The Competitive Advantage of Corporate Philanthropy

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The Competitive Advantage of Corporate Philanthropy

by Michael E. Porter and Mark R. Kramer

Most companies feel

compelled to give to charity.

Few have figured out how to

do it well.

Reprint R0212DThis article is made available with compliments of FSG Social Impact. Further posting, copying or distributing is

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by Michael E. Porter and Mark R. Kramer

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Most companies feel compelled to give to charity. Few have figured out

how to do it well.

Corporate philanthropy is in decline. Charita-ble contributions by U.S. companies fell 14.5%in real dollars last year, and over the last 15years, corporate giving as a percentage of prof-its has dropped by 50%. The reasons are nothard to understand. Executives increasinglysee themselves in a no-win situation, caughtbetween critics demanding ever higher levelsof “corporate social responsibility” and inves-tors applying relentless pressure to maximizeshort-term profits. Giving more does not satisfythe critics—the more companies donate, themore is expected of them. And executives findit hard, if not impossible, to justify charitableexpenditures in terms of bottom-line benefit.

This dilemma has led many companies toseek to be more strategic in their philanthropy.But what passes for “strategic philanthropy”today is almost never truly strategic, and oftenit isn’t even particularly effective as philan-thropy. Increasingly, philanthropy is used as aform of public relations or advertising, promot-ing a company’s image or brand through cause-related marketing or other high-profile spon-

sorships. Although it still represents only a smallproportion of overall corporate charitable ex-penditures, U.S. corporate spending on cause-related marketing jumped from $125 millionin 1990 to an estimated $828 million in 2002.Arts sponsorships are growing, too—they ac-counted for an additional $589 million in 2001.While these campaigns do provide much-needed support to worthy causes, they are in-tended as much to increase company visibilityand improve employee morale as to createsocial impact. Tobacco giant Philip Morris,for example, spent $75 million on its charitablecontributions in 1999 and then launched a$100 million advertising campaign to publi-cize them. Not surprisingly, there are genuinedoubts about whether such approaches actu-ally work or just breed public cynicism aboutcompany motives. (See the sidebar “The Mythof Strategic Philanthropy.”)

Given the current haziness surroundingcorporate philanthropy, this seems an appro-priate time to revisit the most basic of ques-tions: Should corporations engage in philan-

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thropy at all? The economist Milton Friedmanlaid down the gauntlet decades ago, arguing ina 1970

New York Times Magazine

article thatthe only “social responsibility of business” isto “increase its profits.” “The corporation,” hewrote in his book

Capitalism and Freedom,

“isan instrument of the stockholders who ownit. If the corporation makes a contribution, itprevents the individual stockholder from him-self deciding how he should dispose of hisfunds.” If charitable contributions are to bemade, Friedman concluded, they should bemade by individual stockholders—or, by exten-sion, individual employees—and not by thecorporation.

The way most corporate philanthropy ispracticed today, Friedman is right. The major-ity of corporate contribution programs are dif-fuse and unfocused. Most consist of numeroussmall cash donations given to aid local civiccauses or provide general operating support touniversities and national charities in the hopeof generating goodwill among employees, cus-tomers, and the local community. Rather thanbeing tied to well-thought-out social or busi-ness objectives, the contributions often reflectthe personal beliefs and values of executivesor employees. Indeed, one of the most popularapproaches—employee matching grants—explicitly leaves the choice of charity to theindividual worker. Although aimed at enhanc-ing morale, the same effect might be gainedfrom an equal increase in wages that employ-ees could then choose to donate to charity on atax-deductible basis. It does indeed seem thatmany of the giving decisions companies maketoday would be better made by individualsdonating their own money.

What about the programs that are at leastsuperficially tied to business goals, such ascause-related marketing? Even the successfulones are hard to justify as charitable initiatives.Since all reasonable corporate expenditures aredeductible, companies get no special tax ad-vantage for spending on philanthropy as op-posed to other corporate purposes. If cause-related marketing is good marketing, it isalready deductible and does not benefit frombeing designated as charitable.

But does Friedman’s argument always hold?Underlying it are two implicit assumptions.The first is that social and economic objectivesare separate and distinct, so that a corpora-tion’s social spending comes at the expense of

its economic results. The second is the assump-tion that corporations, when they address so-cial objectives, provide no greater benefit thanis provided by individual donors.

These assumptions hold true when corpo-rate contributions are unfocused and piece-meal, as is typically the case today. But there isanother, more truly strategic way to thinkabout philanthropy. Corporations can use theircharitable efforts to improve their

competitivecontext

—the quality of the business environ-ment in the location or locations where theyoperate. Using philanthropy to enhance con-text brings social and economic goals intoalignment and improves a company’s long-term business prospects—thus contradictingFriedman’s first assumption. In addition, ad-dressing context enables a company not onlyto give money but also to leverage its capabili-ties and relationships in support of charitablecauses. That produces social benefits far ex-ceeding those provided by individual donors,foundations, or even governments. Context-focused giving thus contradicts Friedman’ssecond assumption as well.

A handful of companies have begun to usecontext-focused philanthropy to achieve bothsocial and economic gains. Cisco Systems, totake one example, has invested in an ambitiouseducational program—the Cisco NetworkingAcademy—to train computer network admin-istrators, thus alleviating a potential constrainton its growth while providing attractive job op-portunities to high school graduates. By focus-ing on social needs that affect its corporatecontext and utilizing its unique attributes as acorporation to address them, Cisco has begunto demonstrate the unrealized potential of cor-porate philanthropy. Taking this new direction,however, requires fundamental changes in theway companies approach their contributionprograms. Corporations need to rethink both

where

they focus their philanthropy and

how

they go about their giving.

Where to Focus

It is true that economic and social objectiveshave long been seen as distinct and often com-peting. But this is a false dichotomy; it repre-sents an increasingly obsolete perspective in aworld of open, knowledge-based competition.Companies do not function in isolation fromthe society around them. In fact, their abilityto compete depends heavily on the circum-

Michael E. Porter

is the Bishop Will-iam Lawrence University Professor at Harvard University; he is based at the Harvard Business School in Boston. He is a frequent contributor to HBR, and his most recent article, “Strategy and the Internet” (March 2001), won the McKinsey Award.

Mark R. Kramer

is the managing director of the Founda-tion Strategy Group, a consulting firm in Boston, and cofounder, with Porter, of the Center for Effective Philanthropy, a nonprofit research organization also located in Boston.


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stances of the locations where they operate.Improving education, for example, is generallyseen as a social issue, but the educationallevel of the local workforce substantially af-fects a company’s potential competitiveness.The more a social improvement relates to acompany’s business, the more it leads to eco-nomic benefits as well. In establishing its Net-working Academy, for example, Cisco focusednot on the educational system overall, buton the training needed to produce networkadministrators—the particular kind of educa-tion that made the most difference to Cisco’scompetitive context.(For a more detailed lookat that program, see the sidebar “The CiscoNetworking Academy.”)

In the long run, then, social and economicgoals are not inherently conflicting but inte-grally connected. Competitiveness today de-pends on the productivity with which compa-nies can use labor, capital, and natural resourcesto produce high-quality goods and services.Productivity depends on having workers whoare educated, safe, healthy, decently housed,

and motivated by a sense of opportunity. Pre-serving the environment benefits not onlysociety but companies too, because reducingpollution and waste can lead to a more produc-tive use of resources and help produce goodsthat consumers value. Boosting social and eco-nomic conditions in developing countries cancreate more productive locations for a com-pany’s operations as well as new markets forits products. Indeed, we are learning that themost effective method of addressing many ofthe world’s pressing problems is often to mobi-lize the corporate sector in ways that benefitboth society and companies.

That does not mean that every corporate ex-penditure will bring a social benefit or thatevery social benefit will improve competitive-ness. Most corporate expenditures producebenefits only for the business, and charitablecontributions unrelated to the business gener-ate only social benefits. It is only where corpo-rate expenditures produce simultaneous socialand economic gains that corporate philan-thropy and shareholder interests converge, asillustrated in the exhibit “A Convergence ofInterests.” The highlighted area shows wherecorporate philanthropy has an important influ-ence on a company’s competitive context. It ishere that philanthropy is truly strategic.

Competitive context has always been impor-tant to strategy. The availability of skilled andmotivated employees; the efficiency of thelocal infrastructure, including roads and tele-communications; the size and sophistication ofthe local market; the extent of governmentalregulations—such contextual variables havealways influenced companies’ ability to com-pete. But competitive context has become evenmore critical as the basis of competition hasmoved from cheap inputs to superior produc-tivity. For one thing, modern knowledge- andtechnology-based competition hinges moreand more on worker capabilities. For another,companies today depend more on local part-nerships: They rely on outsourcing and collab-oration with local suppliers and institutionsrather than on vertical integration; they workmore closely with customers; and they drawmore on local universities and research insti-tutes to conduct research and development.Finally, navigating increasingly complex localregulations and reducing approval times fornew projects and products are becomingincreasingly important to competition. As a

The Myth of Strategic Philanthropy

Few phrases are as overused and poorly defined as “strategic philanthropy.” The term is used to cover virtually any kind of charitable activity that has some de-finable theme, goal, approach, or focus. In the corporate context, it generally means that there is some connection, however vague or tenuous, between the charitable contribution and the com-pany’s business. Often this connection is only semantic, enabling the company to rationalize its contributions in public re-ports and press releases. In fact, most corporate giving programs have nothing to do with a company’s strategy. They are primarily aimed at generating good-will and positive publicity and boosting employee morale.

Cause-related marketing, through which a company concentrates its giving on a single cause or admired organiza-tion, was one of the earliest practices cited as “strategic philanthropy,” and it is a step above diffuse corporate contri-butions. At its most sophisticated, cause-

related marketing can improve the reputation of a company by linking its identity with the admired qualities of a chosen non-profit partner or a popular cause. Companies that sponsor the Olympics, for example, gain not only wide exposure but also an association with the pursuit of excellence. And by concentrating funding through a delib-erate selection process, cause-related marketing has the potential to create more impact than unfocused giving would provide.

However, cause-related marketing falls far short of truly strategic philanthropy. Its emphasis remains on publicity rather than social impact. The desired benefit is enhanced goodwill, not improvement in a company’s ability to compete. True stra-tegic giving, by contrast, addresses im-portant social and economic goals simul-taneously, targeting areas of competitive context where the company and society both benefit because the firm brings unique assets and expertise.


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The Cisco Networking Academy

Cisco Systems’ Networking Academy exemplifies the powerful links that exist between a company’s philanthropic strategy, its competitive context, and so-cial benefits. Cisco, the leading pro-ducer of networking equipment and routers used to connect computers to the Internet, grew rapidly over the past decade. But as Internet use expanded, customers around the world encoun-tered a chronic shortage of qualified network administrators, which became a limiting factor in Cisco’s—and the en-tire IT industry’s—continued growth. By one estimate, well over 1 million in-formation technology jobs remained unfilled worldwide in the late 1990s. While Cisco was well aware of this con-straint in its competitive context, it was only through philanthropy that the company found a way to address it.

The project began as a typical exam-ple of goodwill-based giving: Cisco con-tributed networking equipment to a high school near its headquarters, then expanded the program to other schools in the region. A Cisco engineer working with the schools realized, however, that the teachers and administrators lacked the training to manage the networks once they were installed. He and several other Cisco engineers volunteered to de-velop a program that would not only do-nate equipment but also train teachers how to build, design, and maintain com-puter networks. Students began attend-ing these courses and were able to ab-sorb the information successfully. As Cisco expanded the program, company executives began to realize that they could develop a Web-based distance-learning curriculum to train and certify secondary- and postsecondary-school students in network administration, a program that might have a much broader social and economic impact. The Networking Academy was born.

Because the social goal of the pro-gram was tightly linked to Cisco’s spe-cialized expertise, the company was able to create a high-quality curriculum rap-

idly and cost-effectively, creating far more social and economic value than if it had merely contributed cash and equipment to a worthy cause. At the sug-gestion of the U.S. Department of Educa-tion, the company began to target schools in “empowerment zones,” desig-nated by the federal government as among the most economically chal-lenged communities in the country. The company also began to include commu-nity colleges and mid-career training in the program. More recently, it has worked with the United Nations to ex-pand the effort to developing countries, where job opportunities are particularly scarce and networking skills particularly limited. Cisco has also organized a worldwide database of employment op-portunities for academy graduates, cre-ating a more efficient job market that benefits its cluster as well as the gradu-ates and the regions in which they live.

Cisco has used its unique assets and expertise, along with its worldwide presence, to create a program that no other educational institution, govern-ment agency, foundation, or corporate donor could have designed as well or expanded as rapidly. And it has ampli-fied the impact by signaling other cor-porations in its cluster. Other compa-nies supplemented Cisco’s contributions by donating or discounting products and services of their own, such as Inter-net access and computer hardware and software. Several leading technology companies also began to recognize the value of the global infrastructure Cisco had created, and, rather than create their own Web-based learning pro-grams, they partnered with Cisco. Com-panies such as Sun Microsystems, Hewlett-Packard, Adobe Systems, and Panduit expanded the academy curricu-lum by sponsoring courses in program-ming, IT essentials, Web design, and ca-bling. Because the project was linked to Cisco’s business, it could gain the sup-port of other companies in its cluster and use their contributions effectively.

Although the program is only five years old, it now operates 9,900 acade-mies in secondary schools, community colleges, and community-based organi-zations in all 50 states and in 147 coun-tries. The social and economic value that has been created is enormous. Cisco es-timates that it has invested a total of $150 million since the program began. With that investment, it has brought the possibility of technology careers, and the technology itself, to men and women in some of the most economi-cally depressed regions in the United States and around the world. More than 115,000 students have already gradu-ated from the two-year program, and 263,000 students are currently enrolled, half of them outside the United States. The program continues to expand rap-idly, with 50 to 100 new academies opening every week. Cisco estimates that 50% of academy graduates have found jobs in the IT industry, where the average salary for a network adminis-trator in the United States is $67,000. Over the span of their careers, the incre-mental earnings potential of those who have already joined the workforce may approach several billion dollars.

To be sure, the program has bene-fited many free riders—employers around the world who gain access to highly skilled academy graduates and even direct competitors. But as the market-leading provider of routers, Cisco stands to benefit the most from this improvement in the competitive context. Through actively engaging oth-ers, Cisco has not had to bear the full cost of the program. Not only has Cisco enlarged its market and strengthened its cluster, but it has increased the so-phistication of its customers. Through these tangible improvements in com-petitive context, and not just by the act of giving, Cisco has attracted interna-tional recognition for this program, generating justified pride and enthusi-asm among company employees, good-will among its partners, and a reputa-tion for leadership in philanthropy.


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result of these trends, companies’ success hasbecome more tightly intertwined with localinstitutions and other contextual conditions.And the globalization of production and mar-keting means that context is often importantfor a company not just in its home market butin multiple countries.

A company’s competitive context consistsof four interrelated elements of the local busi-ness environment that shape potential produc-tivity: factor conditions, or the available inputsof production; demand conditions; the contextfor strategy and rivalry; and related and sup-porting industries. This framework is summa-rized in the exhibit “The Four Elements ofCompetitive Context” and described in detailin Michael E. Porter’s

The Competitive Advan-tage of Nations.

Weakness in any part of thiscontext can erode the competitiveness of a na-tion or region as a business location.

Some aspects of the business environment,such as road systems, corporate tax rates, andcorporation laws, have effects that cut acrossall industries. These general conditions can becrucial to competitiveness in developing coun-tries, and improving them through corporatephilanthropy can bring enormous social gainsto the world’s poorest nations. But often just asdecisive, if not more, are aspects of contextthat are specific to a particular

cluster

—a geo-graphic concentration of interconnected com-

panies, suppliers, related industries, and spe-cialized institutions in a particular field, suchas high-performance cars in Germany or soft-ware in India. Clusters arise through the com-bined influence of all four elements of context.They are often prominent features of a region’seconomic landscape, and building them is es-sential to its development, allowing constitu-ent firms to be more productive, making inno-vation easier, and fostering the formation ofnew businesses.

Philanthropic investments by members of acluster, either individually or collectively, canhave a powerful effect on the cluster’s compet-itiveness and the performance of all of its con-stituent companies. Philanthropy can often bethe most cost-effective way—and sometimesthe only way—to improve competitive context.It enables companies to leverage not only theirown resources but also the existing efforts andinfrastructure of nonprofits and other institu-tions. Contributing to a university, for example,may be a far less expensive way to strengthen alocal base of advanced skills in a company’sfield than developing training in-house. Andphilanthropy is amenable to collective corpo-rate action, enabling costs to be spread overmultiple companies. Finally, because of philan-thropy’s wide social benefits, companies areoften able to forge partnerships with nonprofitorganizations and governments that would be

Combined social and economic benefit

SocialBenefit

Economic Benefit

Pure business

Pure philanthropy

A Convergence of Interests


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wary of collaborating on efforts that solelybenefited a particular company.

Influencing Competitive Context

By carefully analyzing the elements of com-petitive context, a company can identify theareas of overlap between social and economicvalue that will most enhance its own and itscluster’s competitiveness. Consider each of thefour elements of context and how companieshave influenced them through philanthropyin ways that have improved their long-termeconomic prospects.

Factor Conditions.

Achieving high levels ofproductivity depends on the presence of trainedworkers, high-quality scientific and technolog-ical institutions, adequate physical infrastruc-ture, transparent and efficient administrativeprocesses (such as company registration orpermit requirements), and available naturalresources. All are areas that philanthropycan influence.

Charitable giving can, for example, improveeducation and training. DreamWorks SKG, thefilm production company, recently created aprogram to train low-income students in Los

Angeles in skills needed to work in the enter-tainment industry. Each of the company’s sixdivisions is working with the Los Angeles Com-munity College District, local high schools, andafter-school programs to create a specializedcurriculum that combines classroom instruc-tion with internships and mentoring. The so-cial benefit is an improved educational systemand better employment opportunities for low-income residents. The economic benefit isgreater availability of specially trained gradu-ates. Even though relatively few of them willjoin Dream-Works itself, the company alsogains by strengthening the entertainmentcluster it depends on.

Philanthropic initiatives can also improvethe local quality of life, which benefits all citi-zens but is increasingly necessary to attractmobile employees with specialized talents. In1996, SC Johnson, a manufacturer of cleaningand home-storage products, launched “Sus-tainable Racine, ”a project to make its homecity in Wisconsin a better place to in whichto live and work. In partnership with localorganizations, government, and residents, thecompany created a community wide coali-

Contextfor Strategyand Rivalry

Related and SupportingIndustries

FactorConditions

DemandConditions

• Presence of sophisticated and demanding local customers

• Presence of local demand in specialized segments that can be served nationallyand globally

• Presence of customer needs that anticipate those elsewhere

• Availability of high quality, specialized inputs:

– human resources

– capital resources

– physical infrastructure

– administrative infrastructure

– information infrastructure

– scientific and technologicalinfrastructure

– natural resources

• Presence of capable, locally based suppliers and companies in related fields

• Presence of clusters instead of isolated industries

• Presence of local policies and incentives, such as intellectual property protection, that encourage investment and sustained upgrading

• Presence of open and vigorous local competition

The Four Elements of Competitive Context


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tion focused on enhancing the local economyand the environment. One project, an agree-ment among four municipalities to coordi-nate water and sewer treatment, resulted insavings for residents and businesses while re-ducing pollution. Another project involvedopening the community’s first charter school,targeting at-risk students. Other efforts fo-cused on economic revitalization: Commer-cial vacancy rates in downtown Racine havefallen from 46% to 18% as polluted sites havebeen reclaimed and jobs have returned forlocal residents.

Philanthropy can also improve inputs otherthan labor, through enhancements in, say, thequality of local research and development in-stitutions, the effectiveness of administrativeinstitutions such as the legal system, the qual-ity of the physical infrastructure, or the sustain-able development of natural resources. ExxonMobil, for example, has devoted substantial re-sources to improving basic conditions such asroads and the rule of law in the developingcountries where it operates.

Demand Conditions.

Demand conditions ina nation or region include the size of the localmarket, the appropriateness of product stan-dards, and the sophistication of local custom-ers. Sophisticated local customers enhance theregion’s competitiveness by providing compa-nies with insight into emerging customer needsand applying pressure for innovation. For ex-ample, the advanced state of medical practicein Boston has triggered a stream of innovationin Boston-based medical device companies.

Philanthropy can influence both the sizeand quality of the local market. The CiscoNetworking Academy, for instance, improveddemand conditions by helping customers ob-tain well-trained network administrators. Indoing so, it increased the size of the marketand the sophistication of users—and henceusers’ interest in more advanced solutions.Apple Computer has long donated comput-ers to schools as a means of introducing itsproducts to young people. This provides aclear social benefit to the schools while ex-panding Apple’s potential market and turn-ing students and teachers into more sophisti-cated purchasers. Safeco, an insurance andfinancial services firm, is working in partner-ship with nonprofits to expand affordablehousing and enhance public safety. As homeownership and public safety increased in its

four test markets, insurance sales did too, insome cases by up to 40%.

Context for Strategy and Rivalry.

The rules,incentives, and norms governing competitionin a nation or region have a fundamental influ-ence on productivity. Policies that encourageinvestment, protect intellectual property,open local markets to trade, break up or pre-vent the formation of cartels and monopolies,and reduce corruption make a location a moreattractive place to do business.

Philanthropy can have a strong influenceon creating a more productive and transpar-ent environment for competition. For exam-ple, 26 U.S. corporations and 38 corporationsfrom other countries have joined to supportTransparency International in its work to dis-close and deter corruption around the world.By measuring and focusing public attentionon corruption, the organization helps to createan environment that rewards fair competitionand enhances productivity. This benefits localcitizens while providing sponsoring compa-nies improved access to markets.

Another example is the International Corpo-rate Governance Network (ICGN), a nonprofitorganization formed by major institutionalinvestors, including the College RetirementEquities Fund (TIAA-CREF) and the CaliforniaPublic Employees Retirement System, knownas CalPERS, to promote improved standards ofcorporate governance and disclosure, espe-cially in developing countries. ICGN encour-ages uniform global accounting standards andequitable shareholder voting procedures. De-veloping countries and their citizens benefit asimproved governance and disclosure enhancelocal corporate practices, expose unscrupulouslocal competitors, and make regions more at-tractive for foreign investment. The institu-tional investors that support this project alsogain better and fairer capital markets in whichto invest.

Related and Supporting Industries.

A com-pany’s productivity can be greatly enhancedby having high-quality supporting industriesand services nearby. While outsourcing fromdistant suppliers is possible, it is not as effi-cient as using capable local suppliers of ser-vices, components, and machinery. Proximityenhances responsiveness, exchange of infor-mation, and innovation, in addition to lower-ing transportation and inventory costs.

Philanthropy can foster the development of

Philanthropy can often

be the most cost-effective

way for a company to

improve its competitive

context, enabling

companies to leverage

the efforts and

infrastructure of

nonprofits and other

institutions.


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clusters and strengthen supporting industries.American Express, for example, depends ontravel-related spending for a large share of itscredit card and travel agency revenues. Hence,it is part of the travel cluster in each of thecountries in which it operates, and it dependson the success of these clusters in improvingthe quality of tourism and attracting travelers.Since 1986, American Express has fundedTravel and Tourism Academies in secondaryschools, training students not for the creditcard business, its core business, nor for its owntravel services, but for careers in other travelagencies as well as airlines, hotels, and restau-rants. The program, which includes teachertraining, curriculum support, summer intern-ships, and industry mentors, now operates inten countries and more than 3,000 schools,with more than 120,000 students enrolled. Itprovides the major social benefits of improvededucational and job opportunities for local citi-zens. Within the United States, 80% of stu-dents in the program go on to college, and 25%take jobs in the travel industry after gradua-tion. The economic gains are also substantial,as local travel clusters become more competi-tive and better able to grow. That translatesinto important benefits for American Express.

The Free Rider Problem

When corporate philanthropy improves com-petitive context, other companies in the clus-ter or region, including direct competitors,often share the benefits. That raises an impor-tant question: Does the ability of other compa-nies to be free riders negate the strategicvalue of context-focused philanthropy? Theanswer is

no.

The competitive benefits reapedby the donor company remain substantial, forfive reasons:

• Improving context mainly benefits com-panies based in a given location. Not all com-petitors will be based in the same area, so thecompany will still gain an edge over the com-petition in general.

• Corporate philanthropy is ripe for collec-tive activity. By sharing the costs with othercompanies in its cluster, including competitors,a company can greatly diminish the free riderproblem.

• Leading companies will be best positionedto make substantial contributions and will inturn reap a major share of the benefits. Cisco,for example, with a leading market share in net-

working equipment, will benefit most from alarger, more rapidly growing market.

• Not all contextual advantages are of equalvalue to all competitors. The more tightly cor-porate philanthropy is aligned with a company’sunique strategy—increasing skills, technology,or infrastructure on which the firm is especiallyreliant, say, or increasing demand within aspecialized segment where the company isstrongest—the more disproportionately thecompany will benefit through enhancingthe context.

• The company that initiates corporate phi-lanthropy in a particular area will often get dis-proportionate benefits because of the superiorreputation and relationships it builds. In itscampaign to fight malaria in African countries,for example, Exxon Mobil not only improvespublic health. It also improves the health of itsworkers and contractors and builds strong rela-tionships with local governments and nonprof-its, advancing its goal of becoming the pre-ferred resource-development partner.

A good example of how a company can gainan edge even when its contributions also bene-fit competitors is provided by Grand CircleTravel. Grand Circle, the leading direct mar-keter of international travel for older Ameri-cans, has a strategy based on offering richcultural and educational experiences for itscustomers. Since 1992, its corporate founda-tion has given more than $12 million to histori-cal preservation projects in locations that itscustomers like to visit, such as the Foundationof Friends of the Museum and Ruins of Ephe-sus in Turkey and the State Museum ofAuschwitz-Birkenau in Poland. Other tourstravel the same routes and so benefit fromGrand Circle’s donations. Through its philan-thropy, however, Grand Circle has built closerelationships with the organizations that main-tain these sites and can provide its travelerswith special opportunities to visit and learnabout them. Grand Circle thus gains a uniquecompetitive advantage that distinguishes itfrom other travel providers.

How to Contribute

Understanding the link between philan-thropy and competitive context helps compa-nies identify

where

they should focus theircorporate giving. Understanding the ways inwhich philanthropy creates value highlights

how

they can achieve the greatest social and


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economic impact through their contributions.As we will see, the where and the how are mu-tually reinforcing.

In “Philanthropy’s New Agenda: CreatingValue” (HBR November–December 1999), weoutlined four ways in which charitable founda-tions can create social value: selecting the bestgrantees, signaling other funders, improvingthe performance of grant recipients, and ad-vancing knowledge and practice in the field.These efforts build on one another: Increas-ingly greater value is generated as a donormoves up the ladder from selecting the rightgrantees to advancing knowledge. (See theexhibit “Maximizing Philanthropy’s Value.”)The same principles apply to corporate giv-ing, pointing the way to how corporate philan-thropy can be most effective in enhancingcompetitive context. Focusing on the fourprinciples also ensures that corporate dona-tions have greater impact than donations ofthe same magnitude by individuals.

Selecting the Best Grantees.

Most philan-thropic activity involves giving money to otherorganizations that actually deliver the socialbenefits. The impact achieved by a donor,then, is largely determined by the effective-ness of the recipient. Selecting a more effec-tive grantee or partner organization will leadto more social impact per dollar expended.

Selecting the most effective grantees in agiven field is never easy. It may be obviouswhich nonprofit organizations raise the mostmoney, have the greatest prestige, or managethe best development campaigns, but such fac-tors may have little to do with how well thegrantees use contributions. Extensive and disci-plined research is usually required to selectthose recipients that will achieve the greatestsocial impact.

Individual donors rarely have the time orexpertise to undertake such serious due dili-gence. Foundations are far more expert thanindividuals, but they have limited staff. Cor-porations, on the other hand, are well posi-tioned to undertake such research if theirphilanthropy is connected to their businessand they can tap into their internal capabili-ties, particularly the financial, managerial,and technical expertise of employees. Whetherthrough their own operations or those oftheir suppliers and customers, corporationsalso often have a presence in many communi-ties across a country or around the world.This can provide significant local knowledgeand the ability to examine and compare theoperation of nonprofits firsthand.

In some cases, a company can introduceand support a particularly effective nonprofitorganization or program in many of the loca-

Social and economic value created

SocialBenefit

Economic Benefit

Advancing knowledge

Improving the performance of grant recipients

Signaling other funders

Selecting the best grantees

Pure business

Pure philanthropy

Maximizing Philanthropy’s Value


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tions in which it operates. Grand CircleTravel, for example, uses its 15 overseas officesto identify historical preservation projects tofund. Fleet Boston Financial assembles teamsof employees with diverse management andfinancial skills to examine the inner-city eco-nomic development organizations that itsfoundation supports. The teams visit eachnonprofit, interview management, review pol-icies and procedures, and report to the corpo-rate foundation on whether support shouldbe continued and, if so, where it should be di-rected. This level of attention and expertise issubstantially greater than most individual do-nors, foundations, or even government agen-cies can muster.

Signaling Other Funders.

A donor can pub-licize the most effective nonprofit organiza-tions and promote them to other donors,attracting greater funding and thus creatinga more effective allocation of overall philan-thropic spending.

Corporations bring uniquely valuable assetsto this task. First, their reputations often com-mand respect, becoming imprimaturs of cred-ibility for grantees. Second, they are oftenable to influence a vast network of entities intheir cluster, including customers, suppliers,and other partners. This gives them far greaterreach than individual donors or even mostnonprofits and foundations. Third, they oftenhave access to communication channels andexpertise that can be used to disseminate in-formation widely, swiftly, and persuasively toother donors.

Signaling other funders is especially impor-tant in corporate philanthropy because it miti-gates the free rider problem. Collective socialinvestment by participants in a cluster can im-prove the context for all players, while reduc-ing the cost borne by each one. By leveragingits relationships and brand identity to initiatesocial projects that are also funded by others, acorporation improves the cost-benefit ratio.The Cisco Networking Academy draws supportfrom numerous technology companies inCisco’s cluster as well as educational systemsand governments throughout the world, all ofwhich benefit from the graduates’ success.American Express’s Travel and Tourism Acade-mies depend on the help of more than 750travel cluster partners who bear part of thecost and reap part of the benefit. Differentcompanies will bring different strengths to a

given philanthropic initiative. By tapping eachcompany’s distinctive expertise, the collectiveinvestment can be far more effective than a do-nation by any one company.

Improving the Performance of Grant Re-cipients.

By improving the effectiveness ofnonprofits, corporations create value for soci-ety, increasing the social impact achieved perdollar expended. While selecting the rightgrantee improves society’s return on a singlecontribution, and signaling other funders im-proves the return on multiple contributions,improving grantee performance can increasethe return on the grantee’s total budget.

Unlike many other donors, corporationshave the ability to work directly with non-profits and other partners to help them be-come more effective. They bring unique assetsand expertise that individuals and foundationslack, enabling them to provide a wide range ofnonmonetary assistance that is less costly andmore sophisticated than the services mostgrantees could purchase for themselves. Andbecause they typically make long-term com-mitments to the communities in which theyoperate, corporations can work closely withlocal nonprofits over the extended periods oftime needed for meaningful organizationalimprovement. By operating in multiple geo-graphical areas, moreover, companies are ableto facilitate the transfer of knowledge andoperational improvements among non-profitsin different regions or countries. Contextual is-sues within a particular industry or cluster willoften be similar across different locations, in-creasing a company’s ability to add and derivevalue in multiple regions.

By tying corporate philanthropy to its busi-ness and strategy, a company can create evengreater social value in improving grantee per-formance than other donors. Its specialized as-sets and expertise, after all, will be most usefulin addressing problems related to its particularfield. DreamWorks’ film production expertisehelped it design the educational curriculumnecessary to help inner-city students in Los An-geles get jobs in the entertainment industry.The Cisco Networking Academy utilized thespecial expertise of Cisco employees.

FleetBoston Financial took similar advan-tage of its corporate expertise in launching itsCommunity Renaissance Initiative. Recogniz-ing that its major markets were in older EastCoast cities, Fleet decided to focus on inner-


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city economic revitalization as perhaps themost important way to improve its context.Fleet combined its philanthropic contribu-tions with its expertise in financial services,such as small business services, inner-citylending, home mortgages, and venture capi-tal. The bank’s foundation identified six com-munities where the bank had a presence, theeconomic need was great, and strong community-based organizations could be identified as re-liable partners: Brooklyn and Buffalo, NewYork; Lawrence, Massachusetts; New Haven,Connecticut; and Camden and Jersey City,New Jersey. The foundation committed$725,000 to each city, building a coalition oflocal community, business, and governmentorganizations to work on a set of issues identi-fied by the community as central to its revi-talization. Bank personnel provided technicaladvice and small business financing packagesto local companies as well as home mortgagesand home-buyer education programs. Thefoundation also attracted $6 million fromprivate and municipal sources, greatly ampli-fying its own $4.5 million investment.

Another example is America Online, whichhas unique capabilities in managing Internetaccess and content. Working closely with edu-cators, AOL developed AOL@School, a free,easy-to-use, noncommercial site tailored bygrade level to students, administrators, andteachers. This service improves the classroomexperience for hundreds of thousands of stu-dents nationally by giving them access to en-richment and reference tools while providinglesson plans and reference materials for teach-ers. Through this program, AOL has been ableto leverage its specialized expertise, more thanjust its donations, to assist in improving sec-ondary school performance more rapidly andcost-effectively than could most other organi-zations. In the process, it has improved boththe long-term demand for its services and thetalent needed to provide them.

Advancing Knowledge and Practice.

Innova-tion drives productivity in the nonprofit sectoras well as in the commercial sector. The great-est advances come not from incremental im-provements in efficiency but from new and bet-ter approaches. The most powerful way tocreate social value, therefore, is by developingnew means to address social problems and put-ting them into widespread practice.

The expertise, research capacity, and reach

that companies bring to philanthropy can helpnonprofits create new solutions that they couldnever afford to develop on their own. Since1994, IBM has committed a total of $70 millionto its Reinventing Education program, whichnow reaches 65,000 teachers and 6 millionstudents. Working in partnership with urbanschool districts, state education departments,and colleges of education, IBM researched anddeveloped a Web-based platform to supportnew instructional practices and strategies. Thenew curriculum is intended to redefine howteachers master their profession; it bridges thegap between teacher preparation and theclassroom experience by providing a com-mon platform that is used in the teachers’college courses and also supports their firstyears of teaching. Neither the colleges of edu-cation nor the school districts had the exper-tise or financial resources to develop such aprogram on their own. An independent evalua-tion in 2001 found that teachers in the Rein-venting Education program were registeringsubstantial gains in student performance.

Pfizer developed a cost-effective treatmentfor the prevention of trachoma, the leadingcause of preventable blindness in developingcountries. In addition to donating the drugs,Pfizer worked with the Edna McConnell ClarkFoundation and world health organizations tocreate the infrastructure needed to prescribeand distribute them to populations that previ-ously had little access to health care, muchless modern pharmaceuticals. Within one year,the incidence of trachoma was reduced by50% among target populations in Moroccoand Tanzania. The program has since expandedaggressively, adding the Bill & Melinda GatesFoundation and the British government aspartners, with the aim of reaching 30millionpeople worldwide. In addition to providingan important social benefit, Pfizer has en-hanced its own long-term business prospectsby helping build the infrastructure requiredto expand its markets.

Just as important as the creation of newknowledge is its adoption in practice. Theknow-how of corporate leaders, their cloutand connections, and their presence in com-munities around the world create powerfulnetworks for the dissemination of new ideasfor addressing social problems. Corporationscan facilitate global knowledge transfer andcoordinated multisite implementation of new


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social initiatives with a proficiency that is un-equaled by most other donors.

A Whole New Approach

When corporations support the right causes inthe right ways—when they get the

where

andthe

how

right—they set in motion a virtuouscycle. By focusing on the contextual condi-tions most important to their industries andstrategies, companies ensure that their corpo-rate capabilities will be particularly well suitedto helping grantees create greater value. Andby enhancing the value produced by philan-thropic efforts in their fields, the companiesgain a greater improvement in competitivecontext. Both the corporations and the causesthey support reap important benefits.

Adopting a context-focused approach, how-ever, goes against the grain of current philan-thropic practice. Many companies actively dis-tance their philanthropy from the business,believing this will lead to greater goodwill inlocal communities. While it is true that a grow-ing number of companies aim to make theirgiving “strategic,” few have connected giving toareas that improve their long-term competitivepotential. And even fewer systematically applytheir distinctive strengths to maximize the so-cial and economic value created by their phi-lanthropy. Instead, companies are often dis-tracted by the desire to publicize how muchmoney and effort they are contributing in orderto foster an image of social responsibility andcaring. Avon Products, for example, recently mo-bilized its 400,000 independent sales represen-tatives in a high-profile door-to-door campaignto raise more than $32million to fund breastcancer prevention. Fighting breast cancer is aworthy cause and one that is very meaningfulto Avon’s target market of female consumers.It is not, however, a material factor in Avon’scompetitive context or an area in which Avonhas any inherent expertise. As a result, Avonmay have greatly augmented its own cash con-tribution through effective fund-raising—andgenerated favorable publicity—but it failed torealize the full potential of its philanthropy tocreate social and economic value. Avon hasdone much good, but it could do even better.As long as companies remain focused on thepublic relations benefit of their contributionsinstead of the impact achieved, they will sacri-fice opportunities to create social value.

This does not mean that corporations can-

not also gain goodwill and enhance their repu-tations through philanthropy. But goodwillalone is not a sufficient motivation. Given pub-lic skepticism about the ethics of business—skepticism that has intensified in the wake ofthe string of corporate scandals this year—corporations that can demonstrate a significantimpact on a social problem will gain morecredibility than those that are merely biggivers. The acid test of good corporate philan-thropy is whether the desired social change isso beneficial to the company that the organiza-tion would pursue the change even if no oneever knew about it. Cisco, for example, hasachieved wide recognition for its good works,but it would have had sufficient reason to de-velop the Networking Academy even if nogoodwill had been created.

Moving to context-focused philanthropy willrequire a far more rigorous approach than isprevalent today. It will mean tightly integrat-ing the management of philanthropy withother company activities. Rather than delegat-ing philanthropy entirely to a public relationsdepartment or the staff of a corporate founda-tion, the CEO must lead the entire manage-ment team through a disciplined process toidentify and implement a corporate givingstrategy focused on improving context. Busi-ness units, in particular, must play central rolesin identifying areas for contextual investments.

The new process would involve five steps:

Examine the competitive context in each ofthe company’s important geographic locations.

Where could social investment improve thecompany’s or cluster’s competitive potential?What are the key constraints that limit produc-tivity, innovation, growth, and competitive-ness? A company should pay special attentionto the particular constraints that have a dis-proportionate effect on its strategy relative tocompetitors; improvements in these areas ofcontext will potentially reinforce competitiveadvantage. The more specifically a contextualinitiative is defined, the more likely the com-pany is to create value and achieve its objec-tives. A broad initiative such as Avon’s effortsto improve the health of all women will notnecessarily deliver contextual benefits, even ifit helps some employees or customers. And atightly targeted objective does not necessar-ily diminish the scale of impact. Narrowly fo-cused initiatives, like Pfizer’s trachoma pro-gram, IBM’s Reinventing Education, or Cisco’s

As long as companies

remain focused on the

public relations benefit of

their contributions, they

will sacrifice

opportunities to create

social value.


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Networking Academy, can potentially benefitmillions of people or strengthen the globalmarket for an entire industry.

Review the existing philanthropic portfolio tosee how it fits this new paradigm.

Current pro-grams will likely fall into three categories:

• Communal obligation: support of civic, wel-fare, and educational organizations, motivatedby the company’s desire to be a good citizen.

• Goodwill building: contributions to sup-port causes favored by employees, customers,or community leaders, often necessitated bythe quid pro quo of business and the desire toimprove the company’s relationships.

• Strategic giving: philanthropy focusedon enhancing competitive context, as out-lined here.

Most corporate giving falls into the first twocategories. While a certain percentage of giv-ing in these categories may be necessary anddesirable, the goal is to shift, as much as possi-ble, a company’s philanthropy into the thirdcategory. As for cause-related marketing, it ismarketing, not philanthropy, and it must standon its own merits.

Assess existing and potential corporate giv-ing initiatives against the four forms of valuecreation.

How can the company leverage itsassets and expertise to select the most effec-tive grantees, signal other funders, improvegrantees’ performance, and advance knowl-edge and practice? Given its strategy, wherecan the company create the greatest valuethrough giving in ways that no other com-pany could match?

Seek opportunities for collective action withina cluster and with other partners.

Collective ac-tion will often be more effective than a solo ef-fort in addressing context and enhancing thevalue created, and it helps mitigate the freerider problem by distributing costs broadly.Few companies today work together to achievesocial objectives. This may be the result of ageneral reluctance to work with competitors,but clusters encompass many related partnersand industries that do not compete directly.More likely, the tendency to view philanthropyas a form of public relations leads companiesto invent their own contributions campaigns,which are branded with their own identitiesand therefore discourage partners. Focusing onthe social change to be achieved, rather thanthe publicity to be gained, will expand the po-tential for partnerships and collective action.

Once a company has identified opportuni-ties to improve the competitive context anddetermined the ways in which it can contrib-ute by adding unique value, the search forpartners becomes straightforward: Who elsestands to benefit from this change in competi-tive context? And who has complementaryexpertise or resources? Conversely, what phil-anthropic initiatives by others are worth join-ing? Where can the company be a good part-ner to others by contributing in ways that willenhance value?

Rigorously track and evaluate results.

Moni-toring achievements is essential to continuallyimproving the philanthropic strategy and itsimplementation. As with any other corporateactivity, consistent improvement over timebrings the greatest value. The most successfulprograms will not be short-term campaigns butlong-term commitments that continue to growin scale and sophistication.

The context-focused approach to philan-thropy is not simple. One size does not fit all.Companies will differ in their comfort levelsand time horizons for philanthropic activity,and individual firms will make different choicesabout how to implement our ideas. Philan-thropy will never become an exact science—itis inherently an act of judgment and faith inthe pursuit of long-term goals. However, theperspective and tools presented here will helpany company make its philanthropic activitiesfar more effective.

Were this approach to be widely adopted,the pattern of corporate contributions wouldshift significantly. The overall level of contribu-tions would likely increase, and the social andeconomic value created would go up evenmore sharply. Companies would be more confi-dent about the value of their philanthropy andmore committed to it. They would be able tocommunicate their philanthropic strategiesmore effectively to the communities in whichthey operate. Their choices of areas to supportwould be clearly understandable and wouldnot seem unpredictable or idiosyncratic. Fi-nally, there would be a better division of laborbetween corporate givers and other types offunders, with corporations tackling the areaswhere they are uniquely able to create value.

Charities too would benefit. They would seean increased and more predictable flow ofcorporate resources into the nonprofit sector.Just as important, they would develop close,

There is no inherent

contradiction between

improving competitive

context and making a

sincere commitment to

bettering society.


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long-term corporate partnerships that wouldbetter apply the expertise and assets of the for-profit sector to achieve social objectives. Just ascompanies can build on the nonprofit infra-structure to achieve their objectives more cost-effectively, nonprofits can benefit from usingthe commercial infrastructure.

To some corporate leaders, this new ap-proach might seem too self-serving. Theymight argue that philanthropy is purely amatter of conscience and should not be adul-terated by business objectives. In some in-dustries, particularly those like petrochemi-cals and pharmaceuticals that are prone topublic controversy, this view is so entrenchedthat many companies establish independentcharitable foundations and entirely segre-gate giving from the business. In doing so,however, they give up tremendous opportu-nities to create greater value for society andthemselves. Context-focused philanthropy doesnot just address a company’s self-interest, itbenefits many through broad social change.If a company’s philanthropy only involvedits own interests, after all, it would not qual-ify as a charitable deduction, and it might

well threaten the company’s reputation.There is no inherent contradiction between

improving competitive context and making asincere commitment to bettering society. In-deed, as we’ve seen, the more closely a com-pany’s philanthropy is linked to its competitivecontext, the greater the company’s contribu-tion to society will be. Other areas, where thecompany neither creates added value nor de-rives benefit, should appropriately be left—asFriedman asserts—to individual donors follow-ing their own charitable impulses. If systemati-cally pursued in a way that maximizes thevalue created, context-focused philanthropycan offer companies a new set of competitivetools that well justifies the investment of re-sources. At the same time, it can unlock avastly more powerful way to make the world abetter place.

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The Competitive Advantage of Corporate Philanthropy