Philanthropy programs are often based on the notion that a corporation can maximize social value by contributing to areas that are not related to its business. This assumption is flawed.
In fact, a company’s greatest opportunity to create social and economic value through philanthropy comes from its ability to improve its competitive context in the locations where it operates. Doing so aligns the company’s social and economic goals and improves its long-term business prospects. Yet, few companies have made this strategic shift in their approach to philanthropy. Instead, they typically use philanthropy to generate public goodwill or support causes that are popular with employees, customers, and the community.
A growing number of companies aim to make their philanthropy “strategic.” But few have linked it to areas that improve their long-term competitive potential or systematically applied their distinctive strengths to enhance the effectiveness of their philanthropic efforts. Those that have made the transition to a more strategic stance often take a four-part approach to the philanthropy process.
Selecting effective grantees
To achieve maximum impact, a corporate donation needs to be targeted to the most relevant recipients. In many cases, this will require extensive and disciplined research to identify the most effective nonprofit organizations to support. A company’s own internal resources are particularly well suited to undertake this research. They include financial, managerial, and technical expertise, as well as a local presence in the communities where a company does business. In addition, a company can leverage the resources of its suppliers and other philanthropic partners in ways that would not be possible for individual donors.
Improving inputs other than labor
A company can also create a disproportionate amount of social and economic value through its philanthropy by improving contextual conditions that affect the quality of output. This may involve enhancing scientific and technological institutions, administrative processes such as legal systems and physical infrastructure, or the development of natural resources. The more tightly a company’s philanthropy is aligned with its strategy—by increasing the skills or technology on which it is especially reliant, for example—the more disproportionate the benefit.
Maximizing philanthropy’s value
To further maximize the impact of its philanthropy, a company should seek opportunities to collaborate with other companies in the same cluster or industry. This can reduce costs and mitigate the free rider problem, which occurs when a single firm reaps benefits that other firms do not share.
The best way to ensure that a collaboration is most effective is to apply the principles of a “value creation hierarchy.” This suggests that a company should focus on the four forms of value created through philanthropy: selecting the right grantees, signaling other funders, improving grantee performance, and advancing knowledge. These four pillars form the foundation of a philanthropy program that can maximize its impact on competitive context.