge, but—just as for procurement and otheroperational improvements—any advantage islikely to be temporary.

Strategic CSR.

For any company, strategymust go beyond best practices. It is aboutchoosing a unique position—doing things dif-ferently from competitors in a way that lowerscosts or better serves a particular set of cus-tomer needs. These principles apply to a com-pany’s relationship to society as readily as toits relationship to its customers and rivals.

Strategic CSR moves beyond good corporatecitizenship and mitigating harmful value chainimpacts to mount a small number of initiativeswhose social and business benefits are large

and distinctive. Strategic CSR involves bothinside-out and outside-in dimensions workingin tandem. It is here that the opportunities forshared value truly lie.

Many opportunities to pioneer innovationsto benefit both society and a company’s owncompetitiveness can arise in the product offer-ing and the value chain. Toyota’s response to con-cerns over automobile emissions is an example.Toyota’s Prius, the hybrid electric/gasoline ve-hicle, is the first in a series of innovative car mod-els that have produced competitive advantageand environmental benefits. Hybrid enginesemit as little as 10% of the harmful pollutantsconventional vehicles produce while consum-ing only half as much gas. Voted 2004 Car ofthe Year by

Motor Trend

magazine, Prius hasgiven Toyota a lead so substantial that Ford andother car companies are licensing the technol-ogy. Toyota has created a unique position withcustomers and is well on its way to establishingits technology as the world standard.

Urbi, a Mexican construction company, hasprospered by building housing for disadvan-taged buyers using novel financing vehicles suchas flexible mortgage payments made throughpayroll deductions. Crédit Agricole, France’slargest bank, has differentiated itself by offer-ing specialized financial products related tothe environment, such as financing packagesfor energy-saving home improvements and foraudits to certify farms as organic.

Strategic CSR also unlocks shared value byinvesting in social aspects of context thatstrengthen company competitiveness. A symbi-otic relationship develops: The success of thecompany and the success of the community be-come mutually reinforcing. Typically, the moreclosely tied a social issue is to the company’sbusiness, the greater the opportunity to lever-age the firm’s resources and capabilities, andbenefit society.

Microsoft’s Working Connections partner-ship with the American Association of Commu-nity Colleges (AACC) is a good example of ashared-value opportunity arising from invest-ments in context. The shortage of informationtechnology workers is a significant constrainton Microsoft’s growth; currently, there aremore than 450,000 unfilled IT positions in theUnited States alone. Community colleges, withan enrollment of 11.6 million students, repre-senting 45% of all U.S. undergraduates, couldbe a major solution. Microsoft recognizes, how-

An affirmative corporate

social agenda moves

from mitigating harm to

reinforcing corporate

strategy through social

progress.

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ever, that community colleges face special chal-lenges: IT curricula are not standardized, tech-nology used in classrooms is often outdated,and there are no systematic professional devel-opment programs to keep faculty up to date.

Microsoft’s $50 million five-year initiativewas aimed at all three problems. In addition tocontributing money and products, Microsoftsent employee volunteers to colleges to assessneeds, contribute to curriculum development,and create faculty development institutes.Note that in this case, volunteers and assignedstaff were able to use their core professionalskills to address a social need, a far cry fromtypical volunteer programs. Microsoft hasachieved results that have benefited manycommunities while having a direct—and po-tentially significant—impact on the company.

Integrating inside-out and outside-in prac-tices.

Pioneering value chain innovations and

addressing social constraints to competitive-ness are each powerful tools for creating eco-nomic and social value. However, as our exam-ples illustrate, the impact is even greater ifthey work together. Activities in the valuechain can be performed in ways that reinforceimprovements in the social dimensions of con-text. At the same time, investments in compet-itive context have the potential to reduce con-straints on a company’s value chain activities.Marriott, for example, provides 180 hours ofpaid classroom and on-the-job training tochronically unemployed job candidates. Thecompany has combined this with support forlocal community service organizations, whichidentify, screen, and refer the candidates toMarriott. The net result is both a major bene-fit to communities and a reduction in Marri-ott’s cost of recruiting entry-level employees.Ninety percent of those in the training pro-

Integrating Company Practice and Context: Nestlé’s Milk District

Nestlé’s approach to working with small farmers exemplifies the symbiotic relation-ship between social progress and competitive advantage. Ironically, while the company’s reputation remains marred by a 30-year-old controversy surrounding sales of infant for-mula in Africa, the corporation’s impact in developing countries has often been pro-foundly positive.

Consider the history of Nestlé’s milk busi-ness in India. In 1962, the company wanted to enter the Indian market, and it received gov-ernment permission to build a dairy in the northern district of Moga. Poverty in the re-gion was severe; people were without elec-tricity, transportation, telephones, or medical care. A farmer typically owned less than five acres of poorly irrigated and infertile soil. Many kept a single buffalo cow that produced just enough milk for their own consumption. Sixty percent of calves died newborn. Because farmers lacked refrigeration, transportation, or any way to test for quality, milk could not travel far and was frequently contaminated or diluted.

Nestlé came to Moga to build a business, not to engage in CSR. But Nestlé’s value chain, derived from the company’s origins in Switzerland, depended on establishing local sources of milk from a large, diversified base

of small farmers. Establishing that value chain in Moga required Nestlé to transform the competitive context in ways that created tre-mendous shared value for both the company and the region.

Nestlé built refrigerated dairies as collec-tion points for milk in each town and sent its trucks out to the dairies to collect the milk. With the trucks went veterinarians, nutrition-ists, agronomists, and quality assurance ex-perts. Medicines and nutritional supplements were provided for sick animals, and monthly training sessions were held for local farmers. Farmers learned that the milk quality de-pended on the cows’ diet, which in turn de-pended on adequate feed crop irrigation. With financing and technical assistance from Nestlé, farmers began to dig previously unaf-fordable deep-bore wells. Improved irrigation not only fed cows but increased crop yields, producing surplus wheat and rice and raising the standard of living.

When Nestlé’s milk factory first opened, only 180 local farmers supplied milk. Today, Nestlé buys milk from more than 75,000 farm-ers in the region, collecting it twice daily from more than 650 village dairies. The death rate of calves has dropped by 75%. Milk production has increased 50-fold. As the quality has im-proved, Nestlé has been able to pay higher

prices to farmers than those set by the govern-ment, and its steady biweekly payments have enabled farmers to obtain credit. Competing dairies and milk factories have opened, and an industry cluster is beginning to develop.

Today, Moga has a significantly higher stan-dard of living than other regions in the vicin-ity. Ninety percent of the homes have electric-ity, and most have telephones; all villages have primary schools, and many have second-ary schools. Moga has five times the number of doctors as neighboring regions. The in-creased purchasing power of local farmers has also greatly expanded the market for Nestlé’s products, further supporting the firm’s eco-nomic success.

Nestlé’s commitment to working with small farmers is central to its strategy. It enables the company to obtain a stable supply of high-quality commodities without paying middle-men. The corporation’s other core products—coffee and cocoa—are often grown by small farmers in developing countries under similar conditions. Nestlé’s experience in setting up collection points, training farmers, and intro-ducing better technology in Moga has been repeated in Brazil, Thailand, and a dozen other countries, including, most recently, China. In each case, as Nestlé has prospered, so has the community.

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gram take jobs with Marriott. One year later,more than 65% are still in their jobs, a substan-tially higher retention rate than the norm.

When value chain practices and investmentsin competitive context are fully integrated,CSR becomes hard to distinguish from the day-to-day business of the company. Nestlé, for ex-ample, works directly with small farmers indeveloping countries to source the basic com-modities, such as milk, coffee, and cocoa, onwhich much of its global business depends.(See the sidebar “Integrating Company Prac-tice and Context: Nestlé’s Milk District.”) Thecompany’s investment in local infrastructureand its transfer of world-class knowledge andtechnology over decades has produced enor-mous social benefits through improved healthcare, better education, and economic develop-ment, while giving Nestlé direct and reliableaccess to the commodities it needs to maintaina profitable global business. Nestlé’s distinctivestrategy is inseparable from its social impact.

Creating a social dimension to the valueproposition.

At the heart of any strategy is aunique value proposition: a set of needs acompany can meet for its chosen customersthat others cannot. The most strategic CSR oc-curs when a company adds a social dimensionto its value proposition, making social impactintegral to the overall strategy.

Consider Whole Foods Market, whose valueproposition is to sell organic, natural, andhealthy food products to customers who arepassionate about food and the environment.Social issues are fundamental to what makesWhole Foods unique in food retailing and toits ability to command premium prices. Thecompany’s sourcing emphasizes purchasesfrom local farmers through each store’s pro-curement process. Buyers screen out foodscontaining any of nearly 100 common ingredi-ents that the company considers unhealthy orenvironmentally damaging. The same stan-dards apply to products made internally. WholeFoods’ baked goods, for example, use only un-bleached and unbromated flour.

Whole Foods’ commitment to natural andenvironmentally friendly operating practicesextends well beyond sourcing. Stores are con-structed using a minimum of virgin raw mate-rials. Recently, the company purchased renew-able wind energy credits equal to 100% of itselectricity use in all of its stores and facilities,the only

Fortune

500 company to offset its elec-

tricity consumption entirely. Spoiled produceand biodegradable waste are trucked to re-gional centers for composting. Whole Foods’vehicles are being converted to run on biofu-els. Even the cleaning products used in its storesare environmentally friendly. And through itsphilanthropy, the company has created the An-imal Compassion Foundation to develop morenatural and humane ways of raising farm ani-mals. In short, nearly every aspect of the com-pany’s value chain reinforces the social dimen-sions of its value proposition, distinguishingWhole Foods from its competitors.

Not every company can build its entirevalue proposition around social issues as WholeFoods does, but adding a social dimension tothe value proposition offers a new frontier incompetitive positioning. Government regula-tion, exposure to criticism and liability, andconsumers’ attention to social issues are allpersistently increasing. As a result, the num-ber of industries and companies whose com-petitive advantage can involve social valuepropositions is constantly growing. Sysco, forexample, the largest distributor of food prod-ucts to restaurants and institutions in NorthAmerica, has begun an initiative to preservesmall, family-owned farms and offer locallygrown produce to its customers as a source ofcompetitive differentiation. Even large globalmultinationals—such as General Electric, withits “ecomagination” initiative that focuses ondeveloping water purification technology andother “green” businesses, and Unilever, throughits efforts to pioneer new products, packag-ing, and distribution systems to meet theneeds of the poorest populations—have de-cided that major business opportunities lie inintegrating business and society.

Organizing for CSR

Integrating business and social needs takesmore than good intentions and strong leader-ship. It requires adjustments in organization,reporting relationships, and incentives. Fewcompanies have engaged operating manage-ment in processes that identify and prioritizesocial issues based on their salience to businessoperations and their importance to the com-pany’s competitive context. Even fewer haveunified their philanthropy with the manage-ment of their CSR efforts, much less sought toembed a social dimension into their core valueproposition. Doing these things requires a far

Typically the more closely

tied a social issue is to a

company’s business, the

greater the opportunity

to leverage the firm’s

resources—and benefit

society.

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different approach to both CSR and philan-thropy than the one prevalent today. Compa-nies must shift from a fragmented, defensiveposture to an integrated, affirmative approach.The focus must move away from an emphasison image to an emphasis on substance.

The current preoccupation with measuringstakeholder satisfaction has it backwards. Whatneeds to be measured is social impact. Operat-ing managers must understand the importanceof the outside-in influence of competitive con-text, while people with responsibility for CSRinitiatives must have a granular understandingof every activity in the value chain. Valuechain and competitive-context investments inCSR need to be incorporated into the perfor-mance measures of managers with P&L re-sponsibility. These transformations require morethan a broadening of job definition; they re-quire overcoming a number of long-standingprejudices. Many operating managers have de-veloped an ingrained us-versus-them mind-set that responds defensively to the discussionof any social issue, just as many NGOs viewaskance the pursuit of social value for profit.These attitudes must change if companieswant to leverage the social dimension of corpo-rate strategy.

Strategy is always about making choices,and success in corporate social responsibility isno different. It is about choosing which socialissues to focus on. The short-term performancepressures companies face rule out indiscrimi-nate investments in social value creation. Theysuggest, instead, that creating shared valueshould be viewed like research and develop-ment, as a long-term investment in a company’sfuture competitiveness. The billions of dollarsalready being spent on CSR and corporate phi-lanthropy would generate far more benefit toboth business and society if consistently in-vested using the principles we have outlined.

While responsive CSR depends on being agood corporate citizen and addressing everysocial harm the business creates, strategic CSRis far more selective. Companies are called onto address hundreds of social issues, but only afew represent opportunities to make a real dif-ference to society or to confer a competitiveadvantage. Organizations that make the rightchoices and build focused, proactive, and inte-grated social initiatives in concert with theircore strategies will increasingly distance them-selves from the pack.

The Moral Purpose of Business

By providing jobs, investing capital, purchas-ing goods, and doing business every day, cor-porations have a profound and positive influ-ence on society. The most important thing acorporation can do for society, and for anycommunity, is contribute to a prosperouseconomy. Governments and NGOs often for-get this basic truth. When developing coun-tries distort rules and incentives for business,for example, they penalize productive compa-nies. Such countries are doomed to poverty,low wages, and selling off their natural re-sources. Corporations have the know-how andresources to change this state of affairs, notonly in the developing world but also in eco-nomically disadvantaged communities in ad-vanced economies.

This cannot excuse businesses that seekshort-term profits deceptively or shirk the so-cial and environmental consequences of theiractions. But CSR should not be only aboutwhat businesses have done that is wrong—important as that is. Nor should it be onlyabout making philanthropic contributions tolocal charities, lending a hand in time of disas-ter, or providing relief to society’s needy—worthy though these contributions may be. Ef-forts to find shared value in operating practicesand in the social dimensions of competitivecontext have the potential not only to fostereconomic and social development but tochange the way companies and society thinkabout each other. NGOs, governments, andcompanies must stop thinking in terms of “cor-porate social responsibility” and start thinkingin terms of “corporate social integration.”

Perceiving social responsibility as buildingshared value rather than as damage control oras a PR campaign will require dramatically dif-ferent thinking in business. We are convinced,however, that CSR will become increasinglyimportant to competitive success.

Corporations are not responsible for allthe world’s problems, nor do they have theresources to solve them all. Each companycan identify the particular set of societalproblems that it is best equipped to help re-solve and from which it can gain the greatestcompetitive benefit. Addressing social issuesby creating shared value will lead to self-sustaining solutions that do not depend onprivate or government subsidies. When awell-run business applies its vast resources,

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expertise, and management talent to prob-lems that it understands and in which it has astake, it can have a greater impact on socialgood than any other institution or philan-thropic organization.

1. An early discussion of the idea of CSR as an opportunityrather than a cost can be found in David Grayson andAdrian Hodges,

Corporate Social Opportunity

(Greenleaf,2004).2. For a more complete discussion of the importance ofcompetitive context and the diamond model, see MichaelE. Porter and Mark R. Kramer, “The Competitive Advan-

tage of Corporate Philanthropy,” HBR December 2002.See also Michael Porter’s book

The Competitive Advantageof Nations

(The Free Press, 1990) and his article “Locations,Clusters, and Company Strategy,” in

The Oxford Handbookof Economic Geography

,

edited by Gordon L. Clark, Mary-ann P. Feldman, and Meric S. Gertler (Oxford UniversityPress, 2000).

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page 16

Further ReadingA R T I C L EDisruptive Innovation for Social Changeby Clayton M. Christensen, Heiner Baumann,Rudy Ruggles, and Thomas M. SadtlerHarvard Business ReviewDecember 2006Product no. R0612E

One of the best ways to gain competitive ad-vantage while serving society is to identify and invest in disruptive innovations in the so-cial sector. These innovations take the form of low-cost and simple—but useful—services for people whom traditional social sector or-ganizations ignore. Consider MinuteClinics, lo-cated in stores such as CVS: nurse practitio-ners, armed with software-based protocols, provide fast, affordable walk-in diagnosis and treatment for common health problems. Less expensive for uninsured people than physi-cian office visits—and convenient for the insured—MinuteClinics have a 99% customer satisfaction level.

Disruptive innovations that drive real social change crop up in other arenas besides health care—including education and economic de-velopment. For example, Apex Learning pro-vides special online classes (for instance, in certain languages) to tens of thousands of U.S. high school students. This innovation enables school systems to offer good-enough courses at a fraction of what live courses cost and ex-pands students’ options. As education bud-gets are squeezed and online learning alterna-tives improve, organizations like Apex may well become the de facto educators for many subjects, particularly noncore classes.

And in economic development, Bangladesh’s Grameen Bank makes small loans to latent en-trepreneurs who otherwise have little or no access to capital. By the end of 2005, it had 4.6 million borrowers. Since its inception in 1976, it has lent over $5.2 billion, with a 99% recov-ery rate. And it has generated a profit for its owners in every year but three.


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