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Strategy talk: What’s the link between strategy and “doing good”?

How to find the best way for your business to have a positive social impact.

Dear Ken,

My view on the social responsibility of companies was heavily influenced by Milton Friedman, who insisted that the business of business is to make a profit while obeying the law. But it seems like hardly anyone agrees with him anymore, if they ever did. What’s the right way to think about “doing good” when working with my team on our strategy?

—Seeking Social Responsibility

Dear Seeking,

Yes, in Milton Friedman’s 1962 book, Capitalism and Freedom, the Nobel Laureate economist declared, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits.” But in a recent Fortune poll, only 5 percent of CEOs agreed with the following statement: “I believe my company should mainly focus on making profits, and not be distracted by social goals.” So, you’re right — it seems that few business leaders agree with Friedman’s dictum.

In fact, in that same poll, more than half of the respondent CEOs see charitable activities to address social problems as part of their companies’ responsibility. Another 44 percent went even further by agreeing that their companies should actively seek to solve major social problems as part of their strategy. These are three very different views on the link between strategy and “doing good,” so there’s a lot to unpack in order to develop your own view.

Here’s my recommendation. First, remember that in genuinely competitive product and labor markets, customers and employees have real choices. In such markets, businesses can do well only by having good strategies. This means having: a) a sharply defined target customer; b) products and services with value propositions that compel customers to willingly — if not enthusiastically — part with their hard-earned money; and c) leading capabilities to market, sell, and deliver the businesses’ value propositions. There’s no getting away from these essential choices that every strategy must comprise.

To be sure, socially irresponsible companies are unsustainable enterprises: Sooner or later, the cost of bad press, social media attacks, customer or employee boycotts, government interventions, and other factors will become too high to bear. But socially responsible companies with bad strategies are unsustainable, too: Eventually, the cost of misallocating their resources and disappointing their customers or shareholders, or both, will bring them down.

Socially responsible companies with bad strategies are unsustainable: Eventually, the cost of misallocating their resources and disappointing their customers or shareholders, or both, will bring them down.

Next, you should recognize that businesses do a lot of good when they do well. Successful businesses can offer attractive jobs, provide more than just a living wage, pay taxes that support governments and their programs, fund retirement savings, generate capital for investing in the real economy, and create wealth for the philanthropically minded. These are fantastic social goods. Even if leaders don’t explicitly seek to produce such goods, they do just that by having strategies that enable their companies to do well. This is what Milton Friedman meant. He knew that sustaining profitable growth in competitive markets is not easy. It can only be achieved by serving customers well, being a good employer, innovating, investing for the long term, and acting responsibly. And he argued that it’s the responsibility of government representatives — and the people who elect them — to set the guardrails for businesses, ensure they have level playing fields, help people who are left behind, and steer all members of society (citizens, companies, charities, churches, and global and local institutions) to work together on solving the world’s problems, social and otherwise.

Third, consider the example of leaders who are showing that doing good can also be a path to doing well, not just a result of it. Fair Harbor offers swimsuits made out of recycled plastic bottles, Warby Parker donates a free pair of glasses for every purchase of its products, and the beer company Patagonia (no tie to the outdoor clothing company) plants a tree for every case of cerveza it sells. At Dave’s Killer Bread, based in Milwaukie, Ore., one-third of the employees — along with co-owner Dave Dahl — have a criminal background. As the packaging on every one of the company’s products puts it, “We have witnessed first-hand how stable employment sparks personal transformation.”

The value propositions from these companies offer an important benefit to their target customers: supporting a social cause when you buy their products. This is doing well by doing good. And it’s an effective way to make a value proposition stand out, particularly for everyday goods.

Finally, know that other companies are taking another path to doing good. For example, IBM has a program called P-Tech to train disadvantaged youth for technology jobs; Microsoft funds efforts to combat housing issues in its local communities; and Kind, a maker of snack bars, sponsors the Kind Movement with the objective of creating a community of people who choose kindness and make it a state of mind. This is doing good with the spoils these companies gain from doing well. And it’s a good strategy if it brings more people into their circle of target customers, enhances their value propositions, or somehow fortifies the capabilities that make them better at marketing, selling, or delivering these value propositions.

Distilling all of this, there are two questions you and your team should consider:

  • Should we tie the purchase of our products and services directly to support for a particular social cause?
  • Should we use our profits to support a specific social cause because by doing so we will broaden our customer base, differentiate (or further distinguish) our value proposition, or strengthen (or further fortify) our leading capabilities in some material way?

Answering “no” to these questions doesn’t make you a bad person or your business an evil enterprise. It simply puts you in the Friedman camp of doing good by doing well.

However, answering “no” when you could answer “yes” is forgoing an opportunity to do well by doing good in ways that elevate your strategy or improve your ability to succeed with it. That would be both commercially and socially irresponsible.

Ken Favaro

Ken Favaro is a contributing editor of strategy+business and the lead principal of act2, which provides independent counsel to executive leaders, teams, and boards.

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