The integration of corporate social responsibility into business strategy and its impact on company performance: an investigation of the Indonesian manufacturing industry

Although the extant literature pays considerable attention to whether corporate social responsibility (CSR) should be integrated with business strategies to gain benefits, research on how CSR and business strategies could be successfully integrated is scant. This thesis aims to investigate how CSR and business strategies are integrated, strategically and functionally, and to examine the impact of such integration on company performance. In addition to direct effect analyses, this thesis also assesses the mediating effect of company social performance (CSP) on the relationship between CSR and company financial performance (CFP) and analyses the moderating effect of business and CSR strategies, company size, and industry type in this relationship. A theoretical framework for integration is developed based on a literature review and is embedded in contingency and stakeholder theories. With a sample of 435 usable responses from a survey of 1,055 manufacturing companies in Indonesia, this thesis employs Partial Least Squares with Structural Equation Modelling (PLS-SEM) to analyse the data. Exploratory and confirmatory factor analyses are conducted, and the hypotheses are verified by examining direct, indirect, and total effects. The evaluation of measurement models is satisfactorily achieved. Reflective and formative measures suggest that all constructs are reliable and valid in the context of this thesis. The assessment of structural models reveals that both strategic and functional integrations have a significant positive impact on company performance, including customer, employee, operational and financial performance. More specifically, the empirical results confirm that strategic and functional integration have an essential effect on customer, employee, and operational performance, and that these performances can mediate the relationship between the integrations and financial performance. The findings also show a positive relationship between strategic and functional integrations. Integration of CSR at the strategic level has an impact on integration of CSR at the next level, such as at the functional level. Furthermore, the findings presented in this thesis indicate that business and CSR strategies have a moderating effect on CSR integration. Notably, regarding business strategy, the results suggest that differentiation strategy has a larger total effect on customer and financial performance than cost leadership strategy in strategic CSR integration. However, in functional CSR integration, the findings suggest that differentiation strategy has a larger total effect than cost leadership strategy, on customer performance only. With respect to CSR strategy, findings in this thesis highlight that CSR strategy has a moderating effect on the relationship between CSR integration and company performance. Proactive and accommodative strategies have a greater total effect on customer and financial performance than reactive strategy in strategic CSR integration. Conversely, in functional CSR integration, empirical evidence indicates that reactive strategy has a larger total effect on employee and financial performance than proactive strategy. In functional integration, accommodative strategy has a greater total effect on operational performance than proactive strategy. In terms of company size, the findings of strategic CSR integration show that large companies have a greater total effect on customer, employee, operational and financial performances than small and medium enterprises (SMEs). On the other hand, large companies have better operational performance than SMEs. These results confirm that company size has a moderating effect on the relationship between CSR integration and company performance. Moreover, the results suggest that industry type moderates the relationship between CSR integration and company performance. In particular, non-environmentally sensitive industries (non-ESI) have a bigger total effect than ESI in the relationship between strategic CSR integration and financial performance. In relation to functional CSR integration, findings indicate that non-ESI groups have a higher total effect in customer and financial performances than ESI groups. From a theoretical perspective, this research contributes to the body of knowledge by focusing on CSR integration to understand its impact on company performance. This thesis contributes to the literature by developing a framework that enables researchers to identify the different types of benefits provided by CSR integration, and the effect that these benefits have on the stakeholder-company relationship. This research presents empirical evidence that, in evaluating the mechanism between CSR integration and company performance, stakeholder and contingency theories should be taken into account. From a practical point of view, the findings of this thesis can encourage companies, particularly Indonesian manufacturing companies, to implement CSR within their company. Companies should treat primary stakeholders-those who interact with business operations directly and daily including employees, suppliers, and customers-well, and act on their needs related to CSR practices. These results could, especially, motivate manufacturing companies to increase their level of CSR practice. In doing so, they will not conduct CSR merely as a charity or philanthropy or only to comply with regulations (as many currently practice); instead, they will strategically and effectively carry out CSR through a range of activities to achieve superior performance, both socially and financially.