April 27, 2009

Comparative Advantage and Corporate Philanthropy

What's the most valuable thing Coca-Cola has to offer? Its brand, certainly, helps it outsell its competitors. I'm sure the company also places great value on its top-secret formula. I'm particularly impressed with the company's distribution network - my friend once saw a Coca-Cola billboard in a rural, rural part of East Africa, hours from the nearest city, and it certainly seems that you can buy a Coke anywhere in the world.

Other successful companies have their own unique, highly-valued assets. GE is famous for its leadership development expertise, and McDonald’s has real estate portfolio with an incredible footprint. Microsoft has an enviable amount of cash sitting on its balance sheet, but I'm sure the company is more concerned with hanging on to its talented developers, who create solutions to problems that stand in the way productivity.

When Google.org announced its reorganization last month, the company also stated, "…our greatest impact has come when we've attacked problems in ways that make the most of Google's strengths in technology and information". That is, Google.org feels it's had the biggest impact on the social problems it cares about when it has utilized its own most valuable asset - in my interpretation, that includes Google's employees and their unique expertise in using technology to solve problems that stem from a lack of organized, accessible information.

This makes a lot of sense to me. When companies put their unique assets to work on social problems, they offer a resource that almost no one else can offer. Furthermore, they can typically make an impact utilizing their existing skills and processes more cost-effectively than a nonprofit partner could buy those services on the open market. One very clear impact of that is in the pharmaceutical sector. Thanks to the economics of the pharmaceutical industry, while fixed costs are very high (drug discovery is ridiculously expensive, and I imagine that setting up manufacturing isn't cheap), marginal costs - the cost of making one extra dose - are fairly low. As such, a pharmaceutical company will have a much greater impact if it donates drugs that cost it a million dollars to make, rather than contributing a million dollars cash, as the recipient of the cash donation would be able to buy a far smaller quantity of drugs than the quantity the company can make for the same cost to the business.

Basically, I think it all comes down to
comparative advantage. Companies might have a lot of cash - maybe even more cash than a lot of the other players in a community. They don't have UNIQUE access to cash, though, and cash isn't the most valuable thing they can offer. So if you have a foundation that could offer a $100,000 grant, and a company that could offer a $100,000 grant OR a service (that the grantee needs) that would cost the company $100,000 to offer but would cost the grantee $200,000 to purchase, wouldn't you want the company to specialize its philanthropy in donating that services? Of course, nonprofits have a need for cash as well, but better for the foundation to specialize in that offering, while the company specializes in something that no other donor can offer as cost effectively.

Of course, sometimes a company needs to donate some cash to unlock the value of the donated product or expertise. I recently read a case about Merck's corporate social engagement activities (Rangan, V. Kasturi, and Katharine Lee. "Merck: Global Health and Access to Medicines." Harvard Business School Case 509-048), for a class I'm taking called
Business at the Base of the Pyramid. One part of the case described the company's philanthropic activities in Botswana around 2000, where Merck donated both cash ($56.5 million) and antiretroviral drugs. According to Raymond V. Gilmartin, then Merck's CEO (and now a professor at HBS):

"It was very clear to many of us that just giving free drugs would not do it. We needed to engineer an entire supply chain, train health professionals, build infrastructure for testing and treatment. All this and more would be crucial to the success of the program."

If Merck had just donated drugs - the resource in which it had a comparative advantage, relative to the other players in the public health space - the drugs might not have ultimately been deployed effectively. However, note that, in this particular initiative, Merck partnered with the Gates Foundation, which also put in $56.5 million in cash - this allowed Merck to redirect its significant but ultimately limited corporate resources to that which it uniquely could offer. Overall, according to the same case, in 2007, Merck donated $828 million, including $62 million in cash (7% of total giving), $161 million through the U.S. Patient Assistance Program (19%), and $605 million via the Merck Medical Outreach Program (73%); the latter two programs, accounting for nearly 93% of total giving, are both product donation programs.

Overall, corporate giving in the US, when broken down by cash and non-cash giving, doesn't look like Merck's program. In its
"The 2008 Corporate Contributions Report", The Conference Board surveyed 197 "major" companies regarding their 2007 giving. The survey found that, among the U.S. respondents, 45.77% of giving was cash, while 54.23% was non-cash; interestingly, among non-U.S. companies, 66.20% was non-cash. The Committee Encouraging Corporate Philanthropy (CECP), in its 2008 "Giving in Numbers" report, had somewhat different findings - it surveyed 155 companies, including 69 of the largest 100 public companies in the U.S., and found that 20% of total giving was non-cash. (I'm not sure why this discrepancy exists - my best guess is that the Conference Board survey happened to include a few more of the big pharma companies, which tend both to give more and to give a higher percentage of contributions in the form of non-cash giving - for instance, in the CECP report, which categorized the respondents into eight industries, "health care" was the only one that gave more than half of its contributions in this form.)

Either way, though, it's clear that most companies are not focusing primarily on contributing their core competencies, and cash is used as more than a way to leverage non-cash contributions. Based on the logic I've laid out thus far, I don't think that's a good thing. I think it's inefficient for companies to give so much cash when they have more valuable resources available, that the total value of corporate contributions would go up if companies were to focus more on contributing the non-cash resources that make them successful in their core businesses.

That said, I have to admit that I'm a bit uncomfortable with the logical conclusion of my argument, that cash contributions by companies would fall significantly. Cash, after all, is much easier to use, and it's much more flexible - it can be deployed to address any number of needs. Companies play an important role in funding the small nonprofits that make up the fabric of a community. Those relatively small grants might not play a big role in the companies' philanthropic strategies, but they might be awfully important to the recipients. As companies become more and more strategic in their community involvement - and I think this is a very, very good thing - what happens to these small organizations, which have for so long received grants just for being local? Big organizations may have well-developed systems for receiving and utilizing product donations; they may have entire departments that can coordinate the use of highly-skilled volunteers, but can your local homeless shelter extract value from a non-cash gift as effectively as it can spend the cash?

I think small nonprofits can indeed utilize these resources, but it will take a constellation of intermediary organizations to make this happen. The United Way and community foundations have, for generations, created economies of scale for their local nonprofits by raising money, pooling it, and distributing it in relatively small quantities, to organizations that, individually, might not have been able to afford to build extensive fundraising departments. Today,
Taproot Foundation is playing a similar role with skills-based volunteerism. By coordinating teams for professionals in areas like marketing and strategy management and "granting" the teams to nonprofits that might not be able to solicit and manage such pro bono services on their own, Taproot helps bridge the divide described above. Similarly, Gifts In Kind International was able to accept $750 million in product donations last year, from thousands of companies, and distribute them to 150,000 organizations.

I also think it's critical to recognize a key area in which most companies do NOT have a core competency - identifying social problems and figuring out how to address them. There are exceptions to this rule - health care companies, for instance, probably have quite a bit of relevant knowledge in-house. In most cases, though, it's important for the corporate partner to acknowledge that it doesn't have a comparative advantage in this piece of the puzzle, while its prospective nonprofit partners do. I think that building strong, thoughtful partnerships is an important way to ensure that each player can individually contribute its own comparative advantage, and that together, the suite of offerings meets the social needs in question.

So could Coca-Cola use its amazing distribution expertise to help development organizations solve the
"last mile" problem in international development? Could GE invite nonprofit leaders to its leadership courses at Crotonville? Could Microsoft put its developers to work solving the computing needs of the worlds' poor? Could McDonald's engage in a social marketing campaign with incredible reach, given the fact that, every day, millions of people all over the world spend several minutes within an environment that the company controls?

Certainly, these companies, and many others, are creating innovative solutions utilizing their comparative advantages - Coca-Cola, for instance,
donates its distribution expertise and capacity for the purpose of disaster relief, while Microsoft, through its Unlimited Potential program, uses the company's skills and knowledge to create technology products that foster economic and social development at the middle and base of the economic pyramid. If you have other examples, PLEASE post them in the comments section.

I think there's a lot of potential for companies to increase their impact without increasing the cost to the company of community involvement. This makes me really optimistic about the future of such social engagement, despite the tough economy. While companies seem to be taking corporate citizenship seriously, I think that we have yet to hit the inflection point, in terms of the impact they can have on the community. I think that focusing on comparative advantage - and recognizing that, in many cases, this means shifting from donating cash to donating expertise or products - will be a major factor in getting there.

1 comment:

  1. Carolyn CavicchioMay 4, 2009 at 2:56 PM

    Very interesting argument. It assumes many things, however:

    1. That other, non-corporate, funders will step up to the plate to provide the cash that companies are currently providing but that would stop once the switch to "comparative advantage" giving took place.

    2. That companies can afford to increase the scope and scale of their non-cash giving. Those potential skills-based volunteers all have "day jobs" that are critical to the success of the company. Ramping up their involvement in volunteerism may not be possible.

    3. That senior execs will be willing to give up the quid-pro-quo that comes from making a cash grant at the request of an exec from another company, or from an elected official or other community leader. Contributions do more than simply support charities -- they also provide an intangible "currency" that helps build corporate reputation and license to operate.

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