Lecture 6 Embedded Sustainability PDF

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Embedding Sustainability into Strategy II - Formulating Strategic Responses
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Montag, 12. Februar 2018

Business Strategy and Sustainable Development Lecture 6 Embedding Sustainability into Strategy II - Formulating Strategic Responses!

Bolt-on vs embed sustainability strategy! Bolt-on sustainability

Embedded sustainability

Goal

Pursue shareholder value

Pursue sustainable value

Scope

Add symbolic wins at the margins

Transform core business activities

Customer

Offer “green” and “socially responsible”

Offer “smarter” solutions with no trade-off

products at premium prices or with

in quality and no social or green premium

diminished quality Value capture

Value chain

Focus on risk mitigation and improved

Reach across all seven levels of

efficiencies

sustainable value creation

Manage company’s own activities

Manage across the product or service life cycle value chain

Relationships

Competitor

Organisation

Leverage transactional relationship.

Build transformative relationships. Co-

Stakeholders such as customers,

develop solutions with all key

employees, and suppliers are resources

stakeholders including NGOs and

to be managed and sources of input

regulators to build system-level change

Operate only in win-lose mode in which

Add cooperation with competitors as

any gain is competitor’s loss

potential sources of gain

Create a “scapegoat” department of

Make sustainability everyone’s job

sustainability Competencies

Visibility

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Focus on data analysis, planning, and

Add new competencies in design, inquiry,

project management skills

appreciation, and wholeness

Make green and social responsibility

Make sustainability performance largely

highly visible and try to manage the

invisible but capable of aligning and

resulting scepticism and confusion

motivating everyone

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Generic strategic response to sustainability!

- Addressing sustainability issues! • organizations can develop and implement a range of strategies to address environmental and social issues (e.g. complying with regulations; proactivity to gain CA)!

• Three important questions:! - How might an organization turn the key global social and environmental issues into strategic business opportunities?!

- How to incorporate environmental and social concerns into strategy?! - What level should environmental and social strategies be integrated?! - Value from a sustainability perspective - “The opportunity to create sustainable value—shareholder wealth that simultaneously drives us toward a more sustainable world—is huge” (Hart and Milstein, 2003)!

Sustainable Value = both + to shareholder & stakeholder (Laszlo and Zhexembayeva, 2011)

- The competitive landscape is constantly evolving - Two B+W key messages! • ‚value is migrating to ‚sustainable value‘ positions“! 2

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•

„Everyone wants to beat the average“!

- Today’s core completeness become tomorrow’s „threshold competencies“ (normal practice) - the standard gets raised creating a new playing field !

- Levels of strategic response ! • WHAT - Banerjee (2001) differentiates between four levels of strategic response:

- Enterprise strategy - concerned with the role a firm plays in society; its fundamental mission. Suggests not much evidence of this except in environmental organisations

- Corporate strategy - the kinds of businesses a firm should enter to meet its enterprise strategy. Includes decisions on business portfolios, markets, technologies

- Business strategy - allocating organisational resources to achieve competitive advantage and integrating different business functions

- Functional strategy -planning operations for different functions (e.g. marketing, purchasing, distribution)

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•

HOW - Our sustainable value vision? !

- Organisational purpose based on the maximisation of ‘sustainable value’. - Concerns how the organisation fulfil this purpose, in terms of the scope of industries and markets within which the organisation competes

- How can we address these social and environmental issues while advancing existing business priorities?

- How do we identify and manage emerging stakeholder issues? - What are the new sources of sustainable value (i.e. those in which shareholder value is not created at the expense of other stakeholders)? (Adapted from Laszlo, 2008, p.182)!

- How might an organization turn the key global social and environmental issues into strategic business opportunities!

• through igniting innovation into new processes and products • To open new, unexpected markets • To create consumer passion and loyalty • To energise the workforce and build its loyalty • To build sustainable supply chains • To radically bring down energy costs and waste productio … and, at the same time, build a safer, more secure, better world !

- What capabilities do we need to realise the sustainability vision? - How do we measure the success of our sustainability?(Adapted from Laszlo, 2008, p.182)

- Rather than just to comply with regulations!

• Recap: Traditional ‚business school‘ thinking ! - Hart (2005) proposed a basis for integrating firms’ relationship to the natural environment into resource-based theory (a dominant strategy school of thought) and indirectly into strategic management (NRBV)

- Key message: one of the most important drivers of new resources and capability development for firms will be the constraints and challenges posed by the natural environment (Hart, 2005) 4

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- Developing solutions for sustainability are our opportunities • Emerging views on strategy formulation - Can we agree? • Goal is sustainable value creation

• this ‘higher purpose’ incorporates both PROFIT & PURPOSE • Process of strategy formulation is basically the same as standard approach except for weight given to ecological (natural) environment relative to competitive environment (Roberts, 1995)

• Same is true for the ‘social’ environment • Necessity is to capture the ‘value bundle’ of both stakeholders and shareholders

• Competitive advantage is deep rooted in strategic capabilities that incorporate a range of sustainability initiatives/actions (i.e. NRBV)

• Organisational values shape strategic choice (… quid pro quo)

• Sustainable Value framework - Hart and Milstein, 2003

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Clean Technology Strategy:

Sustainability Vision strategy:

Is the environmental performance of our products limited by our existing competency base?

Does our corporate vision direct us toward the solution of social and environmental problems?

Is there potential to realise major improvements through new technology?

Does our vision guide the development of new technologies, markets, products, and processes?

Pollution Prevention strategy:

Product Stewardship strategy:

Where are the most significant waste and emission streams from our current operations?

What are the implications for product design and development if we assume responsibility for a product’s entire life cycle?

Can we lower costs and risks by eliminating waste at the source or by using it as useful input?

Can we add value or lower costs while simultaneously reducing the impact of our products?

Generic strategic response to sustainability!

- Creating sustainable value: 1 + 7 strategy responses!

- Laszlo considers “The 7 levels of strategic focus” to be an important tool for identifying value creation

- “Many companies have made great strides in mitigating risk and process cost reduction through minimising waste and improving energy efficiencies …

- few(er) have focussed on top-line growth through product or brand differentiation. 6

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- Even fewer have used stakeholder value creation (levels 4 and 6) to drive new sustainable strategies” (Laszlo, 2008, p. 155)

• Value destruction: It’s an added cost - doing well by doing good seems to violate economic logic (Laszlo & Zhexembayeva, 2011)

• Value creation - 1. It’s risk mitigation - avoiding its destruction - negative sustainability impacts & negative business consequences that follow it

- 2. It’s an efficiency opportunity - Improving efficiency - cut the quantity and intensity of energy, waste, materials

- Environmental + social harm = inefficiency - Pollution prevention as a strategic capability to become a threshold capability (normal practice) - reducing pollution at the input stage is less costly than treatment/repairs and harmful effluents (prevention)

- 3. It’s a factor of differentiation - environmental & social attributes as a way to differentiate products & services

- quality/performance includes a sustainability dimension - do green and socially responsible products cost more? - charge extra for it? - 4. It’s a pathway to new markets - when consumer demand solution for their environmental & social problems

- new market - meeting the needs of world’s poorest 4 billion living on kess than $4 a day

- consumer market = 5 trillion - 5. It’s a way to protect & enhance the brand - brand image rooted on perceived on environmental & social performance

- Draw talent - Secure loyal customers - Become supplier-of-choice - Attract investors 7

- Goodwill with regulators

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- Positioning can be gained and lost - 6. It’s about influencing industry standards - shape government regulation or private industry standards in ways that favor them over competition

- can create barriers to entry - 7. It’s a driver of radical innovation- transformative whole system change - process innovation creating value delivered to customers - „natural resource based view“ will fuel disruptive innovations? • DETOUR - Shared Value WAY 2 - redefining productivity in the value chain

- Environmental management considerations have been applied to supply chain context since the 1990s (Bloemhof-Ruwaard et al., 1995; Lewis, 1997)

- These early publications already foresaw that once sustainability considerations become strategic they will include supply chain considerations (Lewis, 1997).

- Today, sustainable supply chain issues include carbon trading, waste treatment, resource consumption as well as sub-contracting (Chaabane et al., 2011) and managing supply chains sustainably can create competitive advantages (Reuter et al., 2010)

- Porter and Kramer’s second approach to shared value strategies follows this tradition and consists of a holistic evaluation of value chain productivity in terms of

- energy use, - logistics, - resource use, - procurement, - distribution, - location - employee productivity (Porter and Kramer, 2011, pp. 68-71). WAY 1 - by reconciling products and markets !

- This approach has been described previously as ‘‘Business at the Bottom of the Pyramid’’ (Prahalad and Hart, 2002; Prahalad, 2005; Webb et al., 2010)! 8

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- Porter and Kramer define it as ‘‘satisfying unmet social needs’’ and ‘‘serving disadvantaged communities’’ (Porter and Kramer, 2011, pp. 67-8)!

- While this approach is not without critics especially considering the enhancement of social conditions in communities (Karnani, 2007; Olsen and Boxenbaum, 2009) the basic argument rests on creating economies of scale for offering essential products and services such as health, housing or credit at reasonable prices to disadvantaged communities, thus fostering their inclusion within the formal economy!

- Several cases exist demonstrating innovative approaches such as the Aravind Eye Hospital in the area of health (Shah and Murty, 2004), Cemex’s programme ‘‘Patrimonio Hoy’’ in the area of housing (Letelier et al., 2003), or the Grameen Bank in the area of finance (Yunus and Jolis, 1999)!

- ‘‘Business at the Bottom of the Pyramid’’ (Prahalad and Hart, 2002; Prahalad, 2005; Webb et al., 2010)

- Porter and Kramer define it as ‘‘satisfying unmet social needs’’ and ‘‘serving disadvantaged communities’’ (Porter and Kramer, 2011, pp. 67-8).

- Basic argument rests on creating economies of scale for offering essential products and services such as health, housing or credit at reasonable prices to disadvantaged communities, thus fostering their inclusion within the formal economy (Spitzeck and Chapman, 2012)

- Critics focus on the enhancement of social conditions in communities (Karnani, 2007; Olsen and Boxenbaum, 2009) WAY 3 - building supportive industry clusters!

- Industry clusters were found to enhance innovation, competitiveness and knowledge exchange (Arikan, 2009; Liela et al., 2010).

- Shared values help to: - Align the activities of the actors within clusters (Tracy and Clark, 2003) - Collaboration and knowledge exchange on sustainability issues in clusters improves environmental and social performance (Anh et al., 2011).

- Interaction and alignment of several players such as suppliers, service providers, educational institutions, NGOs and local governments in order to attain to local development goals (Nelson, 2006; Kania and Kramer, 2011).%% !

- Case studies have further shown that collaboration and knowledge exchange on sustainability issues in clusters improves environmental and social performance (Anh et al., 2011).! 9

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Summary !

- Getting more stuck into the ‘how’; we need to see things different! - Next week we will look in depth at the Laszlo model by considering further design for sustainability value creating initiatives in the supply chain

- We shall focus on the organisation but also propose that the “supply chain is the new value chain” recognising Christopher (2011) claim that it is:! “Supply chain’s that COMPETE NOT companies”

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