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Corporate Social Responsibility - Unit 4

By CharlotteWain May 15, 2013 2880 Words
Corporate social responsibility is the continuing commitment by a firm to act ethically and take responsibility for the company’s actions on the environment and the local community. Social auditing is the process of evaluating a firm’s various operating procedures, codes of conduct, and other factors to determine its effect on society.

There are many benefits of CSR to a business. Firstly, a company may become more trusted by the public if they are seen to be helping the environment and operating in a way that benefits the community. One such business, which operates like this, is The Body Shop. Anita Roddick, who was strongly against vivisection, set up a business doing something that she liked. Quickly, The Body Shop exhibiting increasing popularity, due to the amount of environmental awareness that has evolved throughout the world. As such, The Body Shop has seen a £66.6million operating profit in the last quarter of 2012, which is up 9.1% on that of the year before. This just goes to show that, if a business operates ethically, then it could attract more and more appeal from consumers, which therefore generates more revenue for the firm, as well as the fact that, the increased demand may mean that the organisation could gain Economies of Scale – where unit costs decrease as the business grows larger- this may mean that higher profit margins can be made. Another business which became more trusted by focusing on CSR is Innocent Smoothies. Innocent Smoothies are sold in a variety of flavours, and each bottle contains 2 of the ‘5 a day’ allowance, meaning that they are healthy. Innocent Smoothies first began to be sold at festivals, however, when Reed, Balon and Wright began to notice the demand for the product (and on public vote), they created the Innocent Brand. Innocent Smoothies saw an increase in turnover by 25.4% to £162.7million during the last period of 2011, while selling over 25 million units. As such, this has given Innocent Smoothies more profit in order to invest into other things, as well as into The Innocent Funds, in which 10% of profits go. As such, consumer confidence in the Innocent Brand has increased, which has been seen in the considerable increase in both revenue and the amount of units that were sold. This therefore enables Innocent Smoothies to become more of a reputable brand, and continue to grow in both volume and value in the future. Ethics are the moral principles that govern an organisation’s behaviour. By engaging in ethical behaviour, it means that a business could gain a better reputation in the long run, which therefore means that sales should increase, resulting in increased sales revenue and a potential increase in profits. One example of an organisation, which acts ethically, is Fair Trade; who provide goods to consumers, where the producers have been paid a fair wage. Due to the ethically sound brand name, Fair Trade is able to charge premium prices for their products, which meant that, along with the fact that the rate of sales increased by 80% from 2009 to 2010, the total revenue earned by Fair Trade in 2010 was £490 million, which increased from £273 million in 2009. Due to the dramatic increase in revenue, this has enable Fair Trade to put more money into the Fair Trade Foundation, which therefore means that, in the future, more people may be attracting to the ‘farmer friendly’ brand, further increasing both profits, revenue and the already sound brand name. However, there are instances where businesses where the ethical behaviour of a business goes wrong. In these instances, reputation is damaged quickly, which leads to a decrease in consumer trust, which results in a decrease in revenue, and therefore profits, as well as the task of getting the business back to where it was before everything went wrong. One such business is Starbucks. For year, Starbucks had been renowned for being an ethically sound business, however, in 2012; it was found out that Starbucks had been part of a Tax Avoidance scandal; having paid only £8.6 million in corporation tax over 14 years of trading, which dramatically impacted the company. Consumers lost confidence in the brand, which then led Starbucks to promise to ‘repay a significant amount of tax in 2013 and 2014, regardless of whether the company is profitable or not’. As such, this will make the cash flow of Starbucks significantly worse, as well as decreasing the value of the business. However, this is what has to happen in order for consumers to regain trust in the brand and start to buy their products at the rate that they did previously. Therefore, in the short run, it will cost Starbucks a lot of money, which could make them less attractive to investors – although, in the long run, their brand name and reputation will hopefully be restored, and the sales volume and value of the business will increase, as well as the profits, which can then be spent on things such as expansion or new product lines, in order to entice more consumers and gain more revenue in the very long run. Another business, for which ethics have been the cause of problems, is Tesco. Tesco currently hold around 30% market share within the supermarket industry of the UK. In 2012, Tesco made revenue of £42,798 million, with an operating profit of £3,985 million (a margin of 6.1%). However, in early 2013, Tesco began to sell Beef products, which contained horsemeat. This discouraged consumers profusely, who went to rival supermarkets for their meat products. This therefore had a detrimental effect on their revenue, which decreased by 14.5% from 2012 to 2013 due to the horsemeat being sold. This has therefore had a dramatic effect on post-tax profits, which have decreased by 95.7% from the same time last year to just £120 million. Meanwhile, although Tesco’s market share has been eroded by competition, it is still far ahead, with around 30%, while the next closest rival has only 16.7%; allowing for error. As well as the horsemeat scandal, Tesco’s has been criticised for bullying their suppliers, which contributed considerably to the decrease in both revenue and post-tax profit. The reputation of Tesco has quickly begun to disintegrate, and as such, this means that the next couple of years could see further decreases in revenue and profits; as well as market share, which therefore means that competitors could overtake the supermarket giant, should things not be rectified quickly.

There are also negatives of CSR. Firstly, building up the reputation of being socially responsible takes time, which therefore means that there is a significant time lag before benefits are seen within the company. As such, increases in revenues and profits may not be seen until consumers have noticed that a company is taking responsibility for its effects on the environment and the local community. As such, there may be a period of time where revenue stays constant before an increase, which could discourage people within the organisation, as well as potential investors, due to the fact that it may be seen that the CSR is not having the desired effect. One business that faced this is Innocent Smoothies. Innocent vowed to reduce landfills and increase recycling in order to gain more ‘followers’ who cared about the environment. This took a long period of time to do, as well as costing Innocent a lot of money to put the whole strategy into place. However, in the long run, it would be beneficial to Innocent due to the fact that it would increase the amount of appeal that consumers have in the brand, which therefore increased the revenue value, as well as the profit margins. Corporate Social Responsibility also costs money. BP found this out, when the large oil spillage occurred. The reputation of the business quickly declined, as well as their public image, which then led to the strategic use of PR in order to try to rectify the situation with consumers, and encourage them to continue to buy BP’s fuel and products in order to stop the revenue value from declining due to the spillage. As such, BP have agreed to pay $340 million for the restoration of the Mexican Gulf, where the spillage took place, in a bid to show consumers around the globe that they are being ethical and helping the community in which their accident caused catastrophe. This therefore makes the cash flow of BP look worse in the short run, with hopes that it will improve the situation in the long run; which could see revenues increasing. However, the large expenditure for the restoration will mean that the balance sheet of the business shows BP to be worth less; potentially being detrimental for the chances of BP to gain investment within the next couple of years while the payment is ongoing, meaning that not as much capital can be raised by way of people buying shares; which means that BP rely on revenue streams more.

Social auditing can be used within businesses to ensure that the right amount of social responsibility is being done. This therefore means that the business could gain a competitive advantage over their competition, which then means that the revenue of that organisation would increase due to the increase in consumer interest for their products rather than those of rivals. This would result in an increase in profits, and, in the long run, an increase in market share, which would confirm the competitive edge that that business has. As such, the business may then be able to complete more things that would benefit society, which would therefore increase the reputation of the firm within consumers even more, and better the profitability of the business. As well as this, by using social auditing, it shows the overall success rate of a business to the stakeholders. This therefore means that more investors may be attracted to buy shares in the business should it be shown that they are acting in a responsible manner, which in turn will increase the amount of capital that is raised, which can then be used on other things such as expansion, or more CSR for the future, in order to further better the brand. Not only this, but social auditing shows how much CSR is being used by a company to its managers and directors. This therefore provides a clear overview of the position of the business, which empowers management to decide what to do about the situation, should it happen that not enough CSR is being utilised, which therefore means that the management can decide on what to do based on the aims and objectives of the business; however, they would still need to think about the benefits of CSR to their business, and weigh them up with the negatives. However, it depends on the current position of the business and the current profitability. If the business is already doing well with both revenue figures and profit margins, then the management may not feel that they need to invest in more CSR due to the fact that the business is already performing soundly, and as such, they may choose to keep the business at the current profitability, instead of spending money on it and therefore worsening the cash flow of the organisation in the short run. As well as this, some business’ current position may show that they are unable to finance CSR. As such, it may be prudent for those businesses to concentrate on bettering their financial position before thinking about investment in CSR. However, some may say that, investment into CSR and therefore the temporary worsening of the cash flow for these businesses would help to increase the financial position in the long term; although it depends on the other aims and objectives that the business has.

Some businesses choose to increase profitability – the ability of a firm to make a profit- rather than using Corporate Social Responsibility. By doing this, the firm focuses on maximising profits, which can then be spent on things such as expansion, new product development or marketing, which would be especially prudent in the case of McDonalds and Nike. This therefore means that the business can gain increased revenues in different streams, rather than investing in CSR. It depends on the nature of the business; if they are a major retailer, then they may just focus on the products that they sell, and the quality of these products, which enables them to charge premium prices, and therefore gain high revenue. As well as this, major retailers may be able to gain purchasing or technical Economies of Scale, which therefore mean that their expenditure is lowered, increasing the ability to make large profit margins on all of their products. This therefore makes the cash flow and the balance sheet of the business look better, which may encourage and entice investors to put their money into the business, which could increase the capital inflows, and this could then be spent on new strategies to put the business in a competitive position and help to increase the awareness of the brand. Not only this, but, if the business is an Ltd or a PLC, then the shareholders of the business may demand dividends to be paid. If the business is spending on CSR, then they will have less money to pay out as dividends at the end of the financial year, which may not please shareholders, who may then sell their shares, which will potentially put the business in a worse position as future investors may not buy their shares, which could give them a bad reputation. However, if the business focuses on profitability, then the shareholders can gain a large dividend at the end of the financial year, which will keep them happy, and therefore they may buy more shares if they see that the financial performance and success of the business is increasing over a number of years. Not only this, but, in the long term, if a business focuses on increasing its profitability, then this means that, not only will they have gained a good brand image and recognition by this point, but, they would then have enough retained profits to spend on CSR in the very long term, which would further increase their brand image – enabling them to gain even higher revenue and profit figures. This therefore means that they may be able to then charge premium prices – or higher prices than before – which would mean that, due to the increase in consumers due to the investment in CSR, revenues would further increase, meaning that more spending on CSR could then be done in the long run from that point.

To conclude, it is beneficial for a company to spend on CSR due to the fact that it could potentially increase their brand name in the long run, which will also increase the amount of consumers that buy their products. As such, revenue would increase, and a competitive edge could be made; meaning that market share may increase, which carries benefits in itself, such as Economies of Scale, as well as marketing in other methods, such as word of mouth. However, it depends on external factors as well. If the economy is not doing too well, such as the 2008 recession, then this may discourage businesses from investing in CSR due to the fact that consumers have little disposable income, which therefore means that spending on CSR may boost their brand name, but it would do little to increase revenue due to the fact that externally, people are only spending on necessities. As well as this, it depends on the market structure. For example, the supermarket industry, which is an oligopoly, may not spend on CSR due to the fact that people need to buy products from them anyway, and, there are only a few dominant firms, who may decide to work together in collusion, which would mean that any investment in CSR would be ‘pointless’ to them. Also talking about the supermarket industry, Tesco may not see it necessary to spend on CSR due to the fact that they own 30% of the market share, which is a legal monopoly, and, their closest rival has 13.3% less market share than them, meaning that they are able to get away with continuing to trade as they are currently. Not only this, but, especially in the case of McDonalds, which could be considered to have negative externalities, it is probably necessary to show the public that the business is behaving in an ethical manner in order to gain more consumers – despite the fact that it is a large and reputable brand already. However, I also feel that, for some businesses, especially smaller businesses, or businesses in which there is a legal or natural monopoly, increasing profitability would be better than CSR due to the fact that there is little competition to overtake them should they not invest; although in normal businesses, it depends on the other aims and objectives of the business for that financial year, as there could already be expansions being planned, which would therefore mean that this objective conflicts with spending money on CSR.

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