MAC 301 SUSTAINABILITY AND STRATEGIC AUDIT
Module for
MAC 301
Sustainability and
Strategic Audit
Prepared by: Ms. Ida Kristina D. Ramos
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Module 1
THE EMERGENCE OF SUSTAINABLE STRATEGIC MANAGEMENT
Week 1-2
Introduction
The convergence of business and sustainability is sustainable management. It is the
practice of a company's effect on the three bottom lines—people, earth, and profit—in
order for all three to thrive in the future. Since it is constructive rather than reactive,
sustainability management leads to a company's long-term survival. Investing in fair-trade
goods, reducing packaging materials, and maintaining humane working conditions at
supplier factories are only a few examples.
Learning Objectives:
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Understand the benefits of sustainability and strategic audit
Explain how globalization and environmental sustainability influence
strategic management
Understand the three bottom lines of sustainability management and its
components
Identify the causes of global sustainability issues
Identify the pillars of sustainability
WHAT IS SUSTAINABILITY?
Sustainability entails fulfilling our own needs without jeopardizing future
generations' ability to fulfill their own. We need social and economic capital in addition to
natural resources. Environmentalism isn't the only aspect of sustainability. Concerns for
social justice and sustainable growth are included in most concepts of sustainability. It's
the act of living within the constraints of available physical, natural, and social resources
in such a way that the living systems in which humans are embedded can survive
indefinitely.
Where does the term ‘sustainability’ come from?
Although the philosophy of sustainability is a recent one, the movement as a -p
has origins in social justice, conservationism, internationalism, and other long-standing
movements. Many of these proposals had come together by the end of the twentieth
century in the call for "sustainable growth."
WHAT IS SUSTAINABILITY MANAGEMENT?
Sustainable management is the intersection of business and sustainability. It is the
practice of managing a firm’s impact on the three bottom lines—people, planet, and
profit—so that all three can prosper in the future. Sustainable management supports a
business’s long-term viability, because it’s preventative rather than reactive. It can take
many forms including investing in fair-trade products, reducing packaging materials, and
ensuring humane working conditions at supplier factories.
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WHAT IS STRATEGIC AUDIT?
It's an in-depth analysis to see whether a corporation is achieving its operational
targets in the most effective way possible. It examines and decides the most suitable
direction for the organization to step toward in order to achieve its goals by assessing
different aspects of the business.
“A strategic audit assesses your:
Current business strategy
How suitable it is for your business
Whether your company is in position to execute the strategy”
WHAT IS SUSTAINABILITY AUDIT?
It's a guide for comparing the company's policies to the best practices for longterm sustainability. It takes generally recognized best practices and distills them into
concrete programs for resource conservation, employee engagement, giving back, and
more.
Figure 1. Causes of Global Sustainability Issues
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Figure 2. Pillars of Sustainability
Figure 3. Pillars of Sustainability and its Functionalities
Pillars of Sustainability and Its Functions
Environmental Sustainability
(Environmental Protection)
Ecological integrity is maintained, all of earth’s environmental systems are kept in
balance while natural resources within them are consumed by humans at a rate where
they are able to replenish themselves.
 Adjust value chain to very low usage of all resources
 Select resources of sufficient supply
 Resources used should be processed with little energy and emissions
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Avoid air and water pollution as much as possible
Strive for closed loops and recovery
Design materials and products for optimum recyclability
The goal is the balance between consumption and regeneration of natural
resources including resource recovery
Figure 4. Pillars of Sustainability
Figure 5. Environmental Functions
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Economic Sustainability
(Economic Prosperity)
Human communities across the globe are able to maintain their independence and have
access to the resources that they require, financial and other, to meet their needs.
Economic systems are intact and activities are available to everyone, such as secure
sources of livelihood.
Social Sustainability
(Social Responsibility)
Universal human rights and basic necessities are attainable by all people, who have
access to enough resources in order to keep their families and communities healthy and
secure. Healthy communities have just leaders who ensure personal, labor and cultural
rights are respected and all people are protected from discrimination.
WHAT IS AN ECOLOGICAL FOOTPRINT?
o Individual demand on nature is determined.
o Resource consumption and emissions are quantified.
o The area needed for regeneration is calculated based on individual use.
o As a result, individuals or nations are assigned a productive area. This creates the
ecological footprint.
o Bio capacity describes the biologically productive area of a country or region.
o The ratio of required to existing surface is the benchmark for sustainability.
o Results of the ratio greater than 1 denote land use.
Sustainability Strategy
Figure 6. Measures of Practical Implementation of Strategy
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Figure 7. Sustainability Balanced Scorecard
Figure 8. Strategic Management Balanced Scorecard
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Figure 9. Strategy Selection
Processes and Structures
(Process Management – Procedure)
Situation and Stakeholder Analysis
Tools
 Identification of all relevant parties / interest groups and their claims.
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Figure 10. Effects of Sustainable Company
Application
(Sustainability Through Project Management)
The criteria of time, cost and
quality management are
indispensable to each project.
The three sustainability pillars,
environmental, economic and society,
affect the entire project schedule.
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References:
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https://www.slideshare.net/PresentationLoad/sustainability-management-ppt-slidetemplate
https://www.slideshare.net/ReemaAbuShaheen/how-to-do-strategic-audit
https://www.mcgill.ca/sustainability/files/sustainability/what-is-sustainability.pdf
https://www.cultivatingcapital.com/sustainability-audit/
https://yourbusiness.azcentral.com/write-strategic-audit-29020.html
https://topnotchceo.com/what-is-a-strategic-audit-for-your-business-assessingstrategy-and-status-quo-with-fresh-eyes/
Exercise #1
Answer the following questions:
a) Explain how Sustainable strategies are deemed competitive advantages.
b) What is Strategic Management and its difference with Sustainable Strategic
Management?
c) Give at least three (3) Sustainability trends emerging and discuss each.
d) Give an example of a company that is built to pursue sustainability. Give the
company’s vision, mission, and objectives.
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Module 2
IN SEARCH OF SUSTAINABILITY
Week 3-4
Introduction
In this module, experts from a variety of fields explore the critical problems that must be
addressed if we are to progress toward a more just and prosperous future. In the areas
of human health, water management, land use and natural environments, energy, equity
and peace, economic structures, climate change, labor forces and jobs, urban design and
transportation, and population, they describe the major issues and challenges for
achieving sustainability.
To achieve sustainability, we must make significant improvements to our current
methods. This module's thought-provoking ideas offer a good introduction to the problems
that must be addressed in the quest for a true path to sustainability.
Learning Objectives:
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Understand the Triple Bottom Line
Identify the five areas of inquiry and action for Sustainable Lifestyles and
Green Economy
Understand the changing role of citizens in a Sustainable Industry
Determine the Agents of Sustainability
Differentiate Company-driven and Entrepreneurial-driven Innovation
Understanding the Circular Economy and Origins
Listing the Benefits and Disadvantages of Circular Economy
WHAT IS TRIPLE BOTTOM LINE?
In economics, Triple Bottom Line (TBL) claims that corporations should commit to
focusing on social and environmental issues as much as they do on income. The theory
of TBL postulates that there should be three instead of one bottom line: benefit, citizens,
and the earth. A TBL aims to calculate the extent of commitment of a company to
corporate social responsibility and its effect on the environment over time.
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The triple bottom line aims to measure the financial, social, and environmental
performance of a company over time.
The TBL consists of three elements: profit, people, and the planet.
TBL theory holds that if a firm looks at profits only, ignoring people and the planet,
it cannot account for the full cost of doing business.
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Sustainable innovations represent different management structures and sizes:
multinationals, small and medium-sized companies, startups and cooperatives.
Their sustainability innovations range from new product development (e.g. sustainable
modular houses or zero-waste food products) to hybrid distribution chains (e.g. to foster
social inclusion and fight youth unemployment), public–private partnerships in
sustainable municipal transportation, community-based innovation models, and citizen
cooperatives for alternative energy production and distribution.
Main Sustainability Innovation
o Internal process
o Role of main stakeholder involved
o Drivers and enablers
o Impact
o Challenges and opportunities
Sustainable innovation seems to be an imperative for business survival in the sense of
an environment that is highly Volatile, Uncertain, Complex and Ambiguous (VUCA).
Sustainability and business agendas are increasingly influenced by the notion that no
business will survive in a failed environment, or in a world where natural resources are
depleted. It is impossible to disassociate development from the environmental footprint,
but at the same time increasing the positive social effects, to ensure the success of
present and future communities and ecosystems.
Companies have gone through several phases in the quest for a value proposition
compatible with social and environmental sustainability: from a more conservative (1)
legal enforcement stance, (2) to the redesign of operations to encourage more
sustainable value chains, (3) to the supply of more sustainable goods and services, as
well as the development of business models that will allow those offers. A collaborative
and multi-stakeholder approach, where each of the partners leverages its expertise
and its access to networks, has been traditionally perceived as a major driver in
this process.
A sustainable future is largely dependent on people, consumers and consumers
not only making sustainable decisions, but also interacting actively with existing
corporations, brands and governments (sometimes taking a stand, others voicing
concerns, and in others also participating in elaborating alternatives). The emergence of
the collaborative economy, where 'people are encouraged to get what they need from
each other directly, suggests that conventional firms are threatened by their former'
customers' cooperation and that 'business as usual' is no longer the only choice.
Key Goals
 The new role of citizens in driving sustainability innovation and entrepreneurship
 The role of companies and entrepreneurs as agents of change
 The role of policy in shaping more sustainable lifestyles and favoring sustainability
innovation and entrepreneurship
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FIVE AREAS OF INQUIRY AND ACTION FOR SUSTAINABLE LIFESTYLES AND
GREEN ECONOMY
1. UNDERSTAND consumers’ values and behavior
2. ANALYSE short- and long- term obstacles and opportunities
3. INVESTIGATE new business models
4. MEASURE prospects
5. ASSESS the political dimension of the evolution in sustainable lifestyle
THE NEW ROLE OF THE CITIZEN
In the case of sustainable innovation, the citizen-user-consumer plays different roles. This
latest 'citizumer' or 'prosumer' is not a passive recipient of products and services, but
rather an active participant in transparent processes of innovation, a future sustainable
entrepreneur, unleashing new possibilities and envisaging new business solutions to
environmental or social problems, or a member of a society that facilitates change or
develops alternative production and consumption models.
THE NEW ROLE OF THE CITIZEN
Figure 11. Transition of the Role of Citizen in Sustainability
Although in both cases (company-driven and entrepreneur-driven innovation), the social
and environmental benefit added by the sustainable innovation result can be observed,
there are also clear differences. Entrepreneurial sustainable innovation projects have
their origin in citizens’ own interests, inner drive, and idealistic passion to change the
world. By contrast, sustainable innovation facilitated by companies, even if it engages
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citizens, operates within a market-driven framework guided by the interests of the
company.
AGENTS FOR SUSTAINABLE AND DISRUPTIVE CHANGE
 Can traditional companies be considered sustainability change agents?
The most common approach in large companies might be to protect their core business,
while at the same time experimenting on the side with sustainable innovations that could
eventually shift their business model.
Entrepreneurs face numerous challenges in sustaining their growth and scaling up, the
companies’ potential for impact is greater and they have a unique market position to
influence changes in societal norms, policies, values, expectations and behaviors as well
as the resources to do so. Entrepreneurs, through their networks and community
engagement, often challenge more fundamental societal norms and consumer attitudes.
 Are their sustainable innovations really disruptive?
While companies have the power to scale up, smaller players may be more easily able to
disrupt traditional markets and business models.
Societal embedding of sustainable products and services requires a combination of the
following factors:
 Systems change thinking,
 Transparent co-creation with different actors and stakeholders,
 The understanding of innovation as a network for learning,
 And the use of ‘different types of practices to influence societal norms and
expectations as well as user habits and routines’
THE ROLE OF POLICY IN CREATING MORE SUSTAINABLE LIFESTYLES
One of the key objectives has been to assess how policies can help create conditions to
foster sustainable innovation; specifically, ‘How to develop better policies to encourage
governments, businesses and individuals to take action and to work together to develop
sustainable innovations in order to support sustainable living.’
Four areas were policy change could enable more sustainability innovation products and
processes:
a) Education: a shift in educational systems to enable sustainability innovation and
entrepreneurship through more learner-centred programmes, critical analysis and
systems thinking approaches. Other ideas suggested are to include sustainability
innovation in higher education and to offer grants to support the development of
sustainability curricula and teaching resources.
b) Networks: government policy should encourage and establish mechanisms for
the creation and maintenance of sustainability learning networks where multiple
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stakeholders collaborate. The creation of formal networks and incubators for
entrepreneurs are some of the policy recommendations suggested.
c) Funding: facilitate access to finance and better tax and investment incentives to
run, escalate and grow business ventures, companies and SMEs with a positive
social and environmental impact.
d) Impact: different impact measurement and a new definition of ‘value’ appear as
two important factors to consolidate sustainability innovation. Some ideas on this
would be the mandatory inclusion of non-financial metrics in corporate reporting to
showcase the environmental and social value of an innovation.
COMPANY- DRIVEN INNOVATION
1. Company Internal Enablers
LEADERSHIP AND TOP MANAGEMENT BUY-IN
Management and top management buy-in is a vital organizational enabler. A strong intraentrepreneurial organizational culture has also proved crucial, not only in the decision to
involve citizens-users-consumers in the process of innovation, but also in enabling
experiments to take new ventures into account. Top management support, visionary
leadership, a strong organizational culture of trial and error, internal collaboration and
strong entrepreneurial attitudes were identified as key facilitators of sustainable
innovations in companies.
B. Company External Enablers
ROLE OF STAKEHOLDERS AND COLLABORATION
In all the cases analysed, the active involvement of both primary stakeholders (e.g.
manufacturers and business partners) and secondary stakeholders (e.g. public
authorities, civil society groups, universities and foundations) was crucial, while
secondary stakeholders tend to play a greater and more important role than other forms
of innovation. We see a far more co-creative and collaborative role for many civil society
groups, moving away from their conventional positions of activism and confrontation.
These different types of stakeholders play a variety of different roles throughout the
process: as facilitators of citizen engagement, acting as stimulators, initiators, brokers,
concept refiners, legitimators, educators, context enablers and impact extenders. This
also demonstrates that people can play a role in these systems, not only as customers of
the products or services of corporations, but also as representatives of institutions in
which they work as practitioners, as members of civil societies, as students, and in other
capacities.
Innovation for sustainability is highly collaborative in nature.
Although businesses find it difficult to deal with numerous stakeholders, they also realize
that in the sustainable innovation phase, these stakeholders are very relevant as they
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contribute expertise, capital and skills and can thus become sources of competitive
advantage.
The stakeholder management initiative to incorporate stakeholder perspectives into the
sustainable innovation process, whether collaborating with specialist foundations or
municipalities as well as small primary stakeholder groups, has not only given additional
input to be included in the project, but has also changed the nature of the project itself (a
sustainable school building, a new zero-waste product line and a hybrid, inclusive
distribution chain).
Companies involved in these co-creation processes are also developing new
organizational capabilities, since proper integration of insights requires a set of
competences specifically for selecting and evaluating stakeholders and establishing
proper dialogue with them, as well as aligning and empowering internal actors for external
collaboration.
C. Tools
INTEGRATION OF CITIZEN INSIGHTS
In their co-creation processes, the businesses studied have used a range of
methodologies and instruments to include citizens-users-consumers and other
stakeholders. Many of these approaches come with a lifestyle twist 2.0 (e.g. conducting
focus group discussions in an online environment). These modernizations bring
fascinating changes to conventional techniques.
Figure 12. Distribution of citizen integration methods across innovation stages in company driven processes
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SUSTAINABLE ENTREPRENEURSHIP INNOVATION
A. Sustainability entrepreneurship development pattern
THE SUSTAINABLE ENTREPRENEURSHIP PROCESS (SEP)
From the analysis of the cases a pattern for sustainability entrepreneurship appears,
which echoes the model developed by Frank-Martin Belz and Julia Binder. This model
includes six distinct phases that are common in all cases studied
1. To begin with, the future sustainable entrepreneurs face a social or
ecological challenge in their private or professional life, which makes them
react and put all their energy, passion and skills into solving it.
2. Second, they re-frame their challenge as an entrepreneurial opportunity.
3. As an intermediate step, the entrepreneur seeks the alignment of his-her
idea or venture with social or ecological goals (“double bottom line solution”)
and the key values and needs of the specific customer groups is
addressing.
4. It is important to note that the triple bottom line of social, environmental, and
economic goals is integrated in a sequential manner and not
simultaneously.
5. The last two stages are funding/forming a sustainable enterprise and
6. Creating/entering a sustainable market.
It is also worth noting that funding for these sustainable businesses chasing the triple
bottom line relies on a number of possible seed capital sources, including families,
friends, bank loans, crowd-funding, and public financing. Another aspect of sustainable
enterprises is that they are either developing new sustainable niches or entering the
higher end of the market into existing sustainable niches and segments.
Figure 13. Sustainable Entrepreneurship Process Model
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THE CIRCULAR ECONOMY
A circular economy is a form of economic growth that benefits enterprises, society, and
the world as a whole. In comparison to the linear model of "take-make-waste," a circular
economy is designed to gradually decouple growth from the consumption of finite
resources. Following a definition of what an economy is, this learning path delves into the
complexities of the circular economy model, including the distinction between biological
and technological materials, the various options for keeping materials and goods in use,
and the history of the concept. Finally, the advantages of moving from a linear to a circular
economy are addressed.
An economy that is restorative and regenerative by design.
Economic operation in a circular economy builds and rebuilds overall system health. The
definition acknowledges the need for the economy to function efficiently at all scales – for
large and small enterprises, organizations and individuals, internationally and locally.
It is based on three principles:
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Design out waste and pollution
Keep products and materials in use
Regenerate natural systems
DESIGN OUT WASTE AND POLLUTION
What if waste and pollution were never created in the first place?
The detrimental effects of economic activity that damage human health and natural
environments are revealed and designed out in a circular economy. This involves the
emission of greenhouse gases and toxic chemicals, air, soil, and water pollution, as well
as systemic waste including traffic congestion.
KEEP PRODUCTS AND MATERIALS IN USE
What if we could build an economy that uses things rather than uses them up?
Activities that conserve value in the form of resources, labor, and materials are favored
in a circular economy. To keep goods, parts, and materials circulating in the economy,
designers must consider longevity, reuse, remanufacturing, and recycling. Circular
systems allow efficient use of bio-based materials by facilitating a variety of applications
as they cycle between the economy and natural systems.
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REGENERATE NATURAL SYSTEMS
What if we could not only protect, but actively improve the environment?
A circular economy prevents the use of non-renewable resources while preserving or
enhancing renewable ones, such as by returning essential nutrients to the soil to aid
regeneration or by relying on renewable energy rather than fossil fuels.
Figure 14. The Circular Economy System Diagram
TERMINOLOGIES:
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Maintain / Prolong (& Share)
The innermost loop of the technical cycle shows the strategy of keeping products
and materials in use by prolonging their lifespan for as long as possible through
designing for durability as well as maintenance and repair. These longer-lasting
products can then be shared amongst user who are able to enjoy access to the
service they provide, removing the need to create new products.
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Reuse / Redistribute
Technical products are materials can also be used multiple times and redistributed
to new user in their original form or with little enhancement or change.
Marketplaces such as eBay are proof of this already well-established approach.
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Refurbish / Remanufacture
Remanufacturing and refurbishment are two similar, yet slightly different, process
of restoring value to a product. When a product is remanufactured it is
disassembled to the component level and rebuilt (replacing components where
necessary) to as-new condition with the same warranty as a new product.
Refurbishment is largely a cosmetic process whereby a product is repaired as
much as possible, usually without disassembly and the replacement of
components.
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Recycle
Recycling is the process of reducing a product all the way back to its basic material
level, thereby allowing those materials (or a proportion of them at least) to be
remade into new products. While this is undoubtedly an important process in a
circular economy, the loss of embedded labour and energy, the necessary costs
to remake products entirely, and the inevitable material losses mean that is a lower
value process than those closer to the centre of the system diagram, such as reuse
and remanufacturing.
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Cascades
This loop, within the biological cycle, refers to the process of putting used materials
and components into different uses and extracting, overtime, stored energy and
material order. Along the cascade, this material order declines until the material
ultimately needs to be returned to the natural environment as nutrients. A cascade,
for example, might be a pair of cotton jeans being turned into furniture stuffing and
then into insulation material before being anaerobically digested so that it may be
returned to the soil as nutrients.
BIOLOGICAL AND TECHNICAL MATERIAL FLOWS
Can a material safely re-enter the natural world?
Most people are struck by the diagram's division into two distinct halves, or cycles, which
reflect two radically different material flows: biological and technological.
Biological materials, which are depicted in green cycles on the diagram's left side, are
materials that can be safely reintroduced into the natural world after one or more usage
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cycles, where they can biodegrade over time, returning the embedded nutrients to the
atmosphere.
Technical materials (shown in blue on the right) cannot be reintroduced into the world.
Metals, plastics, and synthetic chemicals, for example, must constantly rotate through the
system in order for their value to be captured and recaptured.
ACCESS VERSUS OWNERSHIP
Do we consume products or use them?
The differentiation between customers and users is one of the diagram's subtleties.
Biological materials are the only ones that can be considered consumable in a circular
economy, whereas scientific materials are used. It's absurd to compare the use of
washing machines and automobiles to the consumption of food. This is a subtle, but
important distinction in how we view our relationship to materials.
Furthermore, it raises concerns about the necessity of owning products in the manner
that we have done in the past. What is the point of owning a drill if all you want to do is
drill holes in your wall to hang a picture? It is more important to have access to the service
that a product offers than it is to have access to the product itself. Understanding this shift
in mindset lays the groundwork to many of the practicalities of shifting our economy from
linear to circular.
THE ECONOMIC BENEFITS
What are the macroeconomic impacts of shifting to a new economic model?
With business and government leaders alike, the circular economy is gaining momentum.
The prospect of gradually decoupling economic growth from virgin resource inputs,
encouraging creativity, increasing growth, and creating more robust jobs has captured
their imagination. The effects of transitioning to a circular economy will be felt in society.
The slider below depicts some of the possible macroeconomic advantages of a circular
economy transition.
ECONOMIC GROWTH
Economic growth, as defined by GDP, would be achieved mainly through a combination
of increased revenues from emerging circular activities, and lower cost or production
through the more productive utilization of inputs. The changes in input and output of
economic production activities affect economy-wide supply, demand, and prices. Its effect
ripple through all sectors of the economy adding to overall economic growth
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MATERIAL COST SAVINGS
Based on detailed product-level modelling, it is estimated that, in the sectors of complex
medium-level products (such as mobile phones and washing machines) in the UE, the
annual net-material cost savings opportunity cost savings opportunity amounts to up to
$630 billion. For fast moving consumer goods (such as household cleaning products),
there is a material cost-saving potential of up to $700 billion globally.
JOB CREATION POTENTIAL
The largest comparative study to date of the employment impact of a circular economy
transition points to “positive employment effects occurring in the case that the circular
economy is implemented.” This impact on employment is largely due to increased
spending fuelled by lower prices; high-quality, labour-intensive recycling activities; and
higher-skilled jobs in remanufacturing. New jobs will be created across industrial sectors,
with small and medium enterprises, through increased innovation and entrepreneurship,
and a new service-based economy.
INNOVATION
The aspiration to replace linear products and systems with circular ones is an enormous
creative opportunity. The benefits of a mere innovative economy include high rates of
technological development, improved material, labour, energy efficiency, and more profit
opportunities for companies.
ENVIRONMENTAL AND SYSTEM-WIDE BENEFITS
What impact will shifting to a circular economy have on the environment?
Shifting to a circular economy has possible benefits that reach beyond the economy and
into the natural world. The circular economy makes a major contribution to meeting global
climate goals by reducing waste and emissions, keeping goods and resources in use,
and regenerating rather than destroying natural environments.
CARBON DIOXIDE EMISSIONS
A circular economy development path could halve carbon dioxide emission by 2030,
relative to today’s levels across mobility, food systems, and the built environment. In
addition, sector specific analysis indicates that the UK could reduce greenhouse gas
emission by 7.4 million tonnes per annum by keeping organic waste out of landfills.
PRIMARY MATERIAL CONSUMPTION
The circular economy could result in a reduction of primary material consumption (i.e. car
and construction materials, real estate land, synthetic fertiliser, pesticides, agricultural
water use, fuels, and non-renewable electricity) by 32% by 2020.
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LAND PRODUCTIVITY AND SOIL HEALTH
Land degradation costs an estimated $40 billion annually worldwide, without taking into
account the hidden costs for increased fertiliser use, loss of biodiversity, and unique
landscapes. Higher land productivity, less waste in the food value chain, and the return
of nutrients-to the soil will enhance the value of land and soil as assets. Returning
biological material back into the soil will reduce the need for replenishment with additional
nutrients. Recovering all of the nitrogen, phosphorus, and potassium from food, animal
and human waste streams globally could contribute nearly 2.7 times the nutrients
contained within the volumes of chemical fertiliser currently used. This is the circular
economy principle of regeneration at work.
THE OPPORTUNITY FOR COMPANIES
How will companies benefit from the circular economy?
Businesses would reap substantial benefits if they matched their activities with the circular
economy's principles. New profit opportunities are developed, costs are reduced due to
lower virgin-material requirements, and consumer relationships are improved. The sliders
below go over these and other advantages in greater detail.
PROFIT OPPRTUNITIES
Businesses could lower costs and create new profit streams. Analysis of complex
medium-lived products (e g mobile phones) and fast-moving consumer goods (e.g.
household cleaning products) shows that the circular economy would support the
following improvements:
 The cost of remanufacturing mobile phones could be reduced by 50% per device
 High-end washing machines could be leased instead of sold- customers would
save roughly a third per wash, and manufacturers would earn roughly a third more
in profits
REDUCED VOLATILITY AND GREATER SECURITY OF SUPPLY
The shift to a circular economy means using less virgin material and more recycled inputs,
reducing a company’s exposure to ever more volatile raw materials prices and increased
resilience. The threat of supply chains being disrupted by natural disasters or geopolitical
imbalances is reduced because decentralized operators provide alternative material
sources.
NEW DEMAND FOR BUSINESS SERVICES
A circular economy would create demand for new business services, such as:
 Collection and reverse logistics companies that support end-of-use products being
reintroduced into the system
 Product marketers and sales platforms that facilitate longer use or higher utilization
of products
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Part and component remanufacturing, and product refurbishment offering
specialized knowledge and services
IMPROVED CUSTOMER INTERACTION AND LOYALTY
Circular solutions offer new ways to creativity engage customers. New business models,
such as rentals or leasing contracts, establish long-term relationship, as the number of
touch points increases over the lifetime of a product. The business models offer
companies the chance to gain unique insights into usage patterns that can lead to a
virtuous circle of improved products, better service, and greater customer satisfaction.
THE OPPORTUNITY FOR INDIVIDUALS
What does the circular economy mean for individuals?
The circular economy will benefit individuals as well as businesses, the environment, and
the economy as a whole. Individuals benefit from a system based on the principles of
circularity in a variety of ways, from increased disposable income to improved living
conditions and associated health effects.
INCREASED DISPOSABLE INCOME
Analysis shows that circular economy could increase the disposable income of the
average household. The cost of products and services would be reduced and there would
be less unproductive time (e.g. time stuck in traffic). The average disposable income for
households would increase by EUR3000 by 2030.
GREATER ULITILITY
The utility, or benefit, felt by customers may be enhanced by the additional choice or
quality that circular models provide. Customer choice increases as producers tailor
products or services to better meet the customer needs.
REDUCE OBSOLESCENCE
For customers, overcoming premature obsolescence (the untimely failure of products) will
significantly bring down total ownership cost and deliver higher convenience as they
would avoid hassles associated with repairs and returns.
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HEALTH
Shifting to a circular food system could lower the healthcare costs associated with
pesticide use by $550 billion globally. There would also be significant reductions of
antimicrobial (an agent that kills microorganisms or stops their growth) resistance, air
pollution, water contamination, and foodborne diseases. It is estimated that a circular
economy for food, catalysed by cities, could save 290,000 lives otherwise lost to outdoor
air pollution per year, by 2050.
SYSTEMS
Shifting from linear to circular requires systemic solutions.
In the pursuit of system reform, there is no quick remedy, and no stone should be left
unturned. From a circular standpoint, business models, product and service design,
regulation, accounting practices, urban planning, agricultural practices, materials
extraction, manufacturing, and more all have undesirable qualities. However, we cannot
anticipate improvement by changing only one aspect of the current structure. System
reform is difficult to accomplish, and brilliant ideas are often squandered due to a failure
to handle the complexities involved. What we should do instead is study how complex
processes, such as economies, work, because learning is the first step toward developing
better solutions.
Figure 15. Systems Thinking
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The problems of current economy
 https://www.youtube.com/watch?v=aGrcU0TPhuI
THE ORIGINS OF THE CONCEPT
An idea whose time has come.
The concept of circularity has broad conceptual and historical roots. The concept of
feedback, or cycles in real-world processes, is centuries old and has echoes in many
philosophical schools. It resurfaced in industrialised countries after World War II, when
computer-based studies of non-linear processes unambiguously exposed the world we
live in as dynamic, interconnected, and therefore unpredictable – more akin to a
metabolism than a machine. By fundamentally the virtualisation, dematerialisation,
openness, and feedback-driven knowledge, digital technology has the potential to
promote the transition to a circular economy.
A variety of schools of thought have refined and improved the generic definition, which
you can read about in the expander below.
Figure 16. Cradle to Cradle
All materials used in industrial and commercial processes are called nutrients in this
design theory, which are divided into two categories: technological and biological. The
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Cradle to Cradle system focuses on effective design when it comes to making goods that
have a positive impact.
Cradle to Cradle’s three principles
1. Cradle to Cradle design is based on natural systems, which have no sense of
waste and use it as a resource for anything else. Technical nutrients should be
used over and over again at high quality, while biological nutrients should be safely
returned to the soil.
2. The use of clean and sustainable energy is the second principle. Natural systems,
according to the statement, thrive on current solar profits, and human systems
might as well. Renewable energy is renewable (at the point of use), inexpensive
to maintain, produces no waste when in use, and makes use of plentiful resources.
3. Finally, celebrate diversity: diversity in natural systems creates resilience, and it
can do the same in human systems. Similarly, no two places are the same: to
resolve the obstacles and seize the opportunities presented by various
geographies, a diverse approach is often needed.
Resource Abundance by Design | William McDonough at World Economic Forum
 https://www.youtube.com/watch?v=OcO1O99UoUs
The Performance Economy
 https://www.youtube.com/watch?v=o0LTo0r-9ZM
Biomimicry
“Innovation inspired by nature” - Janine Benyus
Biomimicry is based on the idea that life has already solved the majority of the problems
we are currently facing. To give some obvious examples, birds can fly without using fossil
fuels, barnacles can adhere to underwater surfaces and have an incredible ability to stay
attached, insects outweigh humans but produce no pollution or waste, and leaves absorb
sunlight and transport water and nutrients through a dense network efficiently and
effectively.
Biomimicry holds that by emulating nature's patterns and strategies, we can find solutions
to human problems.
Biomimicry is a modern science that explores nature's best ideas and then imitates these
designs and processes to solve human problems, according to Janine Benyus, author of
Biomimicry: Innovation Inspired by Nature.
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Industrial Ecology
The study of material and energy flows through industrial systems.
This approach, which focuses on interactions between operators within the "industrial
ecosystem," aims to create closed-loop processes that use waste as an input, removing
undesirable by-products. Industrial ecology takes a systematic approach, engineering
manufacturing processes to work as closely as possible to living systems. This is
achieved by considering local ecological constraints and looking at global impact of
processes from the outset.
Because of its interdisciplinary nature, this framework is often referred to as the "science
of sustainability." Industrial ecology concepts can also be extended to the service sector.
Industrial ecology focuses on social well-being as well as natural resource regeneration.
Regenerative Design
John T. Lyle began implementing regenerative design concepts in the United States that
could be applied to all processes, not just agriculture, where the principle of regeneration
had already been formulated.
He is widely credited with laying the groundwork for the circular economy framework,
which grew in popularity thanks to McDonough (who had studied with Lyle), Braungart,
and Stahel. Courses on the subject are now available at the Lyle Center for Regenerative
Studies.
Blue Economy
The Blue Economy, founded by former Ecover CEO and Belgian businessman Gunter
Pauli, is an open-source movement that brings together concrete case studies, which
were first collected in an eponymous study presented to the Club of Rome.
"Using the resources available in cascading systems, (...) the waste of one product
becomes the input to create a new cash flow," the official manifesto states. Based on 21
founding principles, the Blue Economy insists on solutions being determined by their local
environment and physical/ecological characteristics, putting the emphasis on gravity as
the primary source of energy. The report, which also serves as the movement's manifesto,
outlines "100 innovations that can create 100 million jobs in the next 10 years" and
includes numerous examples of successful South-South collaboration projects, which is
another unique feature of this approach aimed at emphasizing its hands-on approach.
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WHY NOW?
Moving from vision to reality.
Our economy is currently trapped in a mechanism that favors a linear output and
consumption model. However, under the weight of many strong disruptive forces, this
lock-in is eroding. To accelerate the transition to a circular economy, we must take
advantage of this favourable alignment of fiscal, technical, and social factors. Circularity
is infiltrating the linear economy and has progressed beyond proof of concept; the goal
now is to mainstream and scale the circular economy.
Figure 17. Shifting Systems
Reference:

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https://www.ellenmacarthurfoundation.org/explore/the-circular-economy-in-detail
https://sustain.wisconsin.edu/sustainability/sustainable-management
https://courses.lumenlearning.com/boundless-management/chapter/strategicmanagement/
https://seprianhidayatamin.wordpress.com/2016/04/23/11-strategic-decision-making/
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Exercise #2
Activity Part 1:
This activity is based on the three articles you have just read.
Answer all questions for each article.
Go through each article systematically listing the people who seem to be involved or
affected; events mentioned; elements of structure and process in the situation.
Pause and think. Do you relate to any of the points you’ve listed? (For instance would you
include yourself in any of the groups of people? Were you aware of the events mentioned
or involved in any way? Do you relate to any of the other elements?) Write down any
ways in which you do identify with people, events, structure and process you have listed
in answer to Question 1.
Draw a rich picture of each situation described. Locate yourself in the picture – either as
observer or where you feel included in any group mentioned.
In your view are there any perspectives missing from the articles that you would find
helpful to understand in analysing the situations described? If so, which are those that
you would consider most important to investigate if you had the opportunity to do so?
How might you find out about these other perspectives?
Now consider the structural elements in each situation. Do you recognise any
hierarchies? List all those you can find. Note any uncertainties about positions of some
elements in hierarchies or whether the structure is hierarchical. Do you relate to any of
these hierarchies? For instance are the areas in which your decision-making takes place
represented – or not? If you do recognise any hierarchies, do you relate to them or do
you experience them as ‘someone else’s hierarchies’?
There are several possible hierarchical structures to be found in the articles (to do with
people’s groups, organisations, nations, species etc). Identify a single hierarchy from one
of the articles and try and represent it now in a systems map, using the recursive nature
of the systems map with its different levels of system and sub-system to draw out the
hierarchy you have found. Figure 2 may be of assistance in identifying some different
levels in a hierarchy.
Figure 2 ‘Identifying a hierarchy?’ (Wadsworth, 1991)
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Activity Part 2:
What links can you find between the three articles? For instance, are there issues that
overlap? Are some of the same groups of people mentioned? Can you recognise any
causal links between one situation and another? Try to find one recurring theme or group
of people and explain what connections you see.
Was there enough detail in the articles for you to be able to make the connection easily
or did you have to draw on your own experience, other perspectives or previous
knowledge?
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Module 3
STRATEGIC ENVIRONMENTAL ANALYSIS
Week 5-6
Introduction
Strategic Environmental Analysis (SEAN) is a structured, participatory process to analyse
environmental problems and opportunities for development, to identify main actors, and
to define strategic goals at early stages.
Diverse applications in developing countries have refined its framework, guidelines, tools
and checklists. It has an integrative focus on linkages of environmental and socioeconomic issues of sustainability.
Its analytical framework has four clusters: environmental context analysis, problem
analysis, opportunity analysis and strategic planning. It has succeeded in putting concrete
sustainability goals and environmental issues on policy-makers’ agendas and initiating
participatory and interactive planning.
Learning Objectives:
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Understand Strategic Environmental Analysis
Identify the objectives and main characteristics of SEAN
Understand the SEAN Analytical Framework
Listing five phases of the SEAN process and understanding each
Understanding the process of SEAN
Recognize the result of SEAN
Objectives and main characteristics of SEAN
SEAN basically deals with the interactions between ecosystems and human society, and
aims to develop insight in these complex interrelations and agree upon strategic goals.
The approach is anthropocentric because priorities are set, impacts are assessed and
norms are defined on the basis of human values, while these are matched with ecological
thresholds in environmental stability and resilience.
SEAN can be defined as a participatory process being structured by an analytical
framework, to analyse the environmental problems and opportunities for human
development, to identify the main actors involved, and to define strategic goals at early
stages of decision making or planning. Based on experiences, a practical methodology
has been worked out, with guidelines, tools and checklists.
SEAN has the long-term objective to mainstream environmental issues into development
planning processes by raising the level of knowledge on the environmental context and
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its interrelations with the other dimensions of sustainable development. Short-term
objectives are:
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to analyse the environmental context of human development, the opportunities and
constraints;
to gain insight into the relations between environmental key issues and other
dimensions of sustainable development (social, economic, institutional issues);
to define a vision and strategic goals with relevant actors, as inputs for planning of
sustainable development strategies at early stages of decision making;
to stimulate and provide guidance to an interactive process with actors involved.
SEAN has been applied as a framework for regional planning by decentralised
government agencies, to bring together relevant actors, develop a common vision and
strategic goals for regional development, and by environmental NGOs to develop their
own strategy. This forms the basis for detailed planning or policy formulation, at a sectoral
or administrative level.
Process and Analytical Framework
SEAN consists of a participatory process of creating insights, mutual learning and making
strategic choices. This process is roughly structured by five phases which can be briefly
summarised as: preparation; scoping; detailed studies; synthesis and planning; follow-up
and monitoring (Figure 18).
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Figure 18. The Five phases of the SEAN process, and the analytical tasks to be performed in each
To structure analysis and planning during the five-phase process, an analytical framework
has been developed, consisting of four clusters which hold ten analytical tasks. The
analytical framework provides a logical structure which is necessary to ensure that
relevant environmental issues are not overlooked and cross-sectoral insights are
generated.
Flexibility in terms of the emphasis on certain process phases and analytical tasks is an
important characteristic of SEAN. Its application will depend on the objectives, previous
work that has been done, identified gaps, available expertise and time, and the required
level of detail of the result. Short-cuts can be made.
Conceptual and Methodological Basis
SEAN basically consists of existing concepts and methodologies brought together within
a logical structure to guide a participatory process of analysis and planning. The following
concepts are the basis of the SEAN process and analytical framework.
1. Multiple users and multi-functionality of environmental systems. Environmental
functions can be classified as production, carrier, regulation and cultural
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(information). Ecosystems have different functions with variable value for
stakeholders now and for future generations.
2. Objective and subjective value judgements. Matching the knowledge of insiders
and outsiders, formal and informal information sources, quantitative and qualitative
data, is essential to build up a common understanding of the dynamics and
complexity involved.
3. Limits of acceptable environmental change. Although difficult to quantify, different
norms and thresholds for acceptable environmental change must be recognised
to form the basis for defining bottom-lines and desirable states for different
stakeholders.
4. Environmental problems as a normative perception. Environmental problems are
defined as a negative discrepancy between norms and standards of desirable
qualities for human society and the current situation (de Groot, 1992). Thus,
problem perceptions will vary between different stakeholders and actors involved.
5. Social causality of problems and opportunities. Proximate and root causes of
environmental problems, and factors favouring or disfavouring the realisation and
spread of opportunities, are found in human society. Understanding motivations
and (alternative) options (the psychology) of the actors associated with these
factors allows the design of more effective and specific solution strategies and
partnerships.
6. Interrelationships between sustainable development components. SEAN focuses
on the areas of overlap and the trade-off between environmental and socioeconomic development goals, to set strategic priorities, identify win–win options
and areas of (potential) conflict.
7. Opportunities and initiatives as strategic building blocks. Apart from tackling
perceived problems by developing solutions, a more effective approach is that of
focusing on existing opportunities for change and promising initiatives at various
levels.
8. Strategic partnerships. An effective strategy should start out by collaborating with
innovators ready to adopt more sustainable development concepts and
technologies.
9. Micro–meso–-macro linkages. To overcome constraints (root causes) and benefit
from opportunities (triggers), regional (meso) or local (micro) level sustainable
development requires insight into the macro-level context (policies, macroeconomics and institutions).
“Methodologically, SEAN combines a systems approach and an actor’s approach.”
The systems approach is required to gain insight into the interaction and dynamics
between social, economic and institutional factors in relation to environmental problems
or opportunities. The aim is to identify proximate and root causes, and possible linkages
with opportunities for change.
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The actor’s approach is required to identify the key actors influencing the system
dynamics, both in a negative and positive sense (opponents and proponents). Schematic
representations show the linkages of actors within different sectors and at different levels,
possibly with indication of power relations and mutual interests or conflicts. It is important
to address or involve both proponents and opponents of desirable change in any strategic
plan.
The SEAN process aims to be participatory and transparent. In terms of participation,
there is need for horizontal and vertical integration of participants, by involvement of
insiders and outsiders and actors from different institutional levels, the use of both local
(traditional/indigenous) and scientific knowledge, and of both formal and informal
information sources.
Particular attention is given to so-called ‘absent stakeholder’ groups, including future
generations, outside communities and critical nature values. These ‘absent stakeholders’
need to be represented by environmentally or socially oriented organisations.
The SEAN process and analytical framework typically represent a rational structure of
generating insights and defining strategic priorities. However, making strategic choices is
a process that is only partly based on rational considerations and logical insight,
particularly when complex and sensitive trade-off relations exist (for instance, between
environmental and economic goals) and fundamental changes (for instance, within
policies or institutions) are required.
It is therefore essential that the SEAN process is adjusted to local conditions, a diversity
of actors is actively involved, outputs are well communicated, and the process is
responsive to societal views and unexpected opportunities (Figure 19). This underlines
the importance of the SEAN process, as compared to the analytical tasks to be performed.
Figure 19. SEAN as a process of rational analysis and openness to socio-political events and opportunities
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The SEAN process strives for a balance between requirements to develop a good product
(that is, to synthesise available information, views and perceptions) and requirements to
assure a participatory and interactive process based on equal footing (that is, to generate
commitment among different parties involved). Reaching this balance seems an essential
characteristic of alternative mechanisms to improve integration of environmental issues
into policy making (Bailey and Renton, 1997).
Positioning Strategic Environmental Analysis
SEAN brings together elements from different conceptual and methodological planning
and environmental assessment backgrounds, and is therefore difficult to position. It is
ideally applied at early stages of the planning cycle. However, in most cases, existing
plans and programmes have a strong influence, and SEAN is being applied to make
necessary adjustments to integrate relevant environmental issues.
SEAN can easily be confused with strategic environmental assessment (SEA). The
similarity of the name is partly coincidence, but is also useful to illustrate the close
relations. SEAN can basically be considered as an integrated and open-ended planning
tool, but shows similarity with SEA, aimed at informing and influencing policy making
processes at early stages. This can be observed when looking at the recently proposed
performance criteria for SEA, most of which are similar to requirements for integrated
planning.
While SEAN aims at early integration of environmental issues in planning processes, to
define sustainable strategies, plans and interventions, SEA would assess in greater detail
the impacts of a plan or strategy before a decision is being taken. Thus, these two tools
are complementary (Figure 20).
Figure 20. Position of SEAN in relation to other environmental assessment methods
To work out interrelations between sustainable development dimensions, the following
final goals have been defined:
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


ecological: stability and diversity;
socio-institutional: autonomy, health, security and equity;
economic: production and efficiency.
These criteria are used during the SEAN process to make choices and set priorities. The
interrelations between environmental and socio-economic criteria can be of different
types, for instance, management practices, natural resource endowments and
entitlements, cultural values, problem perceptions, and impacts and causes of
environmental changes.
To achieve strong integration between the different components of an integrated analysis
process (Figure 21).
Figure 21. SEAN as part of an integrated sustainability analysis, with strong linkages between the different
dimensions
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SEAN also aims to integrate attention for environmental issues into formal planning
procedures (for instance, decentralised, spatial, sectoral planning). This is necessary to
ensure that relevant priorities arising from the SEAN process are being reflected in
concrete plans (Eggenberger and Partidário, 1999)
Current globalisation processes and changes to the regulatory and institutional
frameworks in many countries further complicate this task. SEAN aims to support
integrated analysis and planning, by:
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being initiated early in the decision making process, similar to (spatial) planning;
actively involving planners and decision makers in the process;
generating outputs that are useful for planners: guidelines;
criteria and norms for environmental management, strategic goals and priorities,
key actors to involve, opportunities and win–win options, tasks and functions for
institutions to fulfil, and so on.
Experiences and Potential Application
SEAN was developed through experiences in a number of developing countries:
Zimbabwe, Ghana, Benin and Nicaragua, and has by now been applied under different
conditions, by different organisations, including the SNV, Netherlands Directorate
General for Development Aid (DGIS), Dutch co-funding organisations, the International
Union for the Conservation of Nature (IUCN) and the World Wildlife Fund (WWF).
The main outputs of these applications have been:
Concrete results: analysis of environmental problems and opportunities, identification of
key issues and key actors to address: strategic goals and priorities, outlines of a vision,
sectoral priorities and inter-sectoral programmes and action fields. Process results:
awareness among various stakeholders, networking, adjustments of policy framework,
improved co-ordination, creation of strategic partnerships and coalitions between private
sector, civil society and government institutions.
Potential Applications and Users
The SEAN process and analytical framework has most potential to support and provide
inputs in early phases of policy making or planning processes that are relatively openended and have a broad, holistic sustainable development perspective.
SEAN has so far been applied both as an informal and as a formal planning process. In
the first case, the process was initiated by (environmental) NGOs or donor agencies, with
the aim of stimulating public awareness, and/or setting strategic goals and development
options as an alternative to formal goals (for instance, the case of NGOs in Botswana
using SEAN to develop their own strategy). SEAN can be used by NGOs and
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countervailing powers to identify and make known political and institutional root causes
of environmental problems, which might be too sensitive to identify in formal processes.
As a formal process, SEAN has been used to support decentralised development
planning. The ‘informal’ application appears to have much potential in situations in which
governmental structures have limited legitimacy or commitment to implement
sustainability objectives, the ‘formal’ application has potential when a legitimate ‘owner’
exists and wants to put into practice a sustainability vision.
SEAN can be applied to different (administrative or planning) areas, to sectors or to single
steps in the planning process. The focus might be a bioregion (for instance, for
management planning of protected areas). SEAN has been applied to defining priorities
for a forest management plan (Honduras) and a strategy for wetland management
(Benin). In cases of a sectoral application, the analysis should work out linkages with
other sectors. The SEAN analytical framework has been adjusted to carry out an analysis
of the environmental impacts of structural adjustment programmes (Kessler and van
Dorp, 1998).
SEAN particularly addresses micro-meso-macro dynamics, and brings together actors
from various institutional levels (vertical integration) during a participatory process (Bass
et al, 1995). In many developing countries, good opportunities and demands for such
support occur at sub-national (meso) levels where linkages can be made with ongoing
decentralisation processes.
The meso-scale is suitable for application because it meets the requirement of
stakeholders being able to perceive concrete issues in their environment and express
themselves, and the requirement of policy makers being sufficiently informed and able to
negotiate with stakeholders (Hoefsloot and van den Berg, 1998). Representatives from
the community level, public sector and private sector must be involved.
Similar potential occurs in developed countries, where municipalities are making their own
‘green’ development plans. The resulting strategic goals and sustainable development
options can be used to work out concrete projects and action plans, and to define
institutional requirements (for instance, for reform and capacity building) based on
institutional functions to be performed. The resulting key issues for sustainable
development within an area or sector provide relevant inputs for more specific analyses
or studies, possibly including project environmental impact assessment (EIA) or sectorwise SEA.
Conducting the SEAN process and using the analytical framework varies for each
application, depending on concrete objectives, budget and time requirements and earlier
work that has been done. For instance, in several cases the use of the SEAN framework
was limited to one ‘scoping workshop’ (phase 2, see Figure 18), as a guideline to define
key issues based mainly on existing information. Another element of flexibility is the level
of integration between SEAN and social, economic or institutional analyses.
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In line with its flexibility, the time required for application of SEAN may vary from a few
weeks (in cases of application such as a scoping workshop only) to several months (in
cases of application of all phases). The outputs can easily be biased if the analysis is
carried out too quickly; this is a common weakness of less rigorous assessment tools (for
instance, English, 1999).
Time and budget requirements mainly depend on:
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the required level of detail and the existence and availability of relevant data and
information (for instance, environmental action plans, rapid rural assessments,
land-use surveys);
experience and expertise of the core SEAN team responsible for execution of the
tasks;
level of application, complexity of the situation and occurrence of sensitive issues;
effectiveness of local co-ordination and clarity of ownership.
SEAN Analysis and Planning Process
SEAN process phases (Figure 18) were applied in the following way:
1. Preparation: this critical phase included defining objectives, lobbying at national
level, selecting participants, discussion on ownership, reviewing relevant
experiences, and training selected participants on SEAN.
2. Scoping: during this phase, two workshops were held, one at village level and one
at provincial level, to capture existing knowledge by going through the SEAN
analytical tasks with selected participants. Results of the village workshop were
inputs to the provincial level workshop.
3. Detailed studies: detailed studies were undertaken on a number of identified key
issues. This involved interviews and surveys to capture views and perceptions of
certain social groups (women, pastoralists, children, and urban settlers), detailed
studies on certain themes (for instance, soil fertility, migration patterns, transboundary pastoralist movements, agricultural extension and local traditions) and
on certain sectors (for instance, gold mining, cotton production).
4. Synthesis and planning: this phase brought together the insights and views
generated in previous phases, during a workshop, to define a common vision and
strategic goals on sustainable development in the province.
5. Follow-up and monitoring: this ongoing phase focuses on supporting and
strengthening implementation of the strategy, working out action plans, ensuring
feedback of results to stakeholders, setting-up a monitoring system, and legalising
the resulting strategy.
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Figure 22. Summary of task 3: impacts of priority environmental trends on key issues for stakeholders (each signed
based on documented evidence)
As illustrated earlier (Figures 18 and 19), the ten analytical tasks, classified in four
clusters, provide a logical structure for the analysis and planning activities undertaken
during the SEAN process, to ensure that relevant issues are not overlooked and crosssectoral insights are generated.
Final results of each analytical task are achieved in phase 4, by synthesising results from
the previous two phases (scoping and detailed analysis).
Concrete results
Task 1: The main stakeholders were identified, including gender distinctions, and the
main environmental functions on which they depend, directly or indirectly. Environmental
functions were classified as production (10), carrier (6), regulation (8) and cultural (3).
Priorities among environmental functions were set by the perceived socio-economic value
for stakeholders, based on studies and questionnaires. Descriptions were made of
stakeholders, resource-use systems and environmental functions.
Task 2: An assessment was made of past and present trends of each of the
environmental functions, in terms of changes in quantity and/or quality, flows and/or
stocks. Use was made of various types of indicator: state, pressure and response
indicators, direct and indirect indicators, those based on scientific and local knowledge.
Indicators were discussed during workshops. Cause–effect chains were elaborated to
show the interrelations between trends of different environmental functions. Changes
were determined of relevant economic, social, institutional and political issues, and how
these changes influence the environmental trends (in terms of threats and opportunities).
Task 3: Impacts of current environmental trends were assessed, looking at
consequences for present stakeholders, for outside communities (off-site impacts), for
future generations (by extrapolating current trends) and for natural values (biodiversity).
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Results were synthesised by means of a trend impact matrix (see Figure 6). The impacts
on stakeholders were assessed for priority concerns: incomes; efficiency of income
generating activities; health; resource conflicts; and equity. Risks or economic
consequences were assessed in a qualitative way.
Task 4: Norms, standards and thresholds involved were assessed in two respects:
Bottom-line: when will current trends lead to collapse of environmental functions,
or to unacceptable change as regards social or economic criteria for certain
stakeholders; Ideal situation: what is the desirable situation for different actors, in
terms of environmental qualities in their surroundings and socio-economic values
of livelihood systems.
As norms are difficult to assess, standards are generally absent and thresholds not
known, a qualitative assessment was made using insights and views from different actors
involved.
Task 5: Using a checklist and relevant information from tasks 1–4, environmental
problems were defined in a transparent manner. In total four priority environmental
problems were defined: decline of soil fertility; decline of cereal grain production;
deforestation and decline of the availability of forest products; and decline of urban living
conditions. Each environmental problem was described in detail to make sure there is a
common understanding about the why, where, for whom and since when of each problem.
A good understanding of each problem definition is essential before analysing its causes.
Task 6: Based on the actor-in-context approach, for each environmental problem were
defined: the main causing activities; primary actors involved; their motivations and
alternative options; underlying factors or root causes; secondary actors involved; and so
on. An actor’s field illustrates the interrelations between different actors involved (Figure
23).
Task 7: The main environmental opportunities were defined, classified as ecological (for
instance, potentials for certain cash crops), economic (for instance, emerging markets for
certain products or services) and institutional (for instance, decentralisation process), and
local initiatives and associated actors (for instance, initiatives of forest co-management).
Priorities were set and packages of interrelated opportunities were formed, that is,
opportunities that can reinforce each other.
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Figure 23. Result of task 6: simplified actor’s network, with some examples, showing linkages between actors,
obtained through insight into underlying factors that influence options and motivations of actors
Task 8: The opportunities were elaborated in terms of their potential to tackle underlying
factors of environmental problems (‘win–win options’) and to enhance sustainable
development. Actions required to support further realisation of opportunities, including
building strategic partnerships. Use was made of an opportunity-impact matrix. Priorities
were set on the basis of the potentials and constraints to realise opportunities in a
sustainable way.
Task 9: Information from previous tasks was synthesised by defining a vision and
strategic goals for development of the region, definition of sectoral priorities and intersectoral themes as strategic options based on the main opportunities (the inter-sectoral
themes create synergy between sectoral priorities), and establishment of coalitions with
strategic partners (see example in Box 3). Action plans were worked out for strategic
choices. Required change within institutions involved was obtained by matching, in a
participatory way, strategic choices resulting from the SEAN analysis, with results of an
institutional analysis (existing capacities, strengths and weaknesses of the institutions
involved), as illustrated in Figure 24.
Task 10: A follow-up strategy was elaborated, including issues internal to the
implementing institution (institutionalising the SEAN process, definition of a structure
responsible for co-ordination), establishment of an environmental monitoring system with
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indicators and procedures to adjust strategies or policies, and priorities for external
communication and capacity building.
Figure 24. Linking SEAN outputs with results of an institutional analysis to define desirable institutional reform
Conclusions and Challenges
It appears that SEAN meets a demand by development organisations to support:
o taking into consideration environmental issues early in decision-making
processes;
o looking at the environment in a proactive and positive way, for development
purposes;
o integrating environmental issues with results from social and economic analyses,
with a holistic sustainable development perspective;
o defining key actors that must be addressed and involved to move forward
Establishing effective monitoring systems for adaptive management
Defining a common vision and strategic goals is important as livelihood and
environmental management systems are becoming more complex and more
uncertainties are involved. It raises the question of how to conceive the plan, which
contents are necessary and how to ‘manage’ the plan, in order to be functional in an
unpredictable and dynamic context.
As a result, the need for more adaptive management systems based on strategic goals
has been emphasised. An effective monitoring system is a critical component of such
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systems. A manual was produced on how to design a monitoring system that focuses on
the key issues identified during the SEAN process (Kessler, 1998). Different types of
strategic plans and associated monitoring systems, resulting from SEAN and other
integrated analyses, can be tested to meet requirements for adaptive management in
situations of complex change.
References:
 https://www.tandfonline.com/doi/pdf/10.3152/147154600781767303
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Exercise #3:
Which of the following is a political factor, which may impact upon an
organization?
NAFTA.
Demographics.
Bank of England.
Stock market.
National government.
Which of the following is/are political factor(s), which may impact
upon an organization?
Confederation of British Industry.
Bank of England.
World Trade Organisation.
Answers a & b.
Answers b & c.
Which of the following is/are economic factor(s), which may impact
upon an organisation?
European Central Bank.
World Trade Organisation.
Confederation of British Industry.
Answers a & b.
Answers b & c.
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Which of the following is a socio-cultural factor, which may impact
upon an organization?
Infrastructure.
Cross cultural issues.
Core competencies.
Inefficiencies.
Integrating mechanisms.
Which of the following is a technological factor, which may impact
upon an organization?
Unemployment levels.
Consumer disposable income.
New patents and products.
Attitudes to work and leisure.
Government policy on monopolies and competition.
The threat of substitutes may occur when, which of the following
arises?
Customers perceive the substitute to offer something different.
The substitute is more expensive.
The substitute is more convenient to use.
Answers a & b.
Answers a & c.
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Which of the following is a good example of substitution?
Hot-desking for texting.
Nicotine patches for chocolate.
Videoconferencing for long-distance business travel.
Answers a & b.
Answers b & c.
The threat of new entrants will be greater if which of the following
occur?
There are no high capital set up costs.
Customer base is sufficient to support new entrants.
Markets are mature.
Answers a & b.
Answers b & c.
The threat of new entrants will be reduced if which of the following
occur?
Customer numbers are small.
Profit opportunities are few.
Capital set up costs are high.
Markets are mature.
All of the above.
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The threat of substitutes may occur when, which of the following
arises?
Customers perceive the substitute to offer something different.
The substitute is more expensive.
The substitute is more convenient to use.
Answers a & b.
Answers a & c.
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Module 4
SUSTAINABLE STRATEGIC MANAGEMENT RESOURCE ASSESSMENT
Week 7
Introduction
In the past 300 years, industry has been all about expansion and growth-unlimited growth
with little regard for the social cost on the people who make up the labour force or the
environmental resources that drive the supply chains.
Learning Objectives:







Understand the Supply Chain Process
Listing Environmental, Social and Governance Sustainable Strategic
Management
Recognizing purpose and tools for sustainability maturity level
Understanding resource management
Understanding the DPSIR Framework
List of resource efficiency indicators
List of resource use related environmental impact indicators
Figure 25. Supply Chain Process
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Figure 26. World Resource Usage
Figure 27. ESG Sustainable Strategic Management
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Creation of Value
 Reduce waste
 Use resource more efficiently
 Promote sustainable development
 Every product should bring in MORE value than what we TAKE from the
environment
 PROFIT in its truest and holistic sense
Figure 28. Unilever SSM (Sample)
Figure 29. Adidas SSM (Sample)
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Sustainability Maturity Level
Purpose:
 Increase your awareness on Sustainability
 Empower you to continue your journey
 Identify the maturity level of your organization
 Identify next steps
Tools:
 Strategy: The ‘Why,’ your purpose and direction
 Are of focus: How you implement initiatives / programs and your focus
 Effectiveness: How well you implement, measure, monitor and evaluate your
initiatives
 Communication: Internal and external communication methods and practices
The questions must be kept simple and easy to answer.
The assessment report will give great insights on the performance of Sustainability Pillar.
The pressures on land, water, oil, and other natural resources are increasing as the global
population grows along with expectations of economic growth. As this is coupled with
concerns about climate change, a collection of research, policy, and management
challenges emerge that are crucial for long-term sustainability.
Resource Management
A resource assessment can be defined as the process by which resource managers
estimate a product's future production potential. A resource assessment, for the purposes
of these guidelines, is characterized as the activities necessary to evaluate a managed
species' long-term production potential by understanding population dynamics and
determining acceptable harvest rates and practices to ensure long-term management
(Wong 2000, Hall and Bawa 1993). Resource assessment offers data for identifying
knowledge gaps that need to be filled as well as population characteristics that need to
be tracked over time. This strategy focuses on the controlled population possibilities and
takes into account the characteristics that have a direct effect on the availability of supply
and the capacity for long-term use (Hall and Bawa 1993).
Other approaches are broader, attempting to identify products and describe an ideal
development process that, in some cases, begins with species selection and continues
through market research, resource inventory, participatory assessments, determination
of sustainable harvest practices and intensities, management planning, and monitoring
(e.g., Peters 1994, 1996, and Stockdale 2005).
Whatever approach is used in cases where a sustainable yield or harvest rate must be
determined, a basic understanding of the species' population dynamics is needed.
Making choices needs more than a simple inventory of the resource. Managers need
accurate knowledge about what is happening with the community and the activities that
must be implemented in order to ensure long-term management.
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When a BioTrade organization manages multiple species with multiple products in
different areas, resource assessments for each species involved in each collection area
are needed. While general species biology knowledge can be useful, productivity and
demography differ depending on environmental conditions and the degree of disturbance.
Natural Resources Assessment and Management Services
Natural resources (or Natural Capital) provide factories with raw materials, provide
livelihoods for people, and generate revenue for economies. These resources must be
used, maintained, and conserved in a sustainable manner to ensure their continued
availability for future generations. To devise effective and efficient management
strategies and plans for these resources, a thorough understanding of their condition,
extent, and pressures (threats) is needed.
Services include but are not limited to; Water resources assessment and
management
Evaluate, design, and enforce sustainable water resource management strategies at the
basin or site level, taking into account environmental, economic, and social factors.
Establish water catchment or wetland management strategies in particular to ensure longterm resource usage.
Land-use change and Landscape dynamics
Landscapes are ever-changing and complex. Land-cover changes arise as a result of
both natural and anthropogenic factors, such as land-use change. Changes in land use,
especially through infrastructure growth, can impact biodiversity and ecosystem services
in a variety of ways, including habitat loss, degradation, and fragmentation. Ecosystem
services may have an effect on community livelihoods that rely on natural resources like
water, grazing land, fuel wood, and other raw materials.
As a result, approaching the issue on a landscape scale and including all social players
in the decision-making process is particularly useful for offering successful regional
management options. To model, forecast, and analyze landscape dynamics, we use GIS
and remote sensing. We use long temporal series of satellite images to perform research
on changes in land-cover and land-use, which is then confirmed by ground-truthing; we
also evaluate the impact on biodiversity and ecosystem services.
Human-wildlife conflict and Bushmeat Management
Human-wildlife conflicts (HWC) and bushmeat trade are two of the most serious
challenges to Africa's protected areas management. It's also difficult to come up with
successful mitigation strategies. It is therefore essential to evaluate and comprehend the
dynamics of HWCs in order to establish accurate, appropriate, and productive mitigation
strategies. It's important to understand the hotspots, drivers, types, prevalence and trends
of the events to allow proper planning.
We develop, execute, and monitor long-term mitigation strategies that include impacted
communities and other key stakeholders. We use a comprehensive approach to
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assessment that includes local people, animals, livestock, crops, and biodiversity in order
to design rigorous long-term mitigation strategies that ensure the protection of humans
and their properties, as well as wildlife and their habitats.
Ecosystem services surveys, analysis and mapping
We apply cutting-edge tools such as InVest for assessing, valuing and mapping priority
ecosystem services to understand their distributions, threats, value, amongst others.
We evaluate the challenges, hazards, and future impacts of global change on priority
ecosystem resources, including developmental activities and environmental change such
as land-use/cover change, climate change, and extractive industry impacts, among
others.
To help management planning, we build maps that can be used for spatially clear
prioritization, decision-making, and problem identification, especially when it comes to
synergies and trade-offs between ecosystem services and biodiversity.
A systems approach to the evaluation of natural resource management initiatives
Adopting a new paradigm for natural resource and environmental policy that emphasizes
constant change, adaptation, and learning necessitates a new approach to assessment
in order to strengthen how these programs lead to sustainable resource use. Evaluation
is critical for detecting change, promoting an adaptive approach that is adaptable enough
to meet the challenges of change, and facilitating learning at the person, group,
institutional, and policy levels.
The authors create a set of principles for evaluation in natural resource management
(NRM) based on a consideration of evolving approaches to NRM policy and findings and
experiences in the realistic assessment of on-the-ground initiatives:
a) addresses evaluation from a systems perspective,
b) links objective to consequence,
c) considers the fundamental assumptions and hypotheses that underpin core
policy or program objectives,
d) is grounded in the natural resource, policy/institutional, economic, sociocultural and technological contexts of implementation in practice,
e) establishes practical and valid evaluation criteria by which change can be
monitored and assessed,
f) involves methodological pluralism including both quantitative and qualitative
methods to ensure rigour and comprehensiveness in assessment, and
g) integrates different disciplinary perspectives (i.e. social, economic,
environmental, policy and technological).
The paper proposes a systems-based assessment paradigm that integrates these
concepts while also acknowledging the nested existence of NRM policy at multiple levels,
including problem identification, policy formulation and purpose, program rationale, and
on-the-ground implementation. Finally, we demonstrate its usefulness by applying it to
three different Australian case studies: community-based Integrated Catchment
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Management policy implementation, resource knowledge distribution, and decision
support system creation.
Assessment of resource efficiency indicators and targets
Indicators are used to discuss and draw attention to important problems - or, to put it
another way, "what gets measured gets handled." In the sense of resource use, it is
essential to monitor progress toward total decoupling of resource use and the resulting
environmental destruction from economic development (also known as "double
decoupling"). Indicators of resource usage can include data on the overall amount of
resources used in the economy. Finally, in order to include resource utilization metrics,
the resource use indicators should be related to environmental effects and socioeconomic indicators.
It should be remembered that calculating what one is genuinely interested in is not always
possible; for example, measuring damage to natural resources is difficult. If no clear
indicator can be identified, proxies of similar aspects are often used as indicators.
The term "target" refers to a particular policy goal. They are characterized by an
observable or quantifiable performance measure, such as a reduction in domestic
material consumption of x% compared to a reference year. Setting quantitative and
binding goals in the context of environmental policy can be a powerful tool for policy
implementation. It demonstrates a firm commitment and provides Europe, Member
States, and economic sectors with a clear path on what needs to be accomplished. The
setting of goals, which is based on the precautionary principle, also aids in determining
appropriate levels of risk and environmental quality in society.
DPSIR framework
To define and structure environmental indicators for policy use, the DPSIR system is
used. It's useful for explaining the connections between the use of natural resources, their
effects on the ecosystem, and resource efficiency challenges (see Figure 30). It starts by
first describing the key drivers of resource use (e.g. economic growth, technological
changes, etc.); the type of pressures exerted on the natural resources and the natural
environment throughout its life cycle stages (e.g. energy or water consumption in
extraction, production, use, etc.); the state of the ecosystem providing or sustaining the
resource (e.g. depletion, degradation, etc.); the actual or expected impact of these
pressures on stocks of natural resources and the natural environment (e.g. climate
change, loss of biodiversity, etc.); and finally the policy actions (e.g. energy efficiency
standards, recycling targets) that are the responses to the challenges.
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Figure 30. DPSIR Framework
Resource efficiency indicators
The Commission’s Thematic Strategy on the Sustainable Use of Natural Resources
defined three types of indicators needed to measure resource efficiency (see Figure 31):
 Indicators to measure progress in productivity of the use of resources (resource
productivity), e.g. €/kg
 Indicators to evaluate the environmental impact of the use of specific resources,
e.g. impact/kg
 Indicators to measure progress in reducing the ecological stress of resource use
(eco-efficiency), e.g. €/impact
These indicators are based on three sets of information: the sources and quantities of
resource usage, the socioeconomic benefits we reap from them, and the environmental
effects of all life cycle stages. On its own, each information set employs a broad range of
indicators. Unless otherwise stated, all metrics are based on a year's worth of data.
Resource use indicators
The quantity, availability, and efficiency of natural resources are the key problems of
unsustainable resource use. The use of resources is often linked to production and
consumption processes, such as the processing of products, which necessitates the use
of energy and water. Indicators of resource usage should provide information on the
nature, quantity (e.g. renewable, non-renewable, exhaustible, non-exhaustible),
availability, and location of resources extracted.
Environmental impact indicators
In addition to affecting natural resource supplies, resource usage has an effect on the
climate and human health as a result of a series of changes in the natural environment.
The approach of life cycle assessment (LCA) offers a basis for describing environmental
effects. A life cycle assessment (LCA) measures all physical interactions with the
environment, whether they are positive or negative.
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Materials, water, land use, and energy are examples of inputs, while waste and emissions
to the air, water, and soil are examples of outputs. These inputs and outputs are then
weighed against various environmental impact scenarios (e.g. climate change,
eutrophication, ecotoxicity). Endpoint impacts, such as human health, the natural
environment, and natural resources, may be attributed to these so-called midpoint
impacts.
Socio-economic indicators
Traditional resource valuation has been based on economic market value, which is
calculated by supply and demand. The importance of ecosystem services and the
potential effect of resource usage on human well-being is gaining traction. Externalityaccounting indicators appear to be critical for providing a consistent picture of resource
efficiency in a global economy that is sustainable.
As a result, they can include information on environmental, economic, and social issues.
Indicators of socio-economic gains include not just the market value of resources, but
also facets of resource usage that are not calculated within the economy, such as wellbeing and quality of life.
Figure 31. The three indicator categories needed to measure resource efficiency
Existing resource use and resource efficiency targets
Although hundreds of indicators for tracking resource use have been developed, only a
few are used to set concrete, quantitative targets. With the exception of GHG emissions
and renewable energy, an analysis of resource use and resource usage related goals in
EU Member States, Australia, Canada, China, Japan, Switzerland, and the United States
reveals that strategic priorities for resource use appear to be common in nature. These
are frequently included in long-term development plans or climate action plans. The
typical areas covered by targets are natural resource sustainability, waste, energy, water,
and land. The majority of climate change, electricity, and waste (recycling) goals for EU
Member States are driven by EU legislation.
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The EU climate and energy package developed the "20-20-20" goals based on the Kyoto
Protocol. Many of the countries examined have set renewable energy goals. Denmark is
the first nation to set a target of being fossil-fuel-free by 2050. Austria, Germany, Italy,
Sweden, and Japan (based on Material Flow Analysis (MFA) indicators) have clear
material usage and resource productivity goals. Setting goals for resource efficiency,
cyclical use rate, and waste generation has been the most advanced and competitive in
Japan. In addition to reuse and recycling targets, some countries such as Sweden,
Finland and France have also set targets for reducing waste generation.
Aside from broad national goals, some countries have set specific standards for specific
sectors and goods, such as the percentage of food and construction products derived
from renewable sources, and building and vehicle energy efficiency. Many countries have
set targets for the percentage of agricultural land used for organic farming. Denmark and
Germany have additional land-use targets in terms of woodland land cover and artificial
surfaces. By 2025, Canada plans to achieve a 30 percent reduction in water usage in
different industries to encourage water conservation and wise use (based on 2009 water
use levels).
The use of Ecological Footprint as a metric has been formally adopted by Finland,
Scotland, Wales, Switzerland, and Japan23. Many other countries have proposed
officially using the indicator, but none of the checked countries have done so.
In general, there is little political agreement among national governments when it comes
to setting national and global targets. This may be due in part to a lack of objective
evidence and consensus on the planet's sustainability limits (see Table 32). NGO's and
researchers are calling for further goals to be set, and some have also suggested
concrete targets to be incorporated into legislation. Most nations, on the other hand, are
wary. Many governments develop broad sustainable development plans with no
quantitative goals set in stone. Despite the fact that many countries are more concerned
about the security of supply for some essential raw materials than environmental
concerns, no national targets related to supply security have yet been set (China does,
however, impose export restrictions on certain raw materials).
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Figure 32. Overview of targets with clear links to environmental threshold
Resource use related environmental impact indicators
The most popular indicators for reporting on the environmental impacts of resource use
are environmental accounts and indicators based on life cycle inventory data. While life
cycle inventory-based indicators (such as EMC and recent indicators developed by JRC)
provide a very detailed picture of environmental impacts, the consistency of current Life
Cycle Inventory (LCI) data is their key flaw. Since there are so many different
environmental concerns, it's common to wish for a single indicator that can tell you about
all of them. However, information is lost every time an indicator is aggregated, resulting
in abstract values and less clarity, particularly if subjective weightings of environmental
issues are used. When engaging with the general public, impact indicators related to
environmental thresholds, such as the Ecological Footprint, Water Exploitation Index,
Total Allowable Catches, Environmental Impact Load, and Environmental Performance
Index; or current goals, such as the Sustainability Society Index, are effective. The
thresholds themselves are however more interesting to consider for setting resource
efficiency targets than the constructed indicators themselves.
Approaches to proposing targets for policy
Targeted policy can be an effective tool for coping with environmental concerns. A aim
establishes a clear direction, offers specific directions, and aids in the prioritization of
initiatives to achieve the policy goal. This can effectively guide policy if it is correctly
implemented and backed by an adequate combination of policy steps. Long-term goals
offer clarity, continuity, and time to players in society, such as governmental organizations
and businesses, in order to accomplish the goal in the most effective way possible. There
are several approaches to goal-setting, and four viewpoints have been listed among
them.
 The perspective of limitations to the resource base
 The perspective of limitations to absorption capacities of the earth’s ecosystems
 The perspective of efficient and equitable resource supply for people
 The perspective of efficient and equitable resource supply for economies
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The precautionary principle allows for the definition of acceptable risks and environmental
quality based on available scientific knowledge on environmental thresholds and carrying
capacity where knowledge gaps exist. There is some understanding of the limits to when
long-term depletion and degradation occurs for resources such as land, water, and fish
stocks. The resource base's limits for energy and material resources are less evident.
Instead, knowledge of natural ecosystems' absorption capacities could be used to set a
goal. The limit of a cumulative 2°C increase in global mean temperature, or 350 parts per
million of CO2 in the atmosphere, was used to describe the EU's GHG emission targets.
Equity is a key function for capital with global implications. It is difficult to decide what is
reasonable when attempting to set goals that will require a certain allocation of resource
benefits or commitments to bear environmental burdens. Intergenerational equity (i.e. not
jeopardizing future generations' ability to meet their needs) and intra-generational equity
(i.e. the fairness of sharing resources and burdens among societies and countries within
one generation) are two perspectives on equity. Equity debates are often ethical (and
political) in nature, and they often result in heated arguments. Should policy determine
whether the limited supply of rare earths is used to manufacture environmental
technologies, medical equipment, or cell phones, for example?
The cost-effectiveness of setting a goal and implementing new policy proposals is a
common criterion for determining goals (widely used for energy efficiency measures). In
most effect analyses, the relative cost-efficiency of policy interventions is measured using
cost-benefit analysis, which quantifies the effects of a measure in monetary units to
determine the net present value of costs and (market and non-market) benefits.
Organizing open multi-party debates where members of the key stakeholders are brought
together to identify concrete goals and a plan of action is one solution to the target-setting
process. A good example of this is France's ‘Grenelle de l'environnement' process, which
began in 2007. Extensive consultation in this way allows all viewpoints to be heard on an
equal level and is a good starting point for building consensus.
Since there is often no specific guidance or evidence to set a goal, actors agree that the
best way to think about setting goals and implementing interventions is as a trial and error
process. Ambitious goals cannot always be met due to a variety of factors outside the
actors' control, such as a lack of effective execution of the chosen steps. It is then a
discussion on whether it is better to set an ambitious target and only reach it partly, or to
set a less ambitious target to be sure it can be achieved.
Although there is a strong push in the EU to set specific goals to direct resource efficiency
policy, it should be noted that this is not always the best approach. Target setting may
have unintended negative consequences depending on how the target is defined, the mix
of supporting policy instruments used, and how they are implemented. This is particularly
important when considering how resource usage is interconnected. The goals set for
biofuels in transportation, for example, have major implications for land use.
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Whatever method is used to set resource use and efficiency goals, it is critical that the
goals are based on relevant existing indicators and that knowledge of resource use and
its environmental consequences is well developed. The study looks into indicators that
represent these two types of indicators in greater depth.
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Exercise #4
Answer the following questions:
o How can we develop robust methods to correctly calculate and compare the
environmental impact of different human activities?
o What is a sustainable lifestyle?
o How do analyses at the micro level (company level) connect to analyses at a meso(region/large project) and macro level (society)?
o How can we connect knowledge about the effects land use and changes in land
use have on biodiversity, with other environmental impact assessments?
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Module 5
SUSTAINABLE STRATEGIC MANAGEMENT COMPETITIVE LEVEL STRATEGIES
Week 8-9
Introduction
This chapter focuses on the different strategies a company may use to gain a competitive
edge and benefit in a particular industry or product/market segment. This will look at how
strategic managers can use these two sets of coevolving external and internal data to
develop different strategies for gaining a competitive edge in target market segments. In
addition, this will examine how to choose the appropriate strategies dependent on the
firm’s competitive position and type of market in which its strategic managers have
chosen to compete.
Learning Objectives:




Understanding the nature of competitive level strategies
Differentiate each competitive level strategies
Learn about the different SSM competitive level strategies
Components of the Corporate portfolio of SSM competitive level strategies
Nature of Competitive Level Strategies
Competitive or business level strategies are all about positioning a company against its
rivals in its chosen market in order to obtain a competitive advantage. These strategies
describe how the company will use its core competencies to develop strategies that will
give it a competitive advantage over competitors. The choices made in defining the
business provide the foundation for competitive strategy; these are strategic choices
about customer needs (what is being satisfied), customer groups (who is being satisfied),
and core competencies. Strategic managers devise strategies to differentiate their
products and services in order to meet the specific needs of their customers. The
identification of customer needs provides information for market segmentation based on
customer groups. Then, based on the core competencies identified during the resource
assessment process, specific strategies are developed to meet the needs of customers
in specific market segments. These decisions govern how strategic managers organize
and combine core competencies in order to gain a competitive advantage through a firm's
competitive strategy.
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Figure 33. Foundations of Competitive Strategy
Example:
Gap's target customers were younger generations when it was founded in 1969. (hence
its chosen name, which refers to the generation gap of the time). Gap's signature blue
jeans and white cotton T-shirts were initially sold, but the company later expanded to
include clothing for men, women, and children. Gap, one of the world’s best-known
brands, has very successfully segmented its markets according to customer needs. The
Gap brand, which includes Gap, GapKids, babyGap, GapMaternity, and GapBody, is
clearly intended to appeal to a broad demographic of customers seeking an American
iconic style, whereas Banana Republic stores attempt to convey a more sophisticated
image for an upscale customer seeking accessible luxury. The Old Navy chain, on the
other hand, is aimed at families and younger customers by emphasizing fashion at a low
price. Furthermore, the Athleta brand focuses on women's performance apparel, whereas
Piperlime, a one-of-a-kind online boutique, was created to meet the needs of online
customers. Thus, Gap tailors its stores and brands to appeal to unique customer groups
by developing multiple formats and designs (their core competence) to meet the customer
needs of each market segment (Gap 2012). This is the essence of building a successful
competitive level strategy.
The two generic sources of competitive advantage for the firm result from performing
value-creating activities at a lower cost than competitors or performing them in such a
way that customers perceive the product or service as unique, allowing it to command a
higher price. To achieve competitive advantages through the firm's value-creating
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functions, each of Michael Porter's (1985) generic competitive strategies of cost,
differentiation, and focus requires strategic managers to make consistent decisions about
product/service, market, and core competence. The section that follows discusses
Porter's (1985) generic competitive strategies.
Cost-Leadership Strategies
Managers pursuing a cost-leadership strategy seek to produce goods and services at a
lower cost than competitors, thereby establishing the market's price floor as the low-cost
producer (Porter 1985). A low-differentiation product is typically chosen for a costleadership strategy, as it achieves economies of scale by spreading fixed costs across a
larger output. As a result, the cost-leadership strategy is distinguished by a standardized
product offered to a mass market with little market segmentation. To keep unit costs low,
the strategy must prioritize operational efficiency by allocating resources to develop core
competencies in operations and logistics. This strategy's target customers are pricesensitive and have no brand loyalty.
The cost-core leader's competencies are focused on lowering costs across the firm's
value chain activities. Learning curve effects, where learning by doing can drive down
costs, are cost drivers. Individuals and teams who participate in an activity on a regular
basis gain knowledge from their cumulative experience. Experience curves capture both
learning effects and economies of scale, with economies of scale allowing a firm to reduce
unit costs by moving down a given learning curve. If a company can move further down
its learning curve than its competitors, it can gain a competitive cost advantage. When
combined, leveraging experience based on learning and economies of scale allows the
firm to leapfrog to a steeper learning curve, lowering unit costs even further (Rothaermel
2013). These competencies must be backed up by a formalized, mechanistic
organizational structure with close employee supervision and cost controls designed to
keep unit costs low. The primary risk associated with this strategy is the erosion of the
firm's cost position as a result of competitors' ability to imitate operations or develop new
technologies to produce at a lower cost (Porter 1985).
Choosing to implement a cost-leadership strategy necessitates strategic managers
focusing on lowering overall product or service costs while maintaining quality that meets
customer needs. In the discount retailing market, Walmart employs an effective costcutting strategy. Walmart has pursued low product differentiation from the beginning,
targeting the average customer by providing the fewest products desired by the greatest
number of customers, achieving economies of scale (Hill and Jones 2009). Walmart's
cost-leadership strategy is backed up by its environmentally focused core competencies
in distribution (e.g., sustainable packaging), operations (e.g., eco-efficiency techniques),
and information technology (i.e., environmental performance reporting). Unit costs are
kept low through the platform that Walmart provides to its ecosystem member. Walmart
has been able to execute a cost-leadership strategy that has generated higher than
average returns due, at least in part, to its improved environmental efficiency, by making
consistent strategic choices in terms of low product differentiation that target a mass
market and by developing ecologically based functional level core competencies.
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Differentiation Strategies
The generic differentiation strategy's aim is to conduct value-creating functions in such a
way that consumers view a product or service as special, resulting in a premium price in
the market. Customers pay a higher price because they assume the product's distinct
attributes are worth the extra cost; therefore, the price is determined by the customer's
willingness to pay (Porter 1985). The efficacy of a differentiation strategy is determined
by strategic decisions about product/service, competition, and core competencies, where
product/service differentiation is high and market segmentation is high based on
uniqueness.
When the core competencies of product creation, research and development, distribution,
and marketing are combined in a strategy of new product/service introductions tailored to
specific consumer needs, the company gains a competitive advantage. The strategy is
supported by the organic, versatile organizational framework, which encourages crossfunctional, interdisciplinary interactions that promote dialogue and learning. In order to
execute a differentiation strategy, you'll need an organizational culture that promotes
creativity and offers the amenities that attract talented people. Products and services can
be distinguished by their quality, creative features, and/or customer responsiveness.
Companies should try to distinguish themselves in as many of these dimensions as
possible (Hill and Jones 2009).
Differentiation can take many forms. Customers' psychological appetite for prestige and
luxury is what distinguishes luxury cars and fine jewelry. Others believe that excellent
service is a source of product differentiation that is worth paying more for. Innovation is
also a vital source of differentiation in today's high-tech industry. In reality, the more
dimensions a company can distinguish its goods on, the more competitive it is. Apple, for
example, distinguishes its products in its stores by creative design, cutting-edge features,
high-quality activity, and excellent customer service. An organizational culture that
encourages creativity, debate, and innovative thinking underpins this strategy. As a result,
Apple distinguishes itself in several ways, making it more difficult for rivals to copy what
Apple does (Hill and Jones 2009). Another factor of distinction is sustainability, which can
offer strategic advantages that are difficult to replicate by rivals. Later in the chapter, we'll
go through this basis for differentiation.
Integrating Cost-Leadership and Differentiation Strategies
Strategic managers must ensure that their product, sector, and core competence choices
are compatible with at least one of the firm's competitive objectives in order to
successfully execute a generic strategy. Firms would likely get stuck in the middle if these
decisions are not strategically compatible, since they will be unable to leverage their core
competencies in ways that gain or maintain a competitive advantage (Porter 1985).
Consider Kmart's place in discount retailing, where it is trapped between Walmart, the
cost leader, and Target, the differentiator, resulting in below-average returns and
reorganizational bankruptcy.
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Competitive environments, on the other hand, can force businesses to build
competencies that reduce costs while also adding to their uniqueness. This is particularly
true in global markets, where a company must compete with companies in countries with
lower wage rates while also adding unique features to cater to local tastes and conditions.
Thus, strategic managers are expected to combine all strategic positions, differentiation,
and low cost in certain competitive environments, which is a difficult strategy to execute
due to the contradictory criteria of each strategic position (Rothaermel 2013).
Traditionally, companies had to tailor goods for individual markets, resulting in shorter
production runs and higher manufacturing costs, so differentiation could only be
accomplished by high costs. Due to servicing several consumer segments, the
differentiator usually had higher marketing costs, while the cost-leader developed
standardized goods for mass markets. The growth of new flexible manufacturing
technology, on the other hand, has made it easier for strategic managers to reap the
benefits of both strategies. Flexible-manufacturing technologies allow firms to pursue a
differentiation strategy at lower costs because they significantly reduce the costs of
retooling the production line and making small production runs. Strategic managers have
the ability to generate a higher level of profit than companies following only one of the
generic tactics because they can charge a higher price for their goods than the cost leader
and have lower unit costs than the pure differentiator (Hill and Jones 2009).
Due to the competing criteria of each strategy, combining cost and differentiation is a
difficult strategy to implement. Since they are distinct strategic roles that require strategic
managers to efficiently manage value chain operations that are radically different,
reconciling the tradeoffs between cost and distinction is challenging. Cost-leaders
structure value chains around operational efficiency, with a focus on process technologies
to improve efficiency, whereas a differentiator spends its R&D dollars on product
technologies that add uniqueness (Rothaermel 2013).
Example:
IKEA is one firm that has been able to effectively managing two value chains in order to
successfully implement a unique strategy that reconciles the tension between
differentiation and cost leadership. The complexity of the strategy entails designing
beautiful furniture that is inexpensive and functional. IKEA differentiates its products via
innovation in design, engineering, and store format that offers customers furniture that is
stylish, functional, and designed for easy assembly. IKEA reduces its costs by displaying
its furniture in a warehouse setting, and by having customers serve themselves and
transport their new furniture to their homes in flat packs for assembly. Thus, IKEA is
simultaneously leveraging innovation to increase the perceived value of its furniture, while
lowering its costs through operational efficiency (Rothaermel 2013).
Focus Strategies
Michael Porter (1985) identified the third generic strategy as the focus strategy, which is
aimed at a specific market niche (a small group of customers). The focus strategy, unlike
the other two generic strategies, does not provide a source of competitive advantage in
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and of itself. Rather, the firm's competitive advantage stems from its ability to specialize
while serving the needs of a specific market segment. As a result, market segmentation
is low, and product differentiation can range from high (uniqueness) to low (price). The
geographic uniqueness of the market segment, specialized requirements for using the
product, or special product attributes that appeal only to niche members can all be used
to define the market segment. Companies frequently choose focus strategies in order to
better serve the needs of a smaller market segment than competitors (Hill and Jones
2009).
As a result, focus strategies can provide competitive advantages through cost leadership
or product differentiation. A focused cost-leadership strategy serves a small market niche
of customers by operating at a lower unit cost and thus offering a lower price than
competitors. For example, Southwest Airlines entered the airline industry with a focused
cost-leadership strategy of being the low-cost carrier in the south-western region of the
United States by providing a no-frills airline with exceptional operational efficiencies. A
focused differentiation strategy, on the other hand, caters to a narrow consumer segment
with goods that are tailored to the specific tastes and needs of the target market. For
example, manufacturers such as Ferrari, Aston Martin, and Lamborghini use a focused
differentiation strategy to compete in the small supercar market segment of automobiles
costing US$150,000–600,000. Companies that use such focused differentiation
strategies often enjoy high customer loyalty that discourages other firms from competing
with them directly. The primary risks of focus strategies include a limited focus that fails
to meet consumer expectations, cost deflation, new competition, competitors' ability to
mimic the service, and niche disappearance due to technological changes, shifting
customer tastes, and so on (Dess, Lumpkin, and Eisner 2008).
For small and medium-sized businesses that lack the capital to service a wide market,
concentrating a company's entire competitive focus on a narrow market segment is ideal.
This approach allows strategic managers to identify a market gap (a niche) and create
new products or services for consumers that fall into that niche. A focused company can
take many avenues to create competitive advantages, which explains why there are many
more small firms than large ones (Hill and Jones 2009).
Competitive Dynamics and Strategic Positioning
As the external environment changes, so do strategic positions. Competitive moves and
countermoves can only be predicted by fully knowing how competitors think, so a
competitor analysis is needed in the formulation of the firm's competitive strategy. Thus,
competitive dynamics refers to the moves and countermoves of the competitors within an
industry (Hitt, Ireland, and Hoskisson 2009). Preemptive strategic moves result in firstmover advantages, which provide firms with a competitive advantage. Firms can
outperform their competitors by being first to market by investing in product development,
innovation, and research and development, securing a superior competitive position as
well as customer loyalty. Of course, since it is testing the market, the preemptive firm
assumes the risks of unpredictable market demands, and even if it is competitive, the
advantageous market position can only be temporary as rivals follow. A second mover is
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a company that reacts to a competitor's preemptive first step by learning from its failures
and attempting to more efficiently mimic its creative product. A late mover has a much
lower performance rate than first and second movers, with just average returns (Hitt,
Ireland, and Hoskisson 2009).
Strategic positioning necessitates difficult strategic choices because strategic managers
must adapt the timing and content of the markets in which they compete. Both generative
learning and environmental analysis capabilities are required for an organization's ability
to build new market space as a preemptive step or to anticipate and effectively respond
to competitive countermoves. These diverse skills can be combined to build a culture and
framework that fosters dialogue, creativity, and learning, allowing strategic managers to
make decisions on how to strategically position their companies to gain competitive
advantages. The key is for strategic managers to comprehend and focus on the
coevolving relationships between their business, its external environment, and its value
chain participants, and to use the knowledge gained from stakeholder engagement
processes to gain a competitive advantage through astute competitive market timing and
positioning.
Example:
Consider the strategic timing of General Electric’s (GE) preemptive strategy of reverse
innovation (discussed later in the chapter) with the purpose of expanding the firm’s
markets in China and India to include lower price-point products for the lower income
markets. According to GE CEO Jeffrey Im-melt, being first to these markets will preempt
local companies from India and China from creating products for their local markets and
then using them to “disrupt” GE’s market share in its developed markets (Immelt,
Govindarajan, and Trimble 2009, 56). Product innovation is linked across undeveloped,
developing, and developed markets, providing the potential for the innovations in
undeveloped and developing markets of the world to drive attacker strategies against
established firms like GE in developed markets. In fact, “entrepreneurs in emerging
markets start 25 percent more companies than their U.S. counterparts do, and their firms
have a higher survival rate” (Habiby and Cole 2010, 77). Given this, Immelt firmly believes
that GE’s future will be in these undeveloped and developing markets. The firm’s strategic
intent is to cocreate products and services with multiple stakeholder groups that meet the
unique customer needs of the undeveloped and developing markets, thus preempting
local competitors from their ability to grow into emerging giants with the intent of entering
GE’s established developed markets (Immelt, Govindarajan, and Trimble 2009).
SSM COMPETITIVE STRATEGIES
Porter's (1985) generic competitive strategies are expanded to include SSM competitive
strategies that generate mutual value for both the business and the larger society and
ecosystem (Porter and Kramer 2011). Shared value is generated through the dynamic
capabilities that enable triple-bottom-line efficiency, as discussed in the previous chapter.
Organizations that "stand for sustainability" use SSM tactics (Stead and Stead 2000,
324). Since SSM strategies are built as tools for operationally incorporating the
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environment and the larger community into strategic decision-making processes, the
philosophies and ethics of SSM become observable through these strategies. SSM
strategies vary in content depending on their scope, markets, customer needs, and
purpose. SSM strategies are usually defined as multi-sector strategies that require broad
cooperation with stakeholders to build shared value at and level of the business
ecosystem hierarchy. As a result, SSM strategies are useful for bringing the ecological,
social, and economic aspects of a company's strategic vision of a sustainable planet to
life.
The co-evolutionary nature of SSM strategies is reflected in the progression of the
strategies over time up the hierarchy of strategies. There has already been a coevolution
from eco-efficiency-based competitive level strategies such as pollution prevention that
provide cost reductions and the preservation of natural and economic capital, to the
broader-based socio-efficiency strategies that facilitate the creation of social and human
capital, including investments in community, human resources, and partnerships. Both
eco- and socio-efficiency are sources of potential competitive advantages based on
sustainability-based core competencies that generally create relatively short-term
sustainability and economic value added.
Many companies are starting to adopt higher-level, environmental- and socio-effective
corporate strategies today, however (discussed in depth in the next chapter). These are
intended to help businesses become social and ecological change agents that contribute
to a more prosperous environment while still benefiting them financially in the long run
(Stead and Stead 2009).
Figure 34. Hierarchy of SSM Strategies
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Generic Competitive Level SSM Strategies
Market opportunities for environmentally and socially sensitive products and services can
directly link the organization’s economic sustainability with its environmental and social
sustainability, affording competitive advantages associated with cost reduction and
market differentiation (Porter 1985). Since the metrics are much more difficult for
measuring social performance than for measuring ecological performance, the social
dimension of SSM competitive strategies has been slower to coevolve than the ecological
dimension.
Figure 35. Coevolution of SSM Strategies
Eco-efficiency–Based Pollution Prevention Strategies
Eco-efficiency, is rapidly transforming from a unique competitive advantage enjoyed by a
few cutting-edge organizations into a basic business requirement necessary for the
survival of virtually all industrial firms. Due to the dynamics of coevolutionary competitive
adaptation, the emergence of ecoefficiency as a basic business requirement means that
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those organizations that do not expand their value-creating processes to include natural
capital may eventually become unable to successfully adapt to the sustainability-infused
business environment.
Eco-efficiency involves developing cost-competitive advantages by eliminating or
reducing resource depletion, materials use, energy consumption, emissions, and
effluents. These strategies were the first win– win strategies to be based on eco-efficient
capabilities. In a true biophysical sense, eco-efficiency slows the entropic flow through
the economy. As with Porter’s (1985) cost leadership strategy, core competencies in
pollution prevention strategies are in operational eco-efficiencies that include redesigning
pollution and waste control systems, redesigning production processes to be more
environmentally sensitive, using recycled materials from other production processes
and/or outside sources, and renewing renewable energy sources. Further, eco-efficient
pollution prevention strategies provide firms with opportunities to establish social
legitimacy in the greater community, which means that these strategies can provide firms
with socio-efficient as well as eco-efficient value added.
Example:
3M is generally given credit for being the first mover and leader in ecoefficiency and
pollution prevention. 3M introduced its now famous Pollution Prevention Pays (3P)
program in 1975, demonstrating that preventing pollution before it occurs can create
greater economic and ecological value added. In 1975 this was the innovative, firstmover
thinking that secured 3M a competitive cost position. To date, 3M has completed more
than 9,300 3P projects designed to slow the entropic flow of energy and resources
through the firm. These projects have included such things as product reformulation,
process modification, equipment redesign, and recycling and reuse of waste materials.
Collectively, they have resulted in the elimination of more than 3.5 billion pounds of
pollution at a savings for 3M of nearly US$1.5 billion. The firm makes it clear that the
fourth P, people, is critical to the success of the 3P program because it relies completely
on voluntary employee participation (3M 2012).
Total Quality Environmental Management and ISO 14000
Total quality environmental management (TQEM) is a method that improves a company's
eco-efficiency by using the company's continuous improvement processes. TQEM was
developed by companies in the Global Environmental Management Initiative (GEMI) in
the late 1980s, and it has since become a standard process for improving eco-efficiency
in most manufacturing organizations. TQEM integrates natural resource conservation and
preservation into the overall quality control formula, enhancing companies' ability to avoid
waste and emissions while lowering costs. The scope of TQEM initiatives has been
limited to enhancing the eco-efficiency of internal throughput systems, which is a
shortcoming. TQEM should be extended to TQSM, complete quality sustainability
management, to address this constraint, making it a valuable tool for incorporating both
ecological and social responsibility into products/services.
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TQEM alliancing involves using TQEM as a framework for forming industrial ecologies
with other firms. These reduce waste and pollution while creating social capital within a
business ecosystem. Alliances such as these create advantages that one firm cannot
achieve alone, thus demonstrating the creative potential of investing in the development
of social capital to build ecosystems that reduce the entropic flow.
Sustainability-Based Supplier Relationships
Sustainability-based supplier relationships create social capital and are critical in
minimizing the ecological, social, and economic costs of the firm’s resource acquisition.
A recent study found that vendors consume as much as 80 percent of the energy, water,
and other resources used in a supply chain, which makes it imperative that sustainability
become a priority in supplier relationships. Efficient supply chains are being developed
with shorter distances and more efficient, less polluting modes of transportation. In fact,
many firms are mandating more sustainable practices from their suppliers. Staples has a
goal that all of its paper products come from sustainable forests; Unilever has declared
that it will buy tea and palm oil only from sustainable sources by 2015; and Walmart has
given a directive to its Chinese suppliers to reduce waste and emissions, cut packaging
costs by 5 percent, and increase product energy efficiency by 25 percent by 2012
(Nidumolu, Prahalad, and Rangaswami 2009). Other firms require suppliers to secure
ISO 14001 certification and to adopt pollution prevention policies. Not only does Toyota
require ISO 14001 certification for its suppliers, it also requires them to eliminate toxic
substances from their manufacturing processes. Other firms such as Royal Dutch Shell
regularly audit the child labor practices of their suppliers.
Regardless of the position of a firm in its value chain, there is pressure on it to find ecoefficiency solutions that slow the entropic flow of energy and resources. For example, the
Sustainable Packaging Coalition (SPC) is an industry working group dedicated to a more
robust environmental vision for packaging. SPC is a project of GreenBlue, a
nongovernmental organization (NGO) that provides businesses with the science and
resources to make more sustainable decisions. SPC promotes supply-chain collaboration
that builds packaging systems that encourage the creation of economic value through a
sustainable flow of materials. SPC has created a curriculum of the essentials of
sustainable packaging and a software package to calculate the product’s environmental
life cycle impacts to assist its members in moving toward more sustainable solutions in
their packaging.
Example:
Starbucks, an SPC member, shared at an SPC meeting that it has begun a trial process
in its Chicago stores where it will recycle cups into napkins for further use in its stores.
Starbucks hopes to institute this closed-loop resource recycling process throughout its
stores in the United States by working with individual communities and their varying
recycling infrastructures (SPC 2012).
In today’s business environment of unpredictable energy and materials costs, worldwide
pressures to reduce greenhouse gas emissions, and the incessant pressures from
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competitors and customers to improve efficiency, organizations are showing a willingness
to make significant investments in eco-efficiency. Production facilities in most industries
are being built or redesigned to use minimal energy and to generate minimal emissions
and wastes.
Example:
Consider Subaru’s plant in Indiana. Subaru designed this plant’s operations around ecoand socio-effectiveness; it produces zero wastes and has had zero layoffs and zero pay
cuts, all in a state that has lost 46,000 automobile jobs in the past decade. The firm has
saved $5.3 million due to its eco-effective design, and it produces enough energy at its
waste-to-fuel operation to sell power back to the grid (Farzad 2011). Stakeholders
demand that strategic mangers take full stewardship of their value chain from cradle to
cradle, thus eco- and socio-effective operational designs like Subaru’s that slow entropic
flow and save money are the future of operations management (McDonough and
Braungart 2002).
Product Stewardship Strategies: Ecological and Social Differentiation
Product stewardship strategies are strategies that give a company a competitive
advantage by helping it to distinguish its goods and services from its rivals in the
marketplace on ecological and social grounds (Hart 1995, 1997; Reinhardt 1999; Stead
and Stead 1995). Product stewardship programs aim to reduce an organization's
ecological and social footprint by providing goods and services that are cleaner, more
socially conscious, use less resources and energy, are more recyclable, biodegradable,
durable, and less wasteful, among other things. Product stewardship policies necessitate
the ability to collect and analyze the environmental and social impacts of a company's
goods and services through the open system value chain, so these strategies are built
around core competencies like creativity, product creation, sales, and marketing.
Stuart Hart (1995) described product stewardship as a logical strategic step for firms that
have achieved eco-efficiency. In essence, he said that once companies develop
production processes that lower costs by better managing and preserving the earth's
unique, non-substitutable, non-duplicable natural resources, they would be able to
distinguish their products/services in the marketplace based on their sustainability
features. Thus, he said that product stewardship strategies provide firms with both cost
leadership and differentiation competitive advantages that can be sustained over a long
period of time.
Product stewardship strategies can boost a company's credibility, perceived legitimacy,
and brand value, both of which are intangible assets that are difficult to replicate by rivals.
Furthermore, product stewardship activities are more successful when all of the firm's
stakeholders are active in the product/service creation process from the start. This
enables the company to incorporate a diverse range of stakeholder viewpoints into its
products and services.
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Example:
According to Xerox CEO Ursula Burns, product stewardship is at the heart of her firm’s
innovations. She said, “We approach sustainability from a life cycle perspective because
we recognize that the biggest opportunity for us to make an impact is by addressing all
aspects of our actions, products, and services” (Business Roundtable 2011, 115). Product
stewardship goals have motivated Xerox to form an alliance with the Nature Conservancy
to promote sustainable forestry and to protect biodiversity. Xerox has also developed a
solid ink technology that reduces waste by 90 percent, uses 9 percent less energy,
reduces greenhouse emissions 10 percent, uses no water, and is designed to print pages
that are easier to recycle. The firm also created the industry’s first Sustainability
Calculator to help customers evaluate their environmental footprint (Business Roundtable
2011). Thus, Xerox uses its product stewardship lens to examine both internal processes
and external market dynamics.
Starbucks leads a business ecosystem based on a shared vision of sustainability and has
successfully used both eco-labels and social labels to effectively leverage its brand by
social and ecological differentiation. By actively listening to, interacting with, and acting
on the expectations of its customers who are socially and environmentally conscious,
Starbucks has effectively incorporated eco- and socio-efficiency into their operations and
tells its story of ecological and social responsibility right on its packages and cups. The
key to its success is its ability to leverage the learning attained from the 50 million
customers it sees in its stores every week who give their ideas about how Starbucks can
be more ecologically and socially sensitive. By listening to its customers, Starbucks, for
example, developed its own set of stringent guidelines (Coffee and Farmer Equity
Practices, CAFÉ) to ensure that coffee purchases are ethically sourced, with a goal of
having 100 percent of its coffee purchases responsibly grown and ethically traded by
2015 (Ottman 2011). By connecting coffee producers and consumers, Starbucks works
directly to promote fairer trading conditions, fair wages, and sustainability so workers in
undeveloped and developing markets can invest in a better future for themselves and
their communities. Starbucks customers pay a premium price for a cup of fair-trade
coffee, demonstrating the relationship between socio-efficiency, social labeling, and
competitive advantage.
Starbucks has been able to successfully distinguish itself in the gourmet coffee industry
by offering sustainable goods in a highly segmented market targeted at environmentally
and socially conscious customers, and by building its strategy on the core competencies
of eco- and socio-efficiency. To summarize, Starbucks has effectively developed the
dynamic product stewardship skills to execute an effective strategy of social and
ecological differentiation by making clear strategic choices concerning product, industry,
and core competencies.
Sustainability and Competitive Dynamics
As previously stated, competitively positioning goods and services into carefully
segmented markets while predicting competitive attacks and counterattacks is the key to
strategic positioning. Astute market timing is one of the keys to competitive ecological
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and social differentiation. As previously stated, eco-efficient techniques are often the first
step toward sustainability for businesses. Since the business case for not generating
waste and reducing resource usage is so compelling, most companies have made these
techniques a necessity. As a result, they no longer provide a strategic advantage to
businesses. Firms that do not factor natural resources into their operational plans fall
behind the majority of their rivals and miss out on the benefits of eco-efficiency.
The competitive responses to the increased demand for triple-bottom-line performance
by stakeholders vary depending on the perception of strategic managers in terms of the
opportunities afforded by sustainability. A global survey of 3,000 business executives
conducted by BCG and the MIT Sloan Management Review (2011), found two categories
of strategic moves demonstrated by the firms surveyed. The casual adopters were those
firms that were late into the sustainability market and invested only in short-run, ecoefficient strategies (which do not afford much of a competitive advantage today, as
discussed above). The embracers, on the other hand, were those strategic managers
who pre-emptively put sustainability at the top of their strategic agendas because they
believed that sustainability was important to their firm’s competitiveness.
Business executives' differing perspectives on sustainability result in a vortex of
competitive steps and countermoves. Embracers usually pre-empt their rivals with
socially or environmentally positioned goods or services to gain favorable market
positions. “First movers who value innovate alternatives to fossil fuels, distributed
electricity generation, cellulosic plastic, and in vitro meat substitutes have the possibility
to create new, profitable, and uncontested market space for years to come” (Lazlo and
Zhexembayeva 2011, 85). However, these first-mover strategies may provide only shortrun advantages if competitors follow suit (Reinhardt 2008). The key, of course, is to have
another competitive countermove in place when, for example, differentiation is lost due
to imitation by competitors.
Example:
Executives from Clorox believe that embracing sustainability can enhance their firm’s
brand position by allowing them to penetrate the sustainability-based segments within
their markets. Clorox has repositioned its Brita water pitchers and filter lines, has
introduced a new natural cleaning product line called Green Works, and has acquired and
expanded the Burt’s Bees line of natural personal care products. Their market research
indicates that 15 percent of customers take sustainability and health into account when
purchasing, and 25–30 percent take environmental benefits into consideration. By
carefully segmenting their market and offering a product such as Green Works, Clorox is
able to charge a premium price of 15–20 percent above conventional cleaners. A
multisector marketing agreement with the Sierra Club for their endorsement created a
more differentiated brand for Clorox, and a partnership with Walmart and Safeway made
sure that consumers could easily find the new product entry. Clorox achieved first-mover
advantages, securing a 40 percent share of this $200 million market by the end of 2008,
and the Sierra Club received $500,000 as its share of revenue (MIT Sloan Management
Review and BCG 2011). Thus, Clorox developed a small business ecosystem around its
new sustainable product introduction, creating shared value for the whole system.
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Strategies Dependent on the Firm’s Relative Competitive Position
Whether or not a company operates in a structured business ecosystem, its competitive
position within its target market will influence its competitive strategy. Strategic managers
of dominant market share firms must strike a balance between harvesting what has
already been accomplished and maintaining or improving their current competitive
position. One strategic option is to stay on the offensive in order to continue to outperform
rivals by taking the lead, introducing new products/services ahead of competitors, and
increasing marketing activities. Another option is to hold and maintain the present
competitive position by erecting barriers to entry such as new patents, the introduction of
more brands, and so forth. Strategic managers must be careful not to get complacent
when implementing a hold-and-maintain strategy. Prices must remain competitive, quality
must be maintained, and a high standard of customer service must be maintained. A
confrontational strategy may be used in combination with either a keep-the-offensive or
a hold-and-maintain strategy. These are concerted strategic efforts designed to make it
hard for smaller, aggressive-minded firms to grow and prosper.
Figure 35. Corporate Portfolio of SSM Competitive Strategies
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A focused differentiation strategy based on disruptive change and generative learning in
carefully segmented markets is the general strategic prescription for a small-cap
company. Avoiding head-on rivalry with the dominant share leader can be accomplished
by finding and engaging in market segment gaps, or by generating new market room
entirely. Rather than diversification, revenue growth, and increased market share, the
strategic intent is on specialization and income. Strategic managers should take risks by
concentrating on developing core competencies in research and development,
technological skills, and new product/service development, and thus managing for
innovation as a means of growth.
Ecosystem Leadership Strategies
Keystone firms, the ecosystem leaders, will be responsible for shaping the vision and
structuring the business ecosystem based on eco- and socio-effectiveness by providing
platforms that solve fundamental problems, thus providing sustainable solutions for its
niche ecosystem members. The ecosystem leader’s leverage over niche players is
determined by the nature of the relationships represented by the degree of coupling with
the niche players (Iansiti and Levien 2004a, 2004b). The ecosystem leader is responsible
for shaping a sustainability-based vision and a supportive business ecosystem structure
regardless of whether the ecosystem is operating in developed, developing, or
undeveloped markets.
Business ecosystem analysis focuses on the critical interactions between the leader’s
capabilities and those of its network of business ecosystem partners. The SSM strategies
formulated and implemented by ecosystem members will depend heavily upon their
relative ecosystem position. Three ecosystem positions are identified in the literature: the
ecosystem leader, the niche player, and the dominator (Iansiti and Levien 2004b). Of
these, only the ecosystem leader position and niche player position have significant value
for creating the type of inclusive, collaborative, trusting relationships required to build
effective sustainability-based business ecosystems. On the contrary, the dominator
position would likely impede building such relationships because ecosystem dominators
typically seek maximum short-run benefits for themselves instead of longterm shared
value for all ecosystem members. For example, Enron was a dominator that created value
only for the top managers of the firm and destroyed value for all of its other stakeholders.
Thus, dominators negatively affect the overall health and eventual survival of business
ecosystems because they extract more value than they contribute (Iansiti and Levien
2004b). Thus, it is critical that business ecosystems guard against including firms that
exhibit dominator behaviors due to their lack of value creation and destructive behavioral
patterns. For the remainder of this discussion we will focus on healthy business
ecosystems in which ecosystem leaders and niche players work together to cocreate their
common futures (Iansiti and Levien 2004b; Moore 2006).
Given the complexity and coevolutionary nature of innovating across a multitude of
complementary contributors within a business ecosystem, effective ecosystem leadership
is essential. As discussed above, ecosystem leaders are responsible for shaping the
vision, core values, boundaries, platforms, and relationships of the business ecosystem,
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and they are responsible for the ecosystem’s overall health. Healthy business
ecosystems have leader firms that can translate their shared visions into platforms that
provide ecosystem members with the operating leverage that comes with the ecosystem’s
collective actions and community-based learning structures (Iansiti and Levien 2004b).
Ecosystem leaders essentially serve as a hub in a network of ecosystem member
interactions. In this role, leader firms serve to enhance the robustness, the efficiency, and
the stability of the ecosystem, opening space for value-sharing opportunities among the
niche players and providing sustained competitive advantages for their own firms. As
previously discussed, ecosystem leaders also establish the nature and coupling strength
of the relationships in the ecosystem. Coupling strength determines the switching costs
of moving between ecosystems for the niche players, and it is an important measure of
ecosystem stability (Iansiti and Levien 2004b). Thus, it is up to the ecosystem leader to
find a healthy balance of coupling strength within the business ecosystem. Starbucks,
Apple, Google, Amazon, Microsoft, and Walmart are all examples of keystone firms,
ecosystem leaders of healthy business ecosystems.
Ecosystem Niche Player Strategies
Niche players make up the majority of the members in the ecosystem, and they are
responsible for formulating specific strategies based on innovation, specialization, and
differentiation designed to address customer needs that are unique in their particular
markets. For example, niche players operating in developed markets will likely focus their
strategies more on reducing the entropic flow of physical throughputs, and niche players
operating in undeveloped and developing markets will likely focus their strategies more
on serving basic human needs within ecological limits.
Niche players often use focused-differentiation strategies based on innovative, disruptive
change aimed at carefully segmented target markets. Thus, sustainable innovation with
respect to products, services, business models, and markets is a basic business
requirement for ecosystem membership. The entrepreneurial niche players are selfcontained modules that coevolve around a keystone firm that provides them with a
common platform creating shared sustainable value. This modularity defines the
contributions of each ecosystem member and is developed somewhat independently. The
entrepreneurial niche strategy is one of specialization through taking explicit advantage
of the opportunities provided by the ecosystem while mitigating the challenges posed by
such a business environment. By selecting a specialization that is truly unique and
investing in unique capabilities, niche players can create competitive advantages. Risks,
however, arise when a niche firm’s tight coupling with the ecosystem leader results in a
lack of mobility between ecosystems and the vulnerability to technological change (Iansiti
and Levien 2004b).
Healthy business ecosystems will often support a large number of niche players for a
sustained period of time. The huge and always changing software business ecosystem
has historically supported numerous niche players that have created a variety of product
innovations (Iansiti and Levien 2004b). Intuit is one such niche player. The firm has
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specialized in integrating technology components provided by Microsoft, the ecosystem
leader. For over 25 years, Intuit has coevolved within its ecosystem by developing
innovative business and financial management products for small and midsized
businesses, consumers, and accounting professionals (i.e., QuickBooks, Quicken, and
TurboTax). In 2007, Intuit added sustainability to its vision, creating Intuit Green, in order
to formalize the sustainability efforts in its core business operations (Intuit 2011). Intuit’s
movement over the years to a sustainability-focused differentiation strategy demonstrates
the coevolutionary nature of a successful niche strategy, where competitive strategies
can create shared value within the ecosystem by taking advantage of the opportunities
provided by business ecosystem platforms for innovation, specialization, and
sustainability.
SSM Strategies for Developed Markets
Keep in mind that the current global economy is a mix of developed, developing, and
emerging markets. The world's developed markets actually house the richest 25% of the
global population and regulate 75% of global income and buying power (Milanovic 2002).
These markets are the largest producers and buyers of products and services in the
world, and they have dominated the global marketplace for most of its history. Human
footprints are enormous in both developed and emerging markets. Corporations in many
of the resource-intensive industries in these markets, such as chemicals and energy,
have large ecological footprints and use older technologies with limited ecological
performance improvement potential (Hart 2005). It is critical for the survival of future
generations that strategic managers in developed and developing markets formulate
strategies based on innovative business models that provide consumer value while
slowing the entropic flow of resources through their organizations.
Climate Change Strategies
Simply put, climate change is a major ecological problem that will have long-term
consequences for the economy, culture, and the earth (Barrett 2012). New business
models that can decouple carbon emissions from economic growth are urgently needed,
particularly in the world's emerging and developed markets, where carbon emissions are
the highest.
Climate change and the resultant increase in natural disasters have put carbon emissions
much higher on the agendas of organizational stakeholders around the world. They are
demanding indicators of firms’ carbon emissions, and the result has been a significant
increase of carbon disclosure in corporate reporting. The most popular means for a firm
to disclose its carbon footprint is through its sustainability report, its SEC (Securities and
Exchange Commission) filings in the United States, or the Carbon Disclosure Project, a
multisector partnership formed to assist the international community in carbon emissions
reduction (Pinkse and Kolk 2009). Executives across a broad range of sectors have
started to recognize that climate change is a business reality—whether they believe in
the science or not. McKinsey and Company has long believed that a low-carbon global
economy is a pending reality, and business organizations must get ready for it, especially
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those in transport, energy, and other heavy industries that are the heart of today’s carbonintensive economy (Enkvist, Nauclér, and Oppenheim 2008).
Due to the emergence of carbon emission trading, typically in the form of cap-andtrade
systems, the strategic relevance of climate change for business has increased in
importance. In these systems, firms get limited allowances to emit greenhouse gases and
they are allowed to trade these with other market participants. Through this process,
carbon can actually be assigned a price. The total value of emission rights in the EU
Emissions Trading Scheme is about E40 billion a year. Only a fraction of that value is
traded now, but it is a growing fraction. This provides opportunities for firms to capture
profit in the carbon-trading market via many roles, including buying or selling for
speculative purposes or creating low-carbon projects that would help companies outside
the system reduce emissions at low costs and then profitably sell their emission rights in
the market. Thus, these systems can help strategic managers to translate their firms’
impact on global climate change into financial figures that they can use to account for
climate change in business investment decisions (Hoffman 2007).
Since emission trading is market based, it does not stipulate what means firms may use
to stay within the regulatory limits. This enhances strategic managers’ ability to innovate
and incorporate carbon management issues within their firm’s overall business strategy.
Since carbon is so closely tied to other commodity products, such as coal, oil, and natural
gas, carbon emissions impact strategic decisions related to sourcing energy, the engine
that drives the firm and the economy. Thus, trading emissions has created a whole new
financial market, where carbon has a price, providing opportunities for firms to capture
profit in the carbon-trading market (Pinkse and Kolk 2009). McKinsey and Company
believes that carbon markets will grow in number and will be attractive in coming years
(Enkvist, Nauclér, and Oppenheim 2008).
Climate change strategies have coevolved over time. As global climatic disasters have
increased, the carbon market has emerged and the sustainability movement has grown.
Typically, the initial climate change strategy implemented by firms is to make efforts to
optimize their carbon efficiency through strategies to improve the efficiency of their
infrastructure (buildings, factories, data centers), supply chains, and finished goods
(automobiles, flat-screen TVs, computers). Often, these strategies involve not only ecoefficiency measures but also a shift to less carbon-intensive sources of power such as
wind, solar, or geothermal. Therefore, incremental improvements in carbon efficiency are
usually the first step firms make in implementing a climate strategy (Enkvist, Nauclér, and
Oppenheim 2008).
However, as the low-hanging fruit of eco-efficiency is picked, new business models are
necessary that create radically more effective low-carbon solutions that reward suppliers
and end users for consuming less energy. Value chains that disrupt existing industries
and create new ones will necessarily spring up. In forestry and bioenergy, for example, a
major new value chain seems likely to appear around the large-scale supply of biomass
to power plants and other resource-intensive industries. Or a value chain may emerge
that is built on cellulosic ethanol, which could significantly change the supply patterns of
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transportation fuels if its cost comes down as quickly as many predict (Enkvist, Nauclér,
and Oppenheim 2008). Slowing the flow of low entropy energy through the value-creating
activities of the business ecosystem will slow emissions growth, but will it be enough,
soon enough? The reality is that a new generation of strategies that question the
underlying assumptions of the current business model must emerge to fundamentally
decouple economic growth from carbon emissions growth. This will require building
continuous organizational learning and innovation capabilities to learn how climate
change issues affect core activities and which strategic adjustments are necessary to
manage these impacts (Pinkse and Kolk 2009).
The French specialty chemical company Rhodia, with one-third of its sales in
sustainability-leveraged products, has a committed climate change strategy that has led
to increased earnings from low-carbon projects and participation in the carbon-trading
market. Inspired by the French and Brazilian governments’ collaborative positions on
reducing climate change, Rhodia has also partnered with Brazilian counterparts to target
a reduction in greenhouse gases by: (1) combating deforestation, which is the main
source of greenhouse gas emissions in Brazil; (2) developing cleaner and more
sustainable production processes by using clean technologies and biomass as raw
material for industrial chemistry; (3) developing carbon capture and storage technologies
and cogeneration technologies; and (4) developing renewable energy sources, with
priority given to biomass and wind energy, which are still underexploited in both countries
(Rhodia Group 2009). Collaborative industry relationships such as these have allowed
Rhodia to implement a climate change strategy that continues to coevolve as new value
chains are discovered and organizational learning takes place.
Emerging Business Models for Developed Markets
Consumers in developed markets are becoming more socially conscious, resulting in a
strong green consumer pull (Ottman, 2011). Consumers are driving their increasingly
sustainability-leveraged portfolio of products, according to specialty chemical companies
such as Eastman Chemical and Rhodia, which are usually located in the middle of value
chains. As a result, in today's developed markets, the primary sustainability challenge is
to have a steady stream of creative goods and services that are manufactured, created,
marketed, distributed, consumed, and disposed of in ways that substantially minimize the
firm's high-entropy corporate and customer footprints. Eco-efficiency and product
stewardship strategies, as discussed above, are successful in lowering costs and offering
a means for ecological and social differentiation, allowing businesses to profit from the
green customer pull in many developed markets.
To achieve sustainability, however, businesses in developed markets will need to develop
and adopt innovative SSM strategies that deliver long-term customer value in innovative
ways that maintain and improve the planet's ecological and social structures, as well as
promote sustainable consumption patterns that are in line with the Earth's carrying
capacity. For this reason, more eco- and socio-effective business models are being
developed that go beyond the short-run gains achieved by eco- and socio-efficiency
(Stead and Stead 2009).
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One model indicates that by focusing bundling services, selling end-use value, and
maintaining cradle-to-cradle product stewardship, businesses can generate value for
customers while minimizing environmental and social impacts. Hawken, Lovins, and
Lovins (1999, 146) say, “In the … model, value is delivered [to consumers] as a flow of
services—providing illumination, for example, rather than selling light bulbs.” Customers
get the same level of performance from products, but with reduced environmental impacts
through minimizing entropic throughput. The late Ray Anderson of Interface pioneered
the idea of leasing carpet instead of selling it to consumers, and Cengage, a leader in the
textbook industry, is moving toward book leasing and electronic publishing (Ottman
2011).
Brand design and production models must be rethought in order to create innovative
products that delay the entropic flow of capital while still delivering customer value.
According to Jacquelyn Ottman (2011), simply redesigning existing products to be more
eco-friendly would no longer provide competitive advantages because companies will be
left with the same product model in markets where environmental sustainability has
become a basic business necessity. Rather, she views “eco or functional innovation” as
the next stage of the innovation process. She says, “develop[ing] new product concepts
that perform the same function as existing products but with significantly less impacts
starts with questioning fundamental assumptions” (Ottman 2011, 90). Questioning the
basic assumptions of the business model moves product/service development from a
cradleto-grave to a cradle-to-cradle mentality where product design mimics nature based
on the principles of eco-effectiveness. Eco-effective product design requires an
organizational culture supported by entrepreneurial, generative learning.
Ottman (2011) illustrates generative eco-effective thought with the redesign of a single
toothbrush. A toothbrush can be made more environmentally friendly by using recycled
and recyclable materials, but it is still the same product concept—a toothbrush that must
be discarded at some point. However, thinking eco effectively may lead to a very different
type of solution. Questioning the underlying assumption that a brush is required for
cleaning teeth may well trigger new products such as specially treated chewing gums or
food additives that prevent plaque build up without a brush, paste, water, and packaging.
Sustainable Marketing Strategies
Sustainability marketing prioritizes an organization's dedication to product stewardship in
its marketing campaigns, which is a necessary step toward transforming the consumer
culture into a sustainable society (Kirchgeorg and Winn 2006). According to Ottman
(2011, 45), the idea of product steward-ship has led to the emergence of a whole new
marketing paradigm that views people not “as mere customers with insatiable appetites
for material goods, but as human beings looking to lead full, healthy lives.” This
constitutes a shift from a socio-efficiency to a socio-effectiveness perspective of who and
what customers are.
This change in perspective explains why customer stakeholder engagement mechanisms
are effective vehicles for improving consumer learning, which is a key component of
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marketing sustainability. Strategic managers should attend to the consumption end of the
value chain by involving consumers in discussions about sustainable consumption
practices, for example. Consumers have the ability and desire to learn, and it is the
responsibility of sustainable marketing to assist them in learning how to responsibly use
and dispose of goods and packaging. Organizations can encourage more sustainable
consumption by providing customers with valuable information such as life cycle and
footprint data. That is why organizations such as Proctor and Gamble, Clorox, and
Unilever educate their customers about how to safely use and dispose of their products
(MIT Sloan Management Review and BCG 2011).
Progressive business organizations are no doubt making efforts to broaden their strategic
intent to address the global outcry for more sustainable business practices. Results of a
recent survey of 3,000 global executives indicate that almost 70 percent expected their
organizations to increase their investments in sustainability-related projects during the
recent economic downturn, unlike previous economic downturns when sustainability was
put on the corporate back burner (MIT Sloan Management Review and BCG 2011). As
mentioned earlier, sustainability is clearly becoming more strategically important as “the
sustainability movement nears a tipping point” (Kiron et al. 2012, 69). As consumers and
other stakeholders increase demands for sustainable solutions to the environmental and
social problems generated by the human footprint in the developed and developing
markets, more and more opportunities will emerge for business to be part of the solution
through collaborative action as a leading social change agent. Thus, SSM strategies for
developed markets include dynamic, strategic initiatives that create shared stakeholder
value (Porter and Kramer 2011) by reducing the entropic flow of energy and natural
resources, and by creating innovative, sustainable products and services, both of which
meet current stakeholder demands and enhance the triple-bottom-line performance of the
firm and its business ecosystem.
SSM Strategies for Undeveloped and Developing Markets
The base of the pyramid (BoP) is a market of approximately 4.6 billion people who live on
less than US$4 per day (Hart 2005). About 1.4 billion of them live below the international
poverty line of US$1.25 per day (World Bank 2008). The BoP is a fragmented market
consisting of many segments based on the individual characteristics of regions, countries,
and industry sectors that are not fully integrated into the formal market economy. Entering
the BoP market is difficult because of this inability to scale operations. Within the informal
economy there are few channels of distribution, few formal regulations, and few means
of financing. Living at the base of the pyramid makes people highly susceptible to
isolation, disease, illiteracy, crime, environmental degradation, exponential population
growth, and so forth. As desperate as this sounds (and is), these issues offer numerous
win–win strategic opportunities to create longterm economic benefits by helping to
improve the lives of the poor in these undeveloped markets through eco- and socioeffective BoP strategies (Hart 2005; London and Hart 2011; Prahalad 2006; Prahalad and
Hart 2002).
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As mentioned previously, even highly developed markets like the United States have BoP
market segments that are in desperate need of economic, human, and social capital
creation. Panera Bread cofounder and chairman Ron Shaich believed that Panera had
many capabilities valuable for addressing food insecurity in these depressed U.S.
communities. Based on this belief, the Panera Bread Foundation has opened Panera
Cares Cafés in economically stressed urban areas such as Dearborn, Michigan. In the
cafés anyone who needs a meal gets one. Panera Cares Cafés encourage people to take
what they need and donate what they can. There is a donation box near the counter with
a suggested donation amount posted. So far, about 20 percent of the customers have left
more than the suggested donation, 60 percent have left the suggested amount, and 20
percent have left less. All of the Panera Cares Cafés have reported revenues in excess
of their costs, and the extra money is used to train at-risk youth from the communities to
become Panera employees (Kavner 2011). This is an example how a BoP socioeffectiveness strategy in an economically depressed market segment can serve the
needs of the poor while building the firm’s brand and reputational capital, both of which
provide competitive advantages for the firm.
The Coevolution of BoP Strategies
BoP strategies specifically target the low-income demographic in order to generate
revenues by “selling goods to and sourcing products from the BoP” (London and Hart
2011, 9). As more and more firms have discovered the BoP market space, two generic
strategies have coevolved: one focuses on serving BoP consumers and the other focuses
on serving BoP producers. Given the coevolutionary nature of BoP market space, the firm
may employ either strategy or both strategies to compete in the BoP market. Typically,
organizations implement market strategies that focus on the poor as consumers for the
goods and services of their corporations (Boyle and Boguslaw 2007; Kirchgeorg and Winn
2006). These strategies are designed to provide low-cost products and services that
address the basic needs of the poor, such as education, health care, sanitation, and clean
water (Boyle and Boguslaw 2007; Hart and Christensen 2002).
The poor as consumers is generally the initial perception strategic managers have when
they enter the BoP market space. These strategies are usually designed to merely sell
an organization’s standard products at lower prices to the masses or to generate rapid
sales, often without regard to environmental responsibility or social welfare. Typically,
these strategies take products created for developed markets, make some adjustments
in them for local conditions, and then distribute them in the BoP markets. Such strategies
can prove risky because they are often not well designed to serve the needs of those at
the base of the pyramid. Rather they merely extract wealth from them in the form of
consumer spending (Immelt, Govindarajan, and Trimble 2009). Such fortune-finding
strategies are often viewed as a new form of corporate imperialism (Hart 2008).
The emphasis of the second generic form of BoP strategy moves from extracting capital
from BoP customers to co-creating economic opportunities with them (London and Hart
2011). The poor are seen as co-producers in an inclusive market environment with valuecreating activities in these strategies. The ability of fortune-creating BoP strategies to
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create economic capacity and generate employment and income by creating economic
opportunities within the local community is what makes them so successful.
Both informal and formal economies are protected by generic BoP strategies. The
challenge is to link both sectors' productive assets in order to cocreate mutual stakeholder
value. As a result, active BoP strategies aim to integrate both the formal economy's wealth
and technology with the indigenous expertise of the local population (London and Hart
2011). BoP strategies involve collaborating and partnering with stakeholders spanning
different sectors. As a result, an effective BoP strategy necessitates collaborating with
social entrepreneurs, NGOs, citizen service groups, governmental bodies, competitors,
and development agencies to create an inclusive business ecosystem (Jenkins and
Ishikawa 2010). The inclusive environment is designed to help poor people become
wealth asset builders. The poor become coproducers in the supply chain when they are
able to create “sustainable livelihood businesses” (Kirchgeorg and Winn 2006, 172)
through an inclusive, collaborative ecosystem. This reduces manufacturing costs,
transportation costs, and the overall footprint of the business ecosystem while also
creating employment, profits, and microenterprises in the local area.
Efficient BoP projects must eventually be able to recoup their running costs and become
financially self-sufficient. To do so, they'll need to achieve economies of scale in the
fragmented BoP market, which is a challenging challenge. According to Allen Hammond
(2011), effective scaling strategies for the BoP market should be both global (top-down)
and local (bottom-up), with capital and technology sourced while local issues and needs
are considered. He also notes the critical importance of building an inclusive ecosystem
with multi-sector stakeholders that provide critical knowledge and multiple sources of
solutions.
Such partnerships and alliances with local BoP stakeholders are designed to cocreate
“entirely new businesses that generate mutual value” (Hart 2008, xi). Partnering with local
social entrepreneurs can assist businesses in unlocking the potential in these BoP
markets by providing linkages with local stakeholders that facilitate an understanding of
local cost structures, local consumer behavior, and so forth (Drayton and Budinich 2010).
These partnerships and alliances serve as mechanisms for deep dialogue with BoP
stakeholders, leading to the development of capabilities and strategies that truly serve
the needs of the poor. Stuart Hart (2008) has developed a BoP protocol for such inclusive
ecosystems, which he says is a “co-venturing process that … creatively marr[ies]
companies’ and communities’ resources, capabilities, and energies [in order to] bring life
to new business ideas and models that exceed what either partner could imagine or
create on their own” (Hart 2008, xi). Successful development of these partnerships and
alliances provides the social capital that is necessary for these inclusive ecosystems to
socially embed their BoP strategies into the chosen undeveloped markets (Hart 2005;
Kirchgeorg and Winn 2006; Sánchez, Ricart, and Rodríguez 2005).
Corporate perceptions of the BoP market and the resulting strategic initiatives have
coevolved and matured since C. K. Prahalad and Stuart Hart (2002) first introduced the
idea of the BoP market space. Originally, the BoP was viewed simply as a huge market
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of economically restricted consumers ripe for exploitation, but today it is viewed more as
a complex market of economic partners who cocreate value across the ecosystem along
with helping their communities to meet their basic needs (Gradl and Jenkins 2011;
Jenkins and Ishikawa 2010; Kirchgeorg and Winn 2006; London and Hart 2011).
According to Prahalad (2011, xxx), “The process must start with respect for the Bottom
of the Pyramid consumers as individuals.” Successful BoP strategies convert poverty into
an opportunity for all ecosystem members. For example, Unilever’s Project Novella in
Tanzania, which seeks to develop a sustainable supply of Allanblackia (AB) nuts and oil
for margarine, has built an ecosystem including an AB Board, farmers associations, rural
banks, and agricultural institutes. The ecosystem helps to create economic opportunity
through building human and social capital within the BoP market (Jenkins 2007).
BoP Strategy Implementation
As previously mentioned, the ability to build an interconnected business environment that
achieves a scale of operations that covers operating costs is a crucial success factor in
implementing a BoP strategy. However, there are several obstacles along the way.
Systemic problems afflict BoP economies, ranging from a lack of infrastructure to low
worker awareness and skills to restricted access to credit among low-income consumers
and producers (Jenkins and Ishikawa 2010). To overcome these constraints, an inclusive
ecosystem must be created, which necessitates entrepreneurial learning about
navigating the uncharted waters of the BoP sector. As a result, the stakeholder
engagement conversation with members of the BoP community is critical to the
implementation process. This stakeholder input is critical in deciding how the inclusive
business ecosystem will be framed, funded, supported, and structured (i.e., separate
strategic business units, internal venture funds, cross-functional teams, spin-offs, etc.).
In order to scale operations in the BoP industry, it is critical to encourage entrepreneurship
among members of the BoP ecosystem. Microfinance is important for the development
and funding of local entrepreneurs at the bottom of the pyramid. Microloans allow the
poor to break the cycle of poverty by establishing small businesses that provide a stable
source of income. Grameen Bank, established in the early 1970s by Nobel Peace Prize
winner Muhammad Yunus, was founded on the principle that access to credit is a
fundamental human right (Yunus 2003). Grameen Bank has loaned billions of dollars to
millions of BoP entrepreneurs, mostly women, and there are now hundreds of microfinancing institutions across the globe using the Grameen methodology to serve both the
urban and rural poor. Citibank has been involved in microfinance for over 40 years,
offering savings, insurance, loan guarantees, and other financial services to the BoP
market (Jenkins 2007). There can be, however, a dark side to micro-financing, and that
is the possibility of lenders charging usurious interest rates to the poor.
Example:
General Electric’s reverse innovation strategy, previously discussed as a preemptive
strategy, has been successful in engaging BoP stakeholders in cocreating innovative
products to address the needs of the BoP market. GE’s strategy is to develop an inclusive
business ecosystem in the target BoP market. GE utilizes long-term growth teams (LGTs)
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to actively engage in dialogue and collaboration with local stakeholders to facilitate the
cocreation of products and services that satisfy unique customer needs at the base of the
pyramid. It is called a reverse innovation strategy because innovations are developed at
the base of the pyramid and flow to the top of the pyramid rather than the traditional topto-base flow. For example, in 2009 Jeff Immelt, GE’s CEO, announced a six-year goal to
cocreate 100 low-cost health-care innovations in collaboration with customers in BoP
markets via the LGT process (Immelt, Govindarajan, and Trimble 2009).
GE implements a two-pronged development and market strategy with a focus on building
infrastructure and upgrading technical capabilities at government hospitals and rural
clinics. Initially, GE identifies a target country and then develops deep partnerships with
its Ministry of Health. GE managers then work together with the LGTs to identify the best
technological solutions for the target health-care provider. By partnering with Engineering
World Health, an NGO whose mission is to improve the quality of health care in hospitals
that serve BoP consumers, GE is able to train local health employees to maintain and
repair the new technology. Meanwhile, the company reaps benefits in the form of design
feedback, brand recognition, and reputational capital (Cleveland 2011). Thus, by
constructing an inclusive ecosystem using deep dialogue in its target BoP market, GE
serves the health-care needs of those at the base of the pyramid, creating human capital,
social capital, and economic capital in the BoP communities where it operates. Further,
these innovative products and solutions will likely flow from the base to the top of the
pyramid as health-care costs continue to rise rapidly in developed markets like the United
States. Thus, GE’s reverse innovation strategy is a BoP strategy that encompasses the
whole pyramid, providing sustainable solutions for both the undeveloped and developed
markets served by GE’s portfolio of businesses
Strategies Dependent on Stage of Industry/Ecosystem Coevolution
Since each stage of coevolution presents various opportunities and challenges, the stage
of industry/business ecosystem coevolution is a strategic environmental factor affecting
the formulation of SSM competitive strategies. The embryonic and pioneering period, the
establishment and growth stage, the maturity stage, and the decline stage are the stages
of business ecosystem coevolution that industries and business ecosystems go through
(Moore 1996, 2006). Depending on the stage of coevolution, the focus on generic and
functional level tactics, value-creating tasks, and overall goals shifts, affecting the strategy
formulation process (Dess, Lumpkin, and Eisner 2008).
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Figure 36. Whole-Pyramid Strategic Thinking
In the embryonic, pioneering stage where products are unfamiliar to consumers, markets
are not well defined, and product features are not clearly specified, a successful strategy
requires an emphasis on research and development and marketing activities to create
consumer awareness. It is during this stage when early pioneers appear who explore a
new market/opportunity space, creating first-mover advantages. Pioneering firms begin
to structure a business ecosystem around their platforms.
After the new space is discovered, ecosystem settlers move in to establish the
foundations that let the ecosystem expand, moving into the co-evolutionary stages of
establishment and growth. It is during this stage that pioneering firms seek to establish
their platform as the dominant technology and to begin to build advantageous
relationships with ecosystem settlers who are in the firm’s value chain. Success requires
rapidly improving product quality and performance, building a strong brand, creating
selective demand for the firm’s products, and forecasting future competing ecosystems.
The potential for strong sales and profits attracts other competitors, increasing the
intensity of competition (Dess, Lumpkin, and Eisner 2008). Apple’s Steve Jobs introduced
iTunes and the iPod family of products in the pioneering phase, creating new market
space while establishing the iTunes platform as the dominant technology, and structuring
the Apple ecosystem around this platform.
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During the maturity stage of business ecosystem coevolution, relationships between
ecosystem members are well defined and there is clear modularity in terms of each
member’s interface with the business ecosystem. With saturated markets, slowing
demand, and more intense competition, weak firms exit the industry. Advantages
associated with more efficient operations and process engineering become more
important as customers become more price-sensitive. Thus, in a mature market it
becomes harder and more costly to differentiate products and services, which results in
the need to move more toward a cost-leadership posture. However, careful repositioning
to identify, create, and exploit growth segments can provide growth opportunities during
this stage. Using strategies such as reverse positioning, where products are offered with
fewer product attributes and lower price points, or breakaway positioning, where products
are created that are perceived as totally unique by customers, firms can effectively
change consumer preferences and increase demand (Dess, Lumpkin, and Eisner 2008).
Decisions during the decline stage are particularly difficult because hard choices must be
made. Demand growth becomes negative, sales and profits fall, while competition stiffens
due to excess capacity within the industry (Hill and Jones 2009). Fundamental strategic
choices to either exit or stay in the industry must be made. There are several basic
strategic options available to a business ecosystem in the decline stage. These choices
include hold and maintain, harvesting, divesting, or horizontal integration. The focus of a
hold-and-maintain strategy (discussed briefly earlier in the chapter) is to maintain the
present market position without significant reduction in marketing, technology, and other
investments in hopes that competitors will eventually leave the market. If the firm remains
in the market and others exit, there may still be potential for revenues and profits. On the
other hand, strategic managers may choose to implement a harvesting strategy that
involves obtaining as much profit as possible while quickly reducing costs. The objective
is to wring out as much cash as possible. Divestiture strategies (discussed further in the
next chapter) involve eliminating the business from the firm’s product portfolio, while
horizontal integration strategies (also discussed further in the next chapter), involve the
firm’s acquiring at a reasonable price the best of the surviving firms left in the business,
thus consolidating its competitive position (Dess, Lumpkin, and Eisner 2008). Therefore,
those firms who are able to hold and maintain their position and survive market shakeout
will be able to take advantage of the opportunities posed by the market dynamics of the
decline stage.
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Exercise #5:
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Module 6
SUSTAINABLE STRATEGIC MANAGEMENT CORPORATE LEVEL STRATEGY
Week 11-12
Introduction
The overall plan for a diverse company is known as corporate strategy. Corporate
strategy tasks include managing the mix, reach, and focus of a company's portfolio of
strategic business units (SBUs), maximizing synergies among SBUs, and allocating
resources to each SBU to achieve competitive advantages. The scope of the firm's
operations is determined by strategic decisions made at the corporate level, which are
made along three dimensions: the value chain, the combination of goods and services
provided by the firm, and the regional scope of operations (Rothaermel 2013). The space
in which strategic managers must place their firms for competitive advantage is defined
by the firm's boundaries. As previously stated, space is characterized as new business
domains that exist in strategic managers' minds. As a result, assumptions about reach
are expectations of what the firm's limits will and should be.
Learning Objectives:





Learn about the different corporate level strategies
Differentiate each strategy for global markets
Distinguish each corporate expansion strategies
List the different retrenchment and restructuring strategies
Learn about the SSM Corporate portfolio
At the corporate level, capital allocation decisions are also made. As shown in Figure 37,
the corporate level acts as an internal market for the allocation of capital to the firm's lines
of business by allocating resources to SBUs in accordance with strategy. As a result,
corporate strategy is a method for a company to generate value through the design of its
SBUs, the alignment of its multimarket operations, the use of synergy between its SBUs,
and efficient capital allocation. An effective corporate level strategy produces value
across all of the firm's SBUs, the portfolio as a whole creates more value than if each
SBU stood alone, by producing above-average returns for triple-bottom-line performance
(Campbell, Goold, and Alexander 1995).
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Figure 37. Corporate Strategy Capital Allocation
At the corporate level, strategic managers have many options for determining which
industries a company should participate in to optimize its triple-bottom-line output.
Strategic managers can opt to compete in just one industry by pursuing a focused growth
strategy that focuses on the strategic strategies outlined in the previous chapter that help
the company strengthen its competitive position in that industry. The acquisition of
business rivals can be used as part of a horizontal integration strategy to improve the
firm's competitive position in a particular industry. Strategic managers may choose to join
adjacent stages of the firm's value chain by implementing a vertical integration strategy,
in which the firm begins to manufacture and/or sell its own goods. Strategic managers
can also choose to enter new industries that may or may not be related to the firm’s core
business by pursuing a strategy of diversification. Industries today are more global and
interconnected, which increases environmental turbulence and the need for strategic
managers to consider strategies for global markets and alliance strategies in
implementing their integration and diversification decisions. Finally, strategic managers
may decide to exit existing businesses and industries via retrenchment strategies by
refocusing their portfolios, as Jeffrey Immelt did at GE, or they may decide to shrink the
boundaries of their firms via strategies that restructure or downsize current operations. In
this chapter, we discuss the strategic alternatives available to firms regarding where to
compete, how to adapt the firm’s scope to its turbulent external environment, and how to
redefine the firm’s portfolio and boundaries to create new market space. The following
section discusses the strategic alternatives available to expand the firm’s scope of
operations.
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Corporate Expansion Strategy
Strategic managers have a variety of options for expanding their businesses' reach and
improving their performance. Below we examine some of these corporate expansion
strategies.
Concentration on a Single Industry
Concentrating on one market is an apt corporate level growth strategy for many
businesses. This enables companies to focus all of their energy and skills on
improving their competitive position within a narrow market segment (similar to
Porter's focus strategy mentioned earlier in this chapter). Strategic managers
should concentrate all of their attention on knowing their client base, increasing
customer satisfaction and repeat business, as a result of this approach. This
enables companies to "stick to the knitting" (Peters and Waterman 1982), focusing
on what they know best and avoiding new businesses about which they have no
knowledge and/or where they can add little value.
Concentrated growth strategies are especially successful in growth markets that
place a high demand on a company's capital and skills, but they can also lead to
long-term growth and profitability if the company can maintain its competitive
advantage. When domestic markets become saturated, firms using concentrated
growth strategies typically expand into global markets, whose downside is their
inflexibility. By focusing on just one industry, a firm may miss opportunities in other
industries where it could create more value, or it may face the risk of the industry’s
being subject to changes in consumer preferences and/or technology (Hill and
Jones 2009).
Horizontal Integration Strategies
Horizontal integration is a form of merger that occurs when two companies in the
same sector combine. These businesses are normally rivals that join together to
gain market share and economies of scale. Other reasons include a greater
customer base, improved pricing leverage due to increased market share, and
reduced employment costs because the merged entity's top management is less
than the two combining organizations combined.
Horizontal integration strategies are one of the most popular corporate strategies
for improving a company's role within its industry. Horizontal integration entails the
acquisition of a rival within the industry that improves the firm's competitive position
by rising market strength and market share through the use of cost and revenue
synergies. Economies of scale are the source of these competitive advantages.
According to research, these techniques are most effective when the merging firms
have similar characteristics (Hitt, Ireland, and Hoskisson 2009). The widespread
popularity of horizontal integration and the resulting industry consolidation can be
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seen in the banking, pharmaceutical, telecommunications, transportation, and
energy industries, to name but a few.
Examples:
Vertical Integration Strategies
The degree of ownership of the firm's value chain is a critical corporate level
decision that strategic managers must make. The vertical integration approach
includes deciding whether to manufacture different supply chain operations within
the company or to purchase them in the marketplace. Vertical integration is a
business strategy in which a company extends its operations either backward
(upstream) into industries that manufacture inputs for its core products (backward
vertical integration) or forward (downstream) into industries that use, distribute, or
sell its products (forward vertical integration). The percentage of revenue produced
within a company's borders determines its value added in relation to its vertical
integration strategy (Rothaermel 2013). As a result, the degree of vertical
integration and the firm's limits are determined by the extent of the firm's valuecreating activities. The company is completely integrated if it owns all of its valuecreating roles.
A vertically integrated company is one that has grown into various stages of
development, processing, and distribution. In other words, a vertically integrated
company owns every aspect of the supply chain, meaning it not only distributes
the commodity it sells, but also participates in its production and creation until it
hits the market. Forward and backward integration are two ways in which a
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vertically integrated company can operate. Companies that are forward vertically
integrated are those that are active at the start of the supply chain and integrate
by managing other points. Companies that are backward vertically integrated are
formed at the end of the supply chain but decide to integrate at the beginning.
Business owners who want to enter the ranks of vertically integrated businesses
should look at some vertical integration examples to see if it's feasible.
Examples:
Weyerhaeuser is a fully integrated firm that owns its forests, grows, cuts, and mills
its timber, manufactures a wide product line of paper and construction products,
and distributes them to retail outlets and other large customers. Thus,
Weyerhaeuser competes in numerous industries with different competitors in each
industry, and its value added is 100 percent. By comparison, Apple has
implemented a forward integration strategy by establishing its Apple Stores to sell
its products directly to the consumer, while IBM has integrated backward by
manufacturing the major components that go into its computers. These examples
demonstrate that when strategic managers decide the degree of vertical
integration of their firms, they are determining the boundaries of the firm across
value chain activities.
Both risks and benefits are associated with vertical integration strategies. By
erecting barriers to entry, reducing prices, securing vital resource inputs or
distribution networks, protecting product quality, promoting investments in
specialized infrastructure, and optimizing scheduling, these strategies will improve
the competitive position of the core company (Hill and Jones 2009). When a
company must buy from in-house suppliers despite having the option to purchase
from lower-cost, higher-quality suppliers externally, vertical integration strategies
have the potential to increase costs and/or compromise quality. Vertical integration
can also limit a company's strategic flexibility in reacting to rapidly evolving
conditions in global industries like technology (Rothaermel 2013).
Strategic outsourcing is a risk-reduction strategy that involves contracting one or
more internal value chain operations to outside companies in the value chain rather
than vertical integration. As companies continue to strengthen their competitive
position both domestically and internationally, global outsourcing has become one
of the most important developments in strategic management. Offshore
outsourcing, in which supply chain functions are performed outside of the home
country, has seen tremendous development. The global offshore market is
estimated to be US$1.4 trillion with an expected growth rate of 15 percent.
Banking, financial services, information technology, and health care are currently
the most active outsourcing segments. For example, Infosys, located in Bangalore,
India, is one of the world’s largest technology firms, providing information
technology services to many of the Fortune 100 companies (Rothaermel 2013).
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This trend demonstrates the interconnectedness of the global economy in which
firms must operate.
Diversification Strategies
Strategic managers have the choice of investing the firm's capital in new markets
to increase long-term profitability after improving the firm's core business and
competitive position through integration strategies. Diversification is the process of
a company entering markets that are unrelated to its core business in order to
generate value for multiple stakeholders. As previously stated, in order to efficiently
compete within each market segment, diversified, multimarket companies build
strategic business units in two or more industries. These SBUs may be related or
unrelated. Unrelated or conglomerate diversification is the expansion into
industries that have no connection to the firm's value chain, while connected or
concentric diversification is the expansion into industries that have a strategic
match or synergies with the firm's core company. In related diversification,
resources can be shared and competencies passed between SBUs, but this is not
always the case in unrelated diversification. Economies of reach, or cost savings
resulting from operational relatedness, transference of core competencies
between SBUs, and market power, can also be achieved by related diversification.
Many diversified companies prefer related diversification over unrelated
diversification because related diversification has the potential to generate more
profit and is considered to have less risks (Hitt, Ireland, and Hosskinson 2009).
Examples:
Consider ExxonMobil’s petroleum-based product portfolio that has been subject to
increasing negative public sentiment, including calls for more carbon regulation.
Strategic managers realized that unless the firm diversified its petroleum-based
product portfolio into one that relies on more sustainable energy sources, it would
not likely be able to sustain its superior financial performance over time. In order
to adapt to the dynamic changes in its external environment, ExxonMobil initiated
a strategy of product diversification into clean energy by acquiring natural gas
companies like XTO Energy, which is known for its ability to extract natural gas
from unconventional places, for example, shale rock. Huge deposits have been
found in North Dakota and other states. ExxonMobil hopes to leverage its core
competencies in the exploration and commercialization of petroleum energy
sources into its new natural gas business. Natural gas is lower in carbon compared
to petroleum, and it provides ExxonMobil with a more diversified product portfolio
that will help the firm adapt to the worldwide sustainability movement (Rothaermel
2013).
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Strategies for Global Markets
The degree of control of the supply chain and the degree of diversification of their product
portfolios are decisions made by strategic managers. More and more of these decisions
are being taken in the light of a global context of coevolving developed, undeveloped, and
emerging markets, each with its own set of opportunities. Thus, successful strategies for
operating outside of a company's domestic market will add value to its domestic
operations through increasing market share, gaining access to low-cost factors of
production through strategic sourcing, repurposing current core competencies, and
creating new core competencies (Barney and Hesterly 2010).
Competitive Pressures
Firms who want to leave their domestic markets face two forms of competitive
pressures: the need to cut costs and the need to be sensitive to local consumer
needs, specific distribution networks, infrastructure, conventional practices, and
local government demands (Hill and Jones 2009). These competitive pressures
are difficult strategic challenges because being locally responsive tends to raise
costs. Thus, the appropriateness of a strategy varies depending on the intensity of
pressures for cost reduction and local responsiveness.
The international strategy is commonly used when there are relatively low
pressures for local responsiveness and cost reduction. It is essentially a strategy
of selling the same product in both domestic and foreign markets and is used by
firms with relatively large domestic markets, recognized brands, and reputations.
This is usually the first step firms make into foreign markets, and it can be effective
in leveraging domestically based core competencies into global markets
(Rothaermel 2013). A criticism is that international strategies are often not well
designed to serve the needs of those in undeveloped and developing markets.
Rather they are designed to merely sell an organization’s standard products at
lower prices to the masses or to generate rapid sales without regard to
environmental responsibility or social welfare. Thus, strategies of taking products
created for developed markets, making minor adjustments for local conditions, and
then distributing them in undeveloped and developing markets is risky (Immelt,
Govindarajan, and Trimble 2009).
On the other hand, the localization (or multidomestic) strategy focuses on
increasing profitability by customizing goods and/or services to meet local tastes
and preferences in specific market segments. This strategy attempts to maximize
local responsiveness in hopes that consumers will perceive the firm as domestic
(Rothaermel 2013). By doing this, the firm is able to increase the value for its
products in the local market. Thus, the localization strategy works best when there
are substantial differences in customer preferences across markets and when cost
pressures are not too intense. The strategy creates a fragmented industry by
decentralizing functional level activities such as production and marketing in order
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to address the needs of the local market. GE’s strategy of reverse innovation,
discussed in the previous chapter, is an example of a localization strategy targeted
toward undeveloped markets.
The global standardization strategy is effective when the firm produces a
commodity-type product that enables it to achieve economies of scale and location
that reduce its unit costs. Unlike the localization strategy, the global
standardization strategy allows for the centralization of functional level activities in
a few favorable locations since customer preferences are homogeneous across
markets, creating a more consolidated industry. Therefore, by producing and
marketing a standard product on a worldwide basis, this strategy enables the firm
to effectively compete across various market segments. For example, firms in the
pharmaceutical and semiconductor industries use global standardization
strategies since customers expect the same product regardless of local conditions
(Hill and Jones 2009).
Strategic managers pursuing a glocalization strategy (or transnational strategy)
(Friedman 1999, 2004) attempt to combine the benefits of the localization (local
responsiveness) and global standardization (cost-reduction) strategies. By
harnessing the economies of scale and location and combining them with global
learning from local markets, the firm pursues a strategy of product/service
differentiation at low cost (Rothaermel 2013). Due to the organizational
complexities of working across cultures and trying to reduce costs at the same
time, the glocalization strategy is rather difficult to implement because
differentiating the product to respond to local demands raises costs. Automobile
companies have found that the varying tastes of American, Japanese, and
European customers have necessitated producing products customized for local
markets. In response, Ford, Honda, and Toyota have established production
facilities in each of these regions to better serve customer needs; however, this
customization limits their ability to achieve economies of scale (Hill and Jones
2009).
Entry Modes
After the appropriate strategy for the market has been selected, strategic
managers have several options of entry modes into foreign markets. Usually, firms
will start on a small scale and then increase their involvement, investment, and risk
as they gain greater experience in the new market. The options to entry vary in
terms of risk, investment, and the degree of ownership/control. Options include:
(1) exporting, with low investment, risk, and ownership; (2) licensing and
franchising, which entails a contractual agreement with the firm receiving a fee or
royalty in exchange for the right to use its trademark, brand, or technology; (3)
strategic alliances and joint ventures (to be discussed in the next section); and (4)
wholly owned subsidiaries characterized by high levels of risk, investment, and
control (Dess, Lumpkin, and Eisner 2008). A strategic fit is essential between the
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firm’s strategies, the characteristics of its target market, and the entry mode it
chooses. Thus, strategic managers must carefully analyze both the benefits and
risks of each entry mode, and they must carefully analyze the characteristics of the
foreign market(s) that they plan to enter.
When entering foreign markets, it is important for strategic managers to
understand that their firms are not competing with nations but with other firms
doing business in these nations. Nations do not compete. Industries and industry
segments are the competitors in the global market. The role of the nation is to
serve as a supportive “home base” for firms. A supportive home base is one with
a quality workforce, available technology and resources, and other competitors in
the industry. Strategic managers need to carefully explore the home-base potential
for markets they are considering entering (Porter 1990).
Collaborative Alliance Strategies
Because of the blurring of industry lines and the need to explore the global market room,
collaboration strategies that enable companies to gain competitive advantages through
collaborations are becoming increasingly common. Eighty percent of Fortune 1000 CEOs
have indicated that more than a quarter of their firms’ revenues were generated through
collaborative alliances and partnerships. Paradoxically, while the use of these alliance
strategies—strategies in which two or more firms come together to do something neither
firm could do alone—is rising, research indicates that such strategies are risky, with failure
rates of 30–70 percent (Kale and Singh 2009). As a result, strategic managers pursuing
SSM would almost certainly be forced to engage in alliances as a means of improving
their triple-bottom-line results, despite the fact that doing so would almost certainly add
issues related to retaining and gaining value from these alliances. This strategic challenge
increases the need for firms to build alliance management capabilities that, as will be
discussed later in the chapter, are critical for managing SSM at the corporate level.
The competitive advantages afforded by collaborative alliance strategies are often
embedded within the relationships among partners that span the traditional boundaries
of the firm, creating resource combinations that are rare, valuable, and difficult for
competitors to imitate (Gulati, Nohria, and Zaheer 2000; Kanter 1994; Lavie 2006;
Nahapiet and Ghoshal 1998; Reed and DeFillippi 1990). In order to effectively explain
firm performance and the competitive advantages afforded by interconnected
organizations, the traditional definition of industry and firm must be expanded to include
the broader business ecosystem structure (Dyer and Singh 1998). Recall that within this
structure sources of competitive advantage are found in the relationships between
partners in the alliance. The social capital created by such interconnected organizations
leads to the development of eco-systemic competencies that profoundly influence firm
conduct and performance (Gueguen, Pellegrin-Boucher, and Torres 2006; Gulati, Nohria,
and Zaheer 2000). Business ecosystem members can develop strategies that protect and
exploit these common competencies, and in doing so they can help to improve
competitiveness throughout the ecosystem because of the improved relation-specific
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assets, knowledge sharing processes, complementary resources/capabilities, and shared
governance mechanisms (Dyer and Singh 1998).
Collaboration techniques can help businesses improve efficiency in a variety of ways.
Alliances can be used to break into new markets where local partners can provide
valuable information on consumer tastes, cultural norms, and legal issues. Alliances can
also help a company improve its competitive position by reducing costs and mitigating
risk across the supply chain. Firms collaborate for a variety of purposes, including the
desire to learn new skills, share and develop new information and innovations, and gain
access to complementary assets (Rothaermel 2013). Collaboration is a critical success
factor for firms pursuing sustainability as a competitive advantage because it expands
opportunities to learn and create new knowledge.
Strategic alliances are relationships involving voluntary agreements between
organizations that create competitive advantages for the alliance partners. Strategic
alliances are, at their core, partnerships determined by the partners themselves, and they
are formed by a shared vision for the future. In terms of formalization, investment,
governance, and risk, the portfolio of strategic alliance strategies varies (Rothaermel
2013). The network's keystone companies, or business ecosystem leaders, must
efficiently manage the network's portfolio of strategic alliances. Given the diversity of
stakeholders in the business environment, this is a difficult challenge, but it is a key
success factor in the successful implementation of SSM.
The most common strategic alliance strategies are non-equity alliances in which there is
a contractual agreement between firms, such as a distribution agreement, supply
agreement, or licensing agreement. In many cases these alliances are vertical in nature,
connecting different parts of the value chain. Typically, explicit knowledge is exchanged
between partners. Non-equity alliances are flexible and fast, but they do not usually create
much social capital, which can result in a lack of trust and commitment within the alliance
(Rothaermel 2013).
In equity alliances, one partner takes partial ownership in the other partner, requiring more
investment and commitment than contractual non-equity alliances. These alliances allow
not only for explicit knowledge sharing but also for tacit knowledge sharing in which
process learning can take place. Corporate venture capital (CVC) investments are a type
of equity alliance in which established firms make equity investments in entrepreneurial
ventures that create options for accessing new, potentially disruptive technologies. Large
organizations such as Dow, Siemens, and Johnson and Johnson have huge investments
in CVCs. Equity alliances tend to generate more social capital and greater trust between
partners than nonequity alliances because the stronger ownership relationship and
increased financial investment generate a higher level of commitment to success
(Rothaermel 2013).
Joint ventures are collaborative strategies in which the partners contribute equity to create
a separate legal entity (Dess, Lumpkin, and Eisner 2008). These alliances entail
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significant investments and may be extremely time-consuming in terms of negotiating and
managing the nature of the relationships among partners. In a joint-venture strategy, the
scope of the vision is usually broader than other alliance strategies, with the exchange of
both tacit and explicit knowledge among partners focused on the shared vision. Trust and
commitment are fostered, which creates the social capital embedded in the relationships
that may afford the firm potential competitive advantages. Dow Corning, a global leader
in silicon-based technology and innovation, equally owned by Dow Chemical Company
and Corning, is a joint venture that was established in 1943 specifically to explore the
potential of silicones. The longevity of this joint venture indicates that Dow and Corning
have developed effective alliance management capabilities, thus avoiding the usual risks
of the misappropriation of shared knowledge and the conflicts over sharing rewards that
lead to the high failure rates for strategic alliances (Rothaermel 2013). Thus, the key to
successful alliances is the ability of strategic managers to manage the relationships within
the partnership in ways that develop high levels of trust-creating alliance management
capabilities (Kale and Singh 2009).
Mergers and Acquisitions
Mergers and acquisitions (M&A) are a popular vehicle for expanding a firm’s scope
once the decision has been made to buy expanded economic activity in external
markets. The scope of the economic activity may be expanded vertically across
the firm’s value chain, horizontally within the firm’s industry, or into new products
and markets through diversification strategies. Although the terms “merger” and
“acquisition” are often used interchangeably, they are distinctly different concepts.
When one company purchases another company’s assets, either through a stock
purchase, cash, or the issuance of debt, and clearly establishes itself as the new
owner, the purchase is called an acquisition. From a legal point of view, the target
company ceases to exist, the buyer “swallows” the business, and the buyer’s stock
continues to be traded. On the other hand, in the pure sense of the term, a merger
happens when two firms, often of about the same size, agree to go forward as a
single new company rather than remain separately owned and operated. This kind
of action is more precisely referred to as a “merger of equals.” Both companies’
stocks are surrendered and new company stock is issued in its place. For example,
both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and
a new company, DaimlerChrysler, was created (Hitt, Ireland, and Hoskisson 2009).
However, in some cases strategic managers resist takeovers because they believe
that the target firm has hidden value, they believe resistance may increase the
offer price, or they want to retain their positions. If the shareholders accept the offer
to sell, then the top managers of the target firm will either lose their jobs or will be
stripped of their power, so there are often incentives for antitakeover tactics at the
corporate level to protect incumbent managers. Three common antitakeover
tactics are greenmail, poison pill, and golden parachutes. Greenmail is an offer to
buy back the acquiring firm’s stock at a price higher than it paid for it, but the offer
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is not extended to other shareholders. Poison pills (shareholder rights provisions)
give shareholders certain rights in the event of a hostile takeover. Golden
parachutes, typically part of the CEOs compensation package, specify a significant
severance package in the event of a hostile takeover, which protects executives’
income in the face of job loss. When a firm puts antitakeover tactics in place,
shareholders and other stakeholders should be aware that in many cases the
motives may reflect more concern for top management interests than for
shareholder interests, thus raising some potentially serious ethical issues (Dess,
Lumpkin, and Eisner 2008).
Internal Venturing and Strategic Intrapreneurship
After considering transaction costs and other market factors, strategic managers
may decide that it will be more effective to expand within the boundaries of the
organization by internal venturing or engaging in strategic intrapreneurship within
the firm (Pinchot 1986). The pursuit of new venture opportunities within a firm helps
to create new sources of competitive advantage in new market space, thus
renewing the firm’s value propositions. The key to successful strategic
intrapreneurship is to build the organizational capabilities necessary to generate
the entrepreneurial spirit throughout the firm. Such capabilities arise from an
organizational culture that allows for open questioning of fundamental values and
assumptions and through continuously asking, “what can be?” This requires that
top managers provide the leadership, the resources, the structures, and the
organizational processes necessary for a culture that celebrates taking risks and
exploring new market spaces. The corporate venture capital investments,
discussed above, are vehicles that can enhance a firm’s ability to stimulate
innovation and intrapreneurship.
Via internal venturing, a firm can capture all the value generated by its own
innovative activities. Developing stakeholder engagement processes and
capabilities facilitates dialogue between the firm and its stakeholders within its
target markets. Dialogue with stakeholders enhances the ability of organizations
to discover and evaluate innovative opportunities to meet specific market needs.
Alliance strategies with stakeholders are common in internal venturing where
learning from partners enables innovative, out-of-the-box thinking that enhances
the innovation process. Learning from consumers, suppliers, and other
stakeholders has led to sustainable innovations such as Tide Coldwater and
Starbucks recyclable coffee cups.
Building inclusive business ecosystems with multiple partners using high levels of
alliance maintenance capabilities creates the environment for developing
sustainable solutions to meet the needs of the world’s growing population. Internal
venturing is best able to create triple-bottom-line value when the capabilities are
developed that allow the processes to move quickly from initial opportunity
recognition to market introduction and competitive positioning (Gundry and Kickul
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2007). GE’s strategy of reverse innovation, as previously discussed, has been
effective in utilizing stakeholder engagement processes in the development of
health-care equipment with lower price points to address the health-care needs of
low-income consumers in all markets.
Retrenchment and Restructuring Strategies
The term "corporate retrenchment" or "restructuring" comes from military warfare. As an
army's initial trench line is threatened, it retreats and establishes a secondary trench line,
sacrificing ground to save lives and continue the battle. The same idea applies to
corporate retrenchment, with bankrupt companies withdrawing briefly to regroup before
re-entering the market. During corporate retrenchment, a company's portfolio of
operations is reduced or its financial structure is altered. Selling or divesting properties,
discontinuing ineffective product lines, firing staff, restructuring debt, declaring
bankruptcy, or even liquidating the company could all be part of such a scope reduction.
Corporate restructuring is still a global trend, and strategic alternatives to reducing the
firm's borders can take several forms.
Turnaround Strategies
Negative cash flow, decreasing sales, loss of market share, uncompetitive goods
or services, and inadequate strategic management are all indicators of corporate
decline. A turnaround plan is a strategic response by failing businesses to these
indicators. A turnaround strategy entails using an intentional constructive strategy
to reverse these downward patterns in firm results. The board of directors may
bring in new strategic managers to lead the turnaround if strategic managers are
unable to adjust their firms to external conditions such as increased environmental
volatility, global competition, unfavorable economic cycles, and increased
stakeholder demands. This is often the first step in a turnaround strategy, as was
the case when Apple brought back Steve Jobs to reinvent the company in light of
its declining market share and profitability.
Downsizing is the immediate response to declining margins, market share, and
cash flow. It is a strategy used to put a tourniquet around the firm’s outflow of cash.
This is often done by reducing costs through reducing the number of employees
and/or the number of operating units (Hitt, Ireland, and Hoskisson 2009). Other
turnaround strategies include divesting unproductive assets (discussed below) and
improving operational efficiency. After dealing with a firm’s initial cash-flow crisis,
strategic managers will need to refocus the turnaround strategy onto the future by
defining the firm’s strategic vision for recovery and future profitability.
Divestment Strategies
Divestment is the process of a company selling or spinning off one or more of its
companies in order to increase the market value of its assets, minimize debt,
increase liquidity, or prune/refocus the company's portfolio. A spin-off refers to
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separating a SBU from the corporate portfolio by creating an independent business
that takes assets from the parent company and its shareholders; the shareholders
receive equivalent shares in the new company as compensation for their loss of
equity in the original stock. Sometimes referred to as downscoping, this strategy is
used to refocus the firm around its core business by eliminating unrelated SBUs
(Hitt, Ireland, and Hoskisson 2009). It is hoped that the influx of cash will secure a
better future for the overall corporate portfolio.
A leveraged buyout (LBO) is a restructuring strategy in which a party buys the
assets of the firm and takes the firm private; the company’s stock is no longer
publicly traded. LBOs may be used to correct managerial mistakes, to restructure
distressed assets, to act as an antitakeover defense, or to strategically reposition
the firm. Significant amounts of high-risk debt are typically incurred to finance the
buyout, leaving the firm extremely leveraged. To support debt payments, the new
owner usually has to immediately sell off assets. Private equity firms, such as
Kolberg, Kravis, and Roberts (KKR), facilitate the process of taking companies
private. Usually, LBOs are used to restructure the firm so that it can be sold at a
profit within five to eight years (Hitt, Ireland, and Hoskisson 2009).
Reorganizational Bankruptcy
Corporate retrenchment can also be achieved by reorganizational bankruptcy.
Creditors agree to give the company time to reorganize during a reorganizational
bankruptcy, enabling the company to restructure its debt obligations and maximize
cash flow. This form of bankruptcy buys time for the company, allowing it to devise
a new plan for regaining financial success. Only after divestment and other ways
of restructuring have failed should companies seek reorganizational bankruptcy.
Liquidation Bankruptcy
Liquidation is the last thing any company needs to deal with. Liquidation
bankruptcy is the most severe type of corporate retrenchment, including the sale
of all properties and the closure of the whole company in order to recover whatever
funds are left to pay creditors. All staff are dismissed, and all goods and services
are discontinued as a result of the firm's demise. Liquidation bankruptcy is seen
as a last resort by corporate strategists, who would do everything possible to stop
it.
SSM Corporate Portfolio
Taking a co-evolutionary view of the world’s developed, developing, and undeveloped
markets within a sustainability-based business ecosystem structure is an effective
approach for creating an SSM corporate portfolio that extends an organization’s planning
horizons to include future generations. Within this context, the SSM corporate portfolio
takes a whole-pyramid approach, where corporate strategic decisions (the decisions of
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scope) are made within the context of addressing the unique needs to create triplebottom-line performance in all three types of markets in the global economic pyramid—
developed, developing, and undeveloped (Jenkins and Ishikawa 2010). The specific
content of these strategies varies according to top management commitment, the unique
needs of the market segment, and the firm’s position within its business ecosystem.
These strategies were discussed in the previous chapter and are demonstrated in the
portfolio of SSM competitive strategies.
The real value of focusing an organization’s SSM portfolio on the whole pyramid lies in
the fact that such a portfolio will by definition reflect a deep organizational commitment to
making a positive contribution to a sustainable world. In such a portfolio a firm’s vision,
mission, goals, strategies, capabilities, structures, and processes will all in some way
embody a commitment to serving the needs of the greater society and ecosystem for
generations to come. Thus, establishing a whole-pyramid perspective can provide an
organization and its members with a sense of meaning and higher purpose that eclipses
the firm’s economic success. The firm is not just earning a profit, it is doing so in ways
that benefit fellow humans and nature now and in the future. Therefore, infusing a
commitment to the whole pyramid in an organization’s SSM portfolio provides a deep
foundation for the organization’s continuous transformation to a more sustainable entity.
The purpose of the SSM corporate portfolio is to build capabilities that enhance the firm’s
ability to effectively manage its configuration of multimarket strategies so that triplebottom-line value is created across the whole pyramid. An SSM corporate portfolio
provides a framework that allows strategic managers to continually examine and, if
necessary, change organizational values, assumptions, and strategies in light of eco- and
socio-effectiveness. Doing this requires firms to move beyond strategies for eco- and
socio-efficiency that allow them to readily calculate the direct economic, social, and
ecological costs and benefits of their strategies. Shifting to socio- and ecoeffectiveness
strategies requires taking a long-term intergenerational perspective that can blur these
direct links between actions and outcomes. Thus, an SSM corporate, whole-pyramid
portfolio requires developing corporate level capabilities that allow the firm to sustain itself
by making positive long-term contributions to the planet and its people by becoming an
agent of social change.
Taking a whole-pyramid approach at the corporate level requires balancing cash flow
among the firm’s various lines of SBUs. This may mean using the cash flow from
economically successful business lines to fund businesses created to address the
opportunities arising from the expanded social and ecological scope of the portfolio.
Taking a whole-pyramid perspective may lead firms to use profits from core businesses
in developed markets to pursue new market opportunities in developing and undeveloped
markets (Hart 2005). Research in the telecommunications industry conducted by the
Harvard Kennedy School found that by conceptualizing the corporate portfolio as a whole
pyramid, companies were able to balance their portfolios over time to create positive
triple-bottom-line performance. These firms entered developed markets at the top of the
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pyramid to establish revenue streams and recoup infrastructure investments. This put
them in a financial position to provide products and distribution channels for lower-income
developing and undeveloped markets with lower average returns per customer. Thus, the
whole-pyramid portfolio approach increased these firms’ capabilities to meet consumer
needs in their developed, developing, and undeveloped markets (Jenkins and Ishikawa
2010).
To fulfil the purpose of the SSM portfolio, strategic managers will need to establish
inclusive business ecosystems of multi-sector stakeholder partners that expand the scope
of the firm’s operations. The decisions in terms of who is included in the value chain
(suppliers, distributors, franchisees, retailers, and/or customers) determine the degree of
inclusiveness of the business ecosystem. Inclusive business ecosystems are structured
to create value throughout the whole pyramid. In order to create a whole-pyramid
portfolio, the scope of operations must expand to include the poor as a segment within a
much broader overall portfolio, where both local and global partnerships create triplebottom-line performance across the entire portfolio (Gradl and Jenkins 2011). This entails
implementing a top-down initiative in which the ecosystem leader creates a platform that
supports economies of scope and helps to develop ecosystem niche strategies that
capture the bottom-up, entrepreneurial learning from local partnerships that enable the
ecosystem to develop sustainable solutions to meet consumer needs (Hammond 2011).
Multi-sector stakeholder ecosystems are excellent vehicles for establishing effective
dialogue that provides for all voices to be heard and for collective stakeholder wisdom to
be tapped. These networks provide a neutral space for safe discussion and partnering in
order to solve global issues ranging from economic opportunity to climate change to
poverty. Thus, structuring the ecosystem with a high degree of stakeholder inclusiveness
allows strategic managers to integrate the complex issues of how to care for future
generations, how to care for their organizations, and how to care for the Earth.
SSM Capabilities
Inclusive business ecosystems require corporate capabilities that enable strategic
managers to manage the complexity of relationships arising from alliances with
partners within the whole pyramid. We envision an SSM corporate portfolio as a
set of integrative processes that build the SSM capabilities needed to create an
organizational culture that supports the generative, entrepreneurial learning, the
dialogue, and the transformational change processes required for SSM. These
processes provide the vehicles for strategic managers to question the underlying
assumptions of their corporate portfolios, to develop innovative approaches for
sustainable product and service introductions, and to create economic opportunity
through building human and social capital across their value chain activities. The
SSM portfolio reflects a strong strategic commitment to the ecosystem leader’s
sustainability vision based on eco- and socio-effectiveness, and it reflects a strong
strategic commitment to meaningful innovation and multimarket, stakeholder
partnerships with other business ecosystem members. Thus, an SSM corporate
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portfolio within a business ecosystem structure can provide organizations with
multiple synergistic avenues for contributing to global sustainability that are not
available to organizations operating independently of one another.
Building SSM Capabilities through Alliance Management
As previously discussed, within the whole-pyramid portfolio approach, strategic
intent can vary according to the unique needs of markets, thus requiring alliances
with multi-sector stakeholder partners based on a vision of sustainability. Research
indicates that successful alliances have high levels of alliance management
capability at the corporate level—the ability to manage the configuration of the
portfolio of alliances to achieve a shared vision (Kale and Singh 2009). Given the
complexity of building alliances with multi-sector stakeholder partners that are
required to build sustainability based, whole-pyramid portfolios, alliance
management capability is an essential component of SSM capabilities.
Alliance management capability requires the research and selection of alliance
partners that are compatible and share a common vision. Also, careful design of
the appropriate governance mechanisms that fit the alliance partners’ needs is
essential for successful alliance management. As discussed earlier in this chapter,
strategic managers have three options of alliance governance mechanisms: nonequity contractual agreements, equity alliances, and joint venture strategies. The
choice of governance mechanism defines the level of investment and the degree
of formalization of the partners’ relationships, so it must be carefully designed and
selected.
Once the choice is made, the business ecosystem leader must begin to build interorganizational trust among alliance partners in the post-formation alliance stage
(Rothaermel 2013; Zaheer, McEvily, and Perrone 1998). In effective postformation alliance management, trust among the ecosystem members will
undergird the inclusive ecosystem’s creative and innovative core, and it will give
the ecosystem members the ability to build and maintain the relationships that
constitute the social capital of the ecosystem. These trust-based interorganizational relationships are important sources of competitive advantage for the
alliance by reducing transaction costs and conflicts (Dyer and Singh 1998; Luo
2002). Traditional alliances that have expanded their scope to include partnering
with citizen sector organizations (CSOs) and individuals who share a common
vision of “doing well by doing good” have increased in popularity. Kale and Singh
(2009) refer to these as a new class of alliance strategies with increased
managerial complexity.
The managerial complexity increases as the business ecosystem becomes more
inclusive, making it more difficult to create the trust necessary for effective alliance
management capability. Many times, difficulty in the management of alliances
arises because partners vary significantly in terms of profit-seeking objectives,
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skills, resources, and organizational culture. Incentive problems and the risk of
self-serving behavior from opportunism arise from these differences in orientation
and needs among ecosystem members may prevent alliance partners from fully
participating in the ecosystem. Incentive problems result when ecosystem
members lack trust due to the absence of credible information and effective
governance mechanisms, thus discouraging them from entering what may have
been mutually beneficial transactions. Ecosystem members will not put their assets
at risk unless they can trust others to hold up their ends of the bargain.
Given that ecosystem members need to share resources and experience to create
common goods, without trust the prospect that others will free ride discourages
them from contributing their share (Gradl and Jenkins 2011). Therefore, alliance
management capability requires developing a high level of trust and creating
structures appropriate for resolving the resource and capability constraints
associated with incentive problems. Such trust helps ensure the survival of the
ecosystem and the achievement of the vision by facilitating decision making and
creating reputational capital (Rothaermel 2013).
Accountability alliances are additional types of complex, multistakeholder,
strategic networks. These industry-led coalitions focus on improving social and/or
environmental accountability where there are market failures or governance gaps.
For example, the Alliance for a Healthier Generation in the United States brought
together the American Heart Association, the Clinton Foundation, Coca-Cola,
PepsiCo, and Cadbury Schweppes with the goal to reduce the prevalence of
childhood obesity by 2015, and to empower kids nationwide to make healthy
lifestyle choices (Alliance for a Healthier Generation 2012).
A sustainability-based inclusive business ecosystem can implement three
complementary strategies to achieve high levels of alliance management
capability: strategies for developing human and social capital; strategies for
building institutional capacity within the ecosystem; and strategies for managing
the “rules of the game” (Jenkins 2007, 4). These strategies are complementary
and reinforcing. For example, providing training and assistance for entrepreneurs
and microbusinesses in the value chain, as Coca-Cola did, builds human capital
while increasing the economic development impact of a local procurement
program (an inclusive ecosystem). By expanding the pool and capacity of
entrepreneurs who can qualify for it, this leads to a healthier community (social
and economic capital) (Jenkins 2007). The role of the ecosystem leader is to
effectively manage this alliance of multisector stakeholders that share the vision of
a more sustainable world for future generations.
The whole-pyramid approach increases the complexity of managing the SSM
corporate portfolio of multi-sector stakeholder alliances, creating the need for
greater alliance management capability. Effective alliance management requires
an expansion of the management functions of the business ecosystem leader to
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include configuring the whole-pyramid portfolio to create a set of complete,
complementary, and non-competitive alliances, along with creating knowledgesharing routines that lead to dialogue, entrepreneurial learning, and innovation
(Kale and Singh 2009). Using these processes, the ecosystem leader can embed
in the business ecosystem capabilities necessary for earning profits in ways that
contribute to a higher quality of life for current and future generations. Among other
things, such capabilities ingrain higher levels of meaning and purpose into the core
of an inclusive business ecosystem, and they empower the creation of structures
that foster and maintain high levels of trust among ecosystem members. This
enhances the corporate SSM capability to create shared value by balancing multisector alliances according to the unique needs of the various markets and
stakeholders within the whole pyramid.
Achieving Balance in the SSM Corporate Portfolio
Balancing cash flow among the firm’s various lines of SBUs is a crucial task of
corporate strategy, and in the SSM portfolio this may mean using the cash from
economically successful business lines to fund businesses created to address the
opportunities arising from the expanded social and ecological scope of the whole
pyramid portfolio. Thus, some firms may choose to use profits from core
businesses in developed markets to pursue new market opportunities in
developing and undeveloped markets (Hart 2005). However, other firms may
choose to integrate sustainability advantaged products throughout their portfolio
rather than having discrete SBUs focusing on eco- and socio-effectiveness.
Regardless of the strategic approach taken in constructing the SSM corporate
portfolio, it is crucial for strategic managers to effectively manage and balance the
firm’s cash flow.
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Figure 38. Whole-pyramid Portfolio
A traditional tool that is useful in analyzing the cash-generation and cash-use
relationships among the SBUs in a corporate portfolio is the Boston Consulting
Group (BCG) growth share matrix, originally developed in 1968 (Figure 39). In the
matrix, corporate SBUs are represented graphically in terms of their relative market
share (horizontal axis) and their relative market growth rate (vertical axis). SBUs
are plotted into four categories: stars, cash cows, dogs, and question marks. The
use of cash is appropriate because it is typically proportional to the rate of growth
of SBUs, and the generation of cash is a function of market share because of the
experience-curve effect (Henderson 1973).
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Figure 39. BCG Growth Share Matrix
Stars (in the upper-left quadrant) hold a high market share in a fast-growing
market. They grow rapidly, so they use large amounts of cash. However, since
they are market leaders, they also generate large amounts of cash. Stars normally
generate a balance in terms of net cash flow. Over time the industry growth rate of
stars slows. If they hold their market share during this slower growth period, they
will become cash cows (a success sequence), but if they fail to hold market share,
they become dogs (a disaster sequence). Cash cows (in the lower-left quadrant)
compete in a low-growth market, but hold a considerable market share. Since
growth is slow, cash use is low. However, market share is high and therefore
comparative cash generation is also high. Cash cows generate more cash than
what they need to hold and maintain their competitive position, and their excess
cash is often used to assist other SBUs to grow, to pay dividends, to pay the
interest on debt, or to cover the corporate overhead. Care must be taken, however,
to invest enough to hold and maintain market share, or the cash cow may turn into
a dog, a disaster. Dogs (in the lower-right quadrant) hold a small market share in
a low-growth market. Dogs often report a profit even though they are net cash
users, but they are essentially worthless cash traps that should either be divested
or harvested. Question marks (located in the upper-right quadrant) are the real
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cash traps and the real gambles. Their cash needs are greatest because of their
high growth potential. Yet their cash generation is very low because their market
share is low. Strategic managers invest in question marks in hopes of increasing
market share and becoming a star and eventually a cash cow when market growth
slows (a success sequence). However, if the market growth rate slows, and
question marks have not increased their market share, they can easily become
dogs, a disaster sequence (Henderson 1973).
The BCG matrix is a well-established framework for analyzing the strategic
positions and strategic options among the SBUs in a corporate portfolio,
particularly as it relates to cash flow and resource allocation, though it has its
limitations and should never be relied on as the sole source of data in corporate
strategic decision making (Henderson 1973). The BCG matrix's utility can be
extended to the analysis of cash-generation and cash-use relationships among
partners in a whole-pyramid SSM portfolio, according to the authors. As a result,
valuable data for constructing an image of the strategic relationships between forprofit and non-profit partners in an inclusive business environment will be
produced.
The SSM Portfolio and Social Change
Inclusive business ecosystems that bring together the resources and energies of
business, government, and civil society create partnerships that can drive
transformational change toward global sustainability. The SSM corporate level
portfolio's goal is to create spiritual-capability-based processes that allow
businesses to become agents of social change (Bies et al. 2007). Business
organizations that incorporate an SSM, whole-pyramid portfolio, rooted in an
interconnected business environment founded on the spiritually grounded
strengths of communication and entrepreneurial learning, we believe, are the keys
to the transformational change needed to move toward a more sustainable planet.
Dunphy, Griffiths, and Benn (2007, 4) say, “Corporations have contributed to the
problems … and they must therefore be part of the answer.”
If all business organizations around the world adopted a full-pyramid SSM portfolio,
the sustainability movement will be infused with a powerful force for change.
Millions of business organizations finding ways to make social and environmental
responsibility more and more a part of doing business will join CSOs, NGOs, and
other organisations working hard to drive the planet toward sustainability. The
addition of these organizations would create the critical mass of people and
organizations across the planet necessary to create a more sustainable world. It
will also inject much-needed financial capital into the campaign, which are vital for
translating innovative people's positive ideas into actions that result in tangible
change. As a result, we believe that the time has come for businesses to broaden
their obligations and strategies beyond the economic to include social and
environmental considerations. If the assessments of Hawken (2007), Edwards
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(2005), Speth (2008), and others are correct, then this is the ideal time for
organizations to contribute to a planet that is fiscally, socially, and ecologically
welcoming for all human beings now and in the future.
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Exercise #6:
Create a BCG Growth Share Matrix for the following information:
1)
2)
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Module 7
CHOOSING AND IMPLEMENTING SSM STRATEGIES
Week 13-14
Introduction
In this chapter, we'll look at the main strategic management processes and practices that
are essential for choosing and executing long-term strategic management (SSM)
strategies in businesses. To begin, it's important to remember that strategic managers
have strategic choice, which means they have the power and responsibility to choose the
environments in which their companies compete, the tactics they follow, the performance
criteria they use, and the structures they put in place to meet these performance criteria
(Child 1972). Lewin and Volberda (2003b, 575) say, “The strategic choice perspective
assumes that organizations have the discretion and the strategic capacity to select, enact,
and shape their environments.” Miles and Snow (1978) explain that there are a wide
variety of ways for firms to prosper in a particular environment, and it is the job of strategic
managers to make the choices that will successfully align their firms’ strategies,
structures, and processes to take advantage of those ways to prosper.
Learning Objectives:





Identifying which portfolio best suit business’ SSM strategies
Employing SSM Value Systems in the business
Knowing which pursuits are better than profit
List the different designing self-renewing learning structures
Learn how to establish transformational change process
Choosing Portfolio of SSM Strategies
Strategic choice in SSM begins with strategic managers choosing viable strategies that
will allow their firms to achieve their triple-bottom-line performance goals in today’s
sustainability-rich business environment. Specifically, strategic managers are responsible
for identifying, analyzing, and choosing among alternative SSM strategies at all three
strategic levels—functional, competitive, and corporate.
Strategic Choice at the Functional Level
We discussed several functional level strategies related to improving the triple-bottomline
performance of the primary value-chain activities in operations and marketing. Ecoefficiency, total quality environmental management, life cycle analysis, pollution
reduction, product stewardship, sustainable marketing, and so on are examples of
functional level techniques relevant to the primary activities of the value chain. In this part,
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we'll look at some value-chain support techniques at the functional level that will provide
strategic managers with the triple-bottom-line data they need to make SSM decisions. It
is critical to include sustainability in the framework of the firm's functional level support
systems when implementing SSM. This will provide strategic managers with the highquality data they need to make successful triple-bottom-line decisions on economic,
social, and environmental performance. We'll go through some key SSM support
structures that organizations can build in order to incorporate SSM.
Enterprise Resource Planning Systems
Enterprise resource planning (ERP) systems have grown from specialized
software programs for particular tasks, such as materials requirement planning, to
complex standardized systems that can be used through the entire value chain of
an enterprise. Finance, accounting, manufacturing, sales and support, customer
relationship management, supply chain management, monitoring, and human
resources are all covered by ERP, which combines internal and external
management information systems across the entire value chain. Its aim is to
manage the organization's relationships with outside stakeholders and to promote
the flow of knowledge between all business functions within the organization's
boundaries. ERP systems have been shown to improve the development of
intellectual and social resources in addition to providing knowledge for managerial
decisions (Lengnick-Hall, Lengnick-Hall, and Abdinnour-Helm 2004).
Firms are turning to ERP systems to help enforce and monitor the progress of
sustainability initiatives, as well as provide a contact channel with stakeholders, as
stakeholder demand for sustainability grows. Carbon, for example, is now being
recognized as a vital resource that businesses must handle for the benefit of their
stakeholders. Organizations must also provide more reliable data on carbon
footprints, carbon trades, and evidence to promote carbon labeling of products.
For example, the Greenhouse Reporting Program of the Environmental Protection
Agency (EPA) allows manufacturers who emit at least 25,000 metric tons of carbon
per year to monitor and report those emissions (Moad 2010). This requires
expanding the scope of the ERP systems to include carbon data.
Transparency in the ERP system is critical. The leading-edge sustainability
companies communicate to their stakeholders not only their successes but also
their challenges. Firms like Nike and Gap discovered this in the mid-2000s after
noncompliance with labor, environmental, health, and safety standards in their
supply chain was encountered (MIT Sloan Management Review and BCG 2011).
Thus, it is critical that modern ERP systems be robust and accurate enough to
meet continuously increasing stakeholder demands for expanded triple-bottomline data.
There are, however, many hurdles to incorporating the full costs of the firm’s
valuecreating functions into ERP systems (Wright 2009). Integrating sustainability
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into the firm’s ERP system is more than just an add-on function. Since
sustainability requires new ways of thinking, redesigning ERP systems to include
sustainability performance may be expensive, intrusive, and disruptive, requiring
radical as well as incremental change in the system (Sommer 2009). Although
incorporating sustainability is an innovative challenge to the ERP providers, both
SAP and Oracle, the market share leaders in ERP systems, have recently
introduced carbon emission management tools because of increased consumer
and regulatory demands (Moad 2010). Integration of sustainability data into ERP
systems will be crucial in formulating and implementing SSM, despite its difficulty.
Working within an open-systems value chain necessitates the generation and
dissemination of sustainability data so that managers can make triple-bottom-line
decisions based on applicable sustainability data.
Full-Cost Accounting Systems
It is critical for successful SSM to have reliable, timely financial data that reflects
the true economic, social, and environmental costs of manufacturing, delivering,
consuming, and disposing of goods. According to Joshi and Krishnan (2010),
strategic decisions requiring timely sustainability-based financial data include:
regulatory compliance decisions, cost reduction decisions, risk management
decisions, product mix and pricing decisions, green marketing and
labeling/certification decisions, and product design decisions. According to Butler,
Henderson, and Raiborn (2011), implementing SSM necessitates a wide range of
financial data on sustainability success across the value chain. They suggest using
a "balanced scorecard" strategy, which entails collecting data on 20 sustainability
activities through five value-chain stages—inputs, procurement, processing,
consumption, and disposal.
Unfortunately, traditional accounting methods are inadequate for SSM. At the heart
of this inadequacy is that the discounting methods used in traditional financial
accounting are virtually useless for providing the long-term financial perspectives
necessary for SSM. Thus, traditional financial accounting is incapable of providing
answers to numerous important SSM questions. For example: What is the
economic value of clean air? How much is the aesthetic beauty of the land worth?
How much is a mountaintop worth? How much are good community relations
worth? What monetary amount can be placed on the psychological costs of human
displacement due to environmental or social upheaval? How can value be
assigned to future generations of human beings? How much value can be
assigned to other species, now and in the future?
Since conventional financial accounting approaches are insufficient for SSM, “fullcost accounting” systems, which are financial accounting systems capable of
accounting for both short- and long-term economic, social, and environmental
costs of doing business, have been created (Bebbington et al. 2001). These
programs aim to fully incorporate economic, social, and environmental
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parameters, to give social and environmental considerations primary rather than
secondary importance, to account for both current and future internal and external
costs, and to represent long-term financial results (Sherman, Steingard, and
Fitzgibbons 2002).
One group committed to both research and development of full-cost accounting is
the Association of Chartered Certified Accountants (ACCA) (Bebbington et al.
2001). The ACCA is an association of professional accountants in the United
Kingdom that has been a proponent of full-cost accounting for over two decades.
The ACCA helps organizations to: (1) integrate sustainability into their core
business strategies; (2) develop measurement protocols for carbon and
greenhouse emissions; (3) develop portfolios of social and environmental
accounting techniques that more accurately account for negative sustainability
impacts in the short term and long term; (4) develop sustainability reporting tools
designed to increase firm transparency and credibility; and (5) improve the
accuracy and usefulness of individual firm footprint analysis (Chambers and Lewis
2001).
SSM Reporting
Accurately and fully reporting a firm’s social and environmental performance to its
stakeholders is critical for effectively engaging stakeholders and contributing to the
firm’s legitimacy within society as it pursues improved triple-bottom-line
performance via SSM. The ACCA recommends that sustainability reports should
meet several criteria, including: (1) covering the information in ways that are readily
comprehensible; (2) responding to stakeholder inquiries and concerns; (3)
ensuring both continuity and comparability of data over time; (4) fully describing all
activities, products, processes, policies, programs, and performance targets
related to implementing the firm’s SSM strategies; and (5) reporting on both normal
operations and unusual events or incidents.
Some sustainability reports are mandatory, such as the U.S. EPA’s Toxic Release
Inventory (TRI) report that gives the public access to vast amounts of
environmental performance data. However, many corporations today are taking a
more proactive approach to reporting their SSM activities and results. In addition
to the traditional shareholder reports that focus on the economic performance of
firms, organizations are now creating detailed social and environmental
performance reports. These reports are generally distributed widely to employees,
shareholders, financial institutions, customers, local communities, interest groups,
the media, regulators, and the public at large via the firm’s Web site and social
media sites.
A common practice (and in some cases a requirement) in reporting is to use
external sustainability indices such as the Dow Jones Sustainability Index and the
chemical industry’s Responsible Care Guidelines to benchmark sustainability
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performance and to determine performance gaps in SSM strategies. One very
extensive sustainability reporting effort is the Global Reporting Initiative (GRI). The
focus of the GRI is to develop environmental, social, and economic reporting
guidelines that help advance global comprehensiveness and consistency in SSM
reporting. GRI released its G3 (third generation) guidelines in 2006. The G3
guidelines include 79 “core” and “additional performance” indicators, covering
economic outcomes, labor practices, human rights, decent work, environment,
society, and product responsibility. The G3 guidelines not only include separate
criteria for environmental, social, and economic performance data but also ask
organizations to report on the interactions among these three (GRI 2012a). The
G3 guidelines were updated with the G3.1 guidelines in 2011. These more
thoroughly cover human rights, local community impacts, and gender issues (GRI
2012b).
Employing external indices such as these is one of six major trends in sustainability
reporting. The second trend is that more organizations are reporting sustainability
activities than ever before, and the number is still rising. One survey found that 76
percent of U.S.-based firms currently report their sustainability activity, and that
within five years that number will increase to 93 percent. Third, the roles of chief
financial officers (CFOs) in sustainability reporting are growing. Fourth,
sustainability-reporting processes in organizations are involving more participative
employee engagement processes such as green teams. Fifth, the reporting of
greenhouse gas emissions is rising sharply, even among firms not required by
regulation to report these statistics. Sixth, there is a trend toward reporting the
social and ecological risks of “invisible ingredients” in products—dangerous hidden
ingredients that have the potential for causing ecological or social harm (Goodman
2012).
SSM Auditing
The purpose of SSM auditing is to regularly evaluate a firm’s economic, social, and
environmental performance all along its value chain, thus providing useful data for
closing a firm’s sustainability performance gaps. Social auditing began as a field
in the 1970s, but it really began to gain attention in the late 1990s. Waddock (2000)
refers to it as “responsibility auditing,” which she says involves using external
benchmarks (such as GRI’s G3.1 guidelines) along with internal performance data
to determine how organizational practices impact stakeholders. Responsibility
audits are generally undertaken to improve sustainability performance. For
example, a responsibility audit may assess employee practices, community
relations, environmental performance, and quality performance. The performance
in these areas is then compared to the firm’s stated vision, values, and mission to
determine the performance gaps where stakeholder value can be added (Waddock
2000, 2007). Thus, responsibility auditing is very valuable in evaluating and
improving sustainability performance.
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In sum, designing sustainability into the functional level support systems is critical
in providing strategic managers with the important triple-bottom-line data they need
for SSM decision making. Incorporating sustainability into support level activities,
such as enterprise resource planning (ERP), full-cost accounting systems, full-cost
financial models, sustainability auditing, and sustainability reporting, presents
challenges in implementation because it requires managers not only to do things
differently but also to view things differently.
Strategic Choice at the Competitive Level
Remember that managers at the competitive level are concerned with how to succeed
within particular product/market segments, so they need dynamic skills to adapt the
strategic business unit's (SBU's) resources to the coevolving opportunities and
challenges in their market segments. The core competencies that are the backbone of
the SBU's strategic strategy are made up of these dynamic skills. They allow the SBU to
recognize strategic alignments between its strengths and weaknesses, as well as
opportunities and threats (SWOT) in its market segment. In order to formulate a
successful strategy, the most important ingredient is to find a strategic match. To
effectively select a good competitive level strategy based on triple-bottom-line data, SBU
managers must build sustainability-based processes and dynamic skills that enable them
to recognize and manage the strategic fit between external and internal variables. A static
representation of this capability is shown in Figure 40, which is a SWOT analysis.
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Figure 40. Competitive Level Strategic Choice
Strategic Choice at the Corporate Level
The mix, scope, and emphasis of a company's SBUs are managed at the corporate level.
As a result, strategic managers must customize their portfolio of SBUs to generate more
value than if each stood alone when making corporate decisions. Hamel and Prahalad
(1994) created a conceptual portfolio management tool to assist managers in making
strategic decisions. It focuses on opportunities to generate value by developing and
exploiting core competencies through the firm's portfolio of SBUs. Traditional portfolio
management methods, such as the BCG (Boston Consulting Group) matrix, consider
lines of business as separate and autonomous entities, while Hamel and Prahalad (1994)
identify the interdependencies between SBUs and assess companies as portfolios of core
competencies rather than individual businesses.
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Figure 41. Corporate Portfolio of Core Competencies
The core competencies are central value-creation capabilities of organizations. They are
core skills, so identifying them is the first step firms should take in deciding which
opportunities to pursue. Once firms have identified their core competencies, a matrix
similar to Figure 41 can be used to establish an agenda for building and leveraging these
core competencies in order to create new business opportunities. Hamel and Prahalad
(1994) distinguish between existing and new competencies and existing and new
industries in the matrix, with each quadrant having a distinct strategic implication.
Hamel and Prahalad (1994) argue that where a company is going is more important than
where it is coming from. Strategic choice should therefore focus on building new
competencies to compete in the industries of the future and on creating new products and
services by redeploying or recombining current competencies to address gaps in
traditional markets. In other words, strategic choice should be based on generative
learning where fundamental assumptions are questioned, new market space is created,
and gaps within existing markets identified. Note that although creating the future does
not necessarily mean abandoning the past, it does require identifying what from the past
has current strategic value and ejecting the rest as excess baggage.
Strategic managers too often look at the future through the narrow context of existing
served markets. Hamel and Prahalad (1994) contend that to really compete in the future,
strategic managers must enlarge their opportunity horizon, and thus strategic analysis
should move away from just analyzing current products in existing industries to
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developing current and future capabilities that will position the firm to create new market
space. To see the future, strategic managers must be capable of escaping the narrow
view of “What business are we in?” and “What is our product or service?” and moving to
the strategic goal of occupying the high ground in tomorrow’s business world. The Hamel
and Prahalad framework is designed to aid organizations in doing this, helping them to
create new market space by assisting strategic managers in reconceptualising their
companies’ core competencies and lines of business in order to create the desired future.
The successes of 3M in creating new opportunities and market space have come from its
innovative capabilities to apply its core competencies in adhesives to create new
opportunities from Scotch Tape to Post-it Notes (Hamel and Prahalad 1994). Just imagine
the new opportunities and market space that would unfold from the effective alliance
management of the portfolio of core competencies of the members of an inclusive
business ecosystem formed around the shared vision of sustainability.
To summarize, organizational strategic decision-making eventually decides the
organization's performance or failure. Corporate decisions influence the firm's ability to
shape its own future by determining where it will operate and the scale and limits of its
activities. Strategic decision-making entails objectively assessing potential strategies and
determining which ones the company can follow to meet its objectives. As a result, when
deciding the policies to implement and how to implement them, strategic managers must
thoroughly evaluate the quantitative external and internal data available to them.
Instilling SSM Value System
The importance of rational quantitative analysis for successful strategic decision-making
is emphasized in the preceding discussion. Of course, correctly understanding and using
these data necessitates mental processes like judgement and intuition, all of which are
informed by beliefs. Given that strategic decisions are invariably informed by strategic
managers' values, establishing a sustainability-centered value framework should be the
first step in implementing effective SSM strategic initiatives. This entails profoundly
embedding sustainability into an organization's core value system, where it can develop
and provide strong foundations for the firm's sustainability efforts. Given the importance
of such deep cultural integration, strategic managers leading their organizations toward
SSM may want to start by reviewing their organizations' core value systems to ensure
that they can support their organizations' push for improved triple bottom-line success.
Values are long-lasting, emotionally charged abstractions of topics that people care
about. It's not easy to comprehend ideals. Some have proposed that values reside in
hierarchies, in which an individual rates his or her values according to their significance
to him or her. Others argue that the significance of any given value varies. They claim
that determining how important an individual's complete system of values is to her or him
is the key to understanding how important values are in influencing decisions. This
approach takes a holistic approach to beliefs, recognizing that people's values are shaped
by their circumstances. Both of these mechanisms are likely to come into play to some
extent as people apply their principles to their decisions. Certain values are undoubtedly
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more valuable to people than others; nevertheless, the overall strength of people's value
systems, as well as the circumstances in which they find themselves, are also significant
(Liedtka 1989; Rokeach 1968).
Strategic managers' principles, in particular, affect their decisions at two stages. For
starters, values act as data filters, shaping the data strategic managers pay attention to
and how they view it. Second, they act as decision shapers by offering mechanisms for
making final decisions (Schwenk 1988). Thus, sustainability centered values are
necessary for identifying and understanding SSM opportunities, and they are necessary
for creating and implementing SSM strategies that capitalize on these opportunities.
The ideals of a company are profoundly ingrained in its history. The culture of a company
is made up of shared objects (such as logos, goods, and icons), norms, principles, beliefs,
and assumptions. Objects and conventions are more on the surface, while ideals,
principles, and assumptions are more deeply embedded in the firm's base (Schein 1985).
This is important to consider because, as briefly stated in Chapter 1, organizational
change efforts aimed at the shallower levels of an organization's culture are typically
adaptive, gradual, and based on enhancing what the organization is doing now. Change
strategies that target the deeper layers of an organization's culture, on the other hand,
are typically transformational, involving deep discourse processes that enable the
organization to rethink and redefine who it is and what it does.
In most cases, values are organized into programs. There are intricate networks of
interconnected beliefs based on core values. The essence of a value system is defined
by core values (intrinsic values). They are regarded as valuable in and of themselves, are
usually few in number, are long-lasting and difficult to alter, and represent the
organization's overriding values. Instrumental values (extrinsic values) make core values
usable, allowing them to be implemented more easily. For example, people choose to
apply a wide range of similar instrumental values such as voting, keeping informed, and
so on to make a core value of democracy operational.
Although many perceive that managing with values is a soft approach, nothing could be
further from the truth. Values represent what is important to people. They are roadmaps
for how organizations view their world and how they behave in it. Values can be
contradictory and messy, and managing them requires a willingness to encourage a
continuous open dialogue on all organizational levels around the firm’s purpose and
values (Freeman, Harrison, and Wicks 2007). Thus, organizations wishing to survive over
the long term in today’s upwardly spiraling sustainability-centered business environment
will need to ingrain sustainability deeply into their core values and purpose. Also, they will
need to surround this core value with relevant instrumental values, such as open
dialogue, community prosperity, quality, posterity, and others, that allow firms to pursue
a sustainability path to their economic success.
Enterprise strategy is an overarching values-based strategic framework that allows a firm
to answer its most fundamental ethical question: “What do we stand for?” (Freeman 1984,
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90). Answering this question requires examining how the firm is serving its stakeholders
(Freeman, Harrison, and Wicks 2007), which in turn focuses attention directly on what the
firm “should be doing.” Thus, enterprise strategy explicitly addresses the value systems
of managers and stakeholders in concrete terms.
A firm’s enterprise strategy reflects the interactions among three components. The first
component is the organization’s value system, composed of its core and related
instrumental values. The second component includes the myriad social and ecological
issues facing the organization. The third component involves the values and needs of the
firm’s stakeholders (Ansoff 1979; Freeman 1984; Freeman and Gilbert 1988; Freeman,
Harrison, and Wicks 2007; Hosmer 1994; Stead and Stead 2000).
In an enterprise-strategy context, strategic managers guiding their firms toward SSM
need to: (1) facilitate the development and implementation of a network of instrumental
values centered on a core value of sustainability (as discussed above); (2) analyze how
social and environmental issues (such as those discussed in Chapter 2) relate to their
firms’ inputs, operations, products, services, and other activities; and (3) account for the
rapidly growing social and environmental concerns of their stakeholders, including
suppliers, customers, investors, employees, regulators, insurers, lenders,
nongovernmental organizations (NGOs), citizen sector organizations, and so forth. As
Figure 42 depicts, a firm with a sustainability-based value system, an understanding of
how social and environmental issues relate to the firm’s activities, and a sustainability
centered perspective on its relationships with stakeholders can be said to “stand for
sustainability” (Stead and Stead 2000).
Figure 42. Standing for Sustainability
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Creating Meaning beyond Profit
Throughout the book, we've made it clear that successful SSM implementation is a
multifaceted process that necessitates deeply rooted organizational commitments not
only to profits but also to people and the environment. As a result, companies embarking
on SSM journeys must consider factors other than financial viability when calculating
organizational performance, such as their attempts to contribute to the greater social and
ecological good. Of course, this is much more likely to happen in organisations where
strategic managers regard sustainability as a core personal value—where they genuinely
stand for it. In those situations, strategic managers are more likely to work to create the
necessary sustainability-centered value systems in their organizations (Bansal and Roth
2000; Egri and Herman 2000; Middlebrooks and Noghiu 2010). Such systems bring both
deeper and broader meaning to organizations by tying their economic success to their
ability to serve the greater society and ecosystem (Middlebrooks and Noghiu 2010).
Spiritual Foundations of SSM
Strategic managers create a higher purpose and deeper significance in the pursuit of
SSM that goes beyond their financial achievements. Spiritual fulfillment is a broad
concept that applies to people's search for a higher purpose and deeper meaning in their
lives (Driver 2007; Gull and Doh 2004; Zohar and Marshall 2004). This search is a higherlevel aspiration that is unique to human beings (Schumacher 1977; Wilber 1996, 2000).
When people speak of seeking spiritual meaning in their lives, they are generally
expressing their search for joy, purpose, happiness, love, peace, creativity, achievement,
beauty, caring, compassion, divinity, service, and so forth. Pruzan and Mikkelsen (2007)
interviewed 31 executives and found that spiritual factors like these were powerful
motivators for these executives and their organizations.
The rising sustainability consciousness, according to Patricia Aburdene (2005), is a
metaphysical phenomenon. Aldo Leopold (1949), a naturalist and conservationist,
predicted that embracing a land ethic, which would give nature moral status in humanity's
ethical structure, would enable people to take a more spiritual view of their relationships
with one another and with nature, more than sixty years ago. Pioneer ecological
economist E. F. Schumacher (1973, 1977) echoed this sentiment, saying that a societal
shift toward sustainability represents a shift to a higher level of human consciousness that
is more organic, more inwardly focused, more heartfelt, and more spiritual. In the same
vein, leading ecological economist Herman Daly (1977) has said that pursuing
sustainability requires realizing that a belief in a high quality of life for posterity is the
highest of humankind’s ethical and spiritual aspirations (its “ultimate ends”). SSM can
bring greater social and ecological meaning to organizations, thus enhancing
organizational commitment to posterity.
Organizations pursuing SSM would, of course, need to improve spiritual skills that enable
them to develop and execute strategies that have more value for their members and
stakeholders. Spiritual knowledge and spiritual capital are also developed as part of the
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growth of spiritual capabilities. Human intelligence, according to Howard Gardner (1993),
is multifaceted, with different intelligences coexisting and developing relatively
independently of one another. The logical intellect, also known as the intelligence
quotient, is the most common of these human intelligences (IQ). A high IQ, in theory,
indicates a high capacity to solve logical problems. Emotional intelligence (EQ) is just as
critical as IQ, according to Goleman (1996). People's perception of other people's
emotions, as well as their own, is measured by EQ. As a result, it is a source of human
empathy, compassion, and inspiration. In the business world, EQ has been shown to be
particularly significant. Walter, Cole, and Humphrey (2011), for example, discovered a
clear link between EQ and successful strategic leadership attitudes and behaviors.
In the past decade or so, spiritual intelligence (SQ) (Zohar and Marshall 2000, 2004) has
gained attention. This is the intelligence that humans use to solve problems of value and
meaning. It is a means of integrating internal and external experiences, which facilitates
problem solving (Hyde 2004; Vaughan 2002) and enables humans to adapt to coevolving
life conditions (Beck and Cowan 1996; Wilber 2000). SQ helps put human behaviors and
lives within a larger context of meaning, and thus it serves as the foundation of both IQ
and EQ. Unlike other species, human beings search for meaning and value in what they
do because they are driven by questions regarding why they exist and what their lives
mean. Humans have a longing to feel a part of a larger purpose, something toward which
they can aspire throughout their lives.
SQ allows humans to be creative, to use their imaginations, and to change their rules. It
allows them to think outside of the box and to play with the boundaries of their existence.
It is this transformative characteristic that distinguishes SQ from IQ and EQ. Whereas
both IQ and EQ work within the boundaries of the situation, SQ allows individuals to
question whether or not they want to be in the situation in the first place. SQ facilitates
the dialogue between reason and emotion, between mind and body. It provides the ability
to integrate all the intelligences. Thus, it is a transcendent intelligence that enables people
and organizations to serve higher purposes (Beck and Cowan 1996; Graves 1970, Sisk
and Torrance 2001; Wilber 2000).
SQ equips strategic managers to lead the transformation of the organization to SSM.
Using their SQ, they can guide their firms through transformational processes that create
spiritual capital. We identified spiritual capital as a higher-level, intangible form of capital,
a higher-level purpose that serves fundamental human needs beyond the organization.
In SSM, spiritual capital is the by-product of the transformational, organizational
processes led by a top management team with high levels of spiritual intelligence. Zohar
and Marshall (2004, 27) define spiritual capital as “the amount of spiritual knowledge and
expertise available to an individual or organization.” Research on spiritual capital
indicates that: (1) building it usually begins with the personal disposition of top managers
to commit their organizations to a larger purpose, and (2) this top-management
commitment must permeate an organization’s culture (its systems, norms, and values)
before spiritual capital can provide real value (Middlebrooks and Noghiu 2010). Doing so
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facilitates the creation of shared value, building an organizational culture that serves both
organizational and societal needs (Middlebrooks and Noghiu 2010; Porter and Kramer
2011).
Spiritual Capabilities and Sustained Competitive Advantage
Managers build strategic skills to cultivate, refresh, and maintain the transcendent mission
of their organizations as they continue to establish spiritual capital through
transformational change processes. These spiritual abilities serve as the glue—the
cultural foundation—that holds the entire business ecosystem together. They instill in
ecosystem members an ethos—a spirit—that transcends, sustains, and enriches all
members' material and social resources. To put it another way, they imbue the corporate
community with spiritual significance (Zohar and Marshall 2004). This deepens strategic
managers' awareness and dedication to a core value of sustainability, as well as their
understanding of why contributing to humanity's efforts to meet the needs of current and
future generations is essential for the long-term survival of their ecosystems and
organizations.
As a consequence, developing spiritual skills that result from spiritual intelligence leaders
leading transformational change processes that build spiritual resources within and
amongst ecosystem participants that sustain and strengthen their ability to create triplebottom-line competitive advantages is a key to successfully implementing SSM. The
resource-based view of the firm (RBV) is a great way to look at the competitive essence
of spiritual capabilities. Organizational efficiency, according to the RBV, is a feature of the
types of resources (tangible and intangible resources and capabilities) that managers
build and utilize by strategies that achieve organizational objectives. For these resources
to provide competitive advantages to the firm, they must be valuable, rare, and difficult to
imitate, and they must be strategically combined and deployed (Barney 1986, 1991;
Wernerfelt 1984).
Spiritual abilities have these characteristics and are difficult to replicate since they are
causally vague, socially nuanced, and holistic. As a result, the company gains a longterm competitive advantage (Barney 1986, 1991; Colbert 2004; Grant 1991; Reed and
DeFillippi 1990; Schoemaker 1990). As a result, the spiritual capital generated by
spiritually driven transformation processes that instill the spirit within the environment and
its members is the cornerstone of SSM leadership. The business environment is
embedded with spiritual capabilities that promote sustainability, thanks to the vision of
sustainability and its higher-level intent. They have the ability to provide a sustainable
competitive advantage, despite the fact that they are dynamic and intangible capabilities
that are difficult to develop. Nature's and humanity's artistic importance cannot be touched
or exhibited. It can, however, be observed, and when it is, it can definitely stir the spirit.
Leading firms in the sustainability revolution discussed earlier—Unilever, Johnson and
Johnson, New Belgium Brewing, and Proctor and Gamble—place a very high value on
these sustainability-based intangibles, which they believe enhance their competitiveness.
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Designing Self-Renewing Learning Structure
In addition to creating a sustainability-centered value system and building spiritual
capabilities around it, it is also necessary for strategic managers implementing SSM to
design organizational structures that will support shaping the organization’s sustainabilitycentered strategic capabilities into viable strategies that improve the firm’s triple-bottomline performance. Peter Senge (1990, 2011) says that self-renewing structures, which he
calls “learning organizations,” are ideal for integrating sustainability into the strategic core
of business organizations. Senge defines learning organizations as organizations
capable of using adaptive and generative learning to create and re-create themselves in
order to survive and thrive in their co-evolutionary dance with their turbulent
environments. He says that learning organizations provide “a more sacred view of work”
(Senge 1990, 5). They encourage a more intrinsic, spiritual view of organizational life and
organizational purpose. Because of this, they are capable of operating directly out of their
essence—their basic purposes, identities, and relationships (Beckhard and Pritchard
1992).
Principles of Self-Renewing Structures
Organizational structures come in a wide variety of shapes and sizes. There is general
agreement among management scholars that organizational structures exist along a
continuum, ranging from mechanistic rule-driven organizations designed for more stable
environments to organic knowledge-driven organizations designed for more turbulent
environments. Mintzberg (1979) identified four organizational forms along this continuum,
ranging from highly mechanistic “machine bureaucracies” to less mechanistic
“professional bureaucracies” to more organic “divisional structures” to highly organic
“adhocracies.”
As should be clear from these descriptions, as structures progress from the mechanistic
end of the continuum to the organic end of the continuum, they become more adaptive
and more self-renewing. Today’s rapidly changing co-evolutionary selection-adaptation
cycles require that firms adopt self-renewing organizational structures that are flexible
and adaptable to new entrepreneurial ventures, shifting competitive pressures, disruptive
technologies, and so forth (Flier, Van Den Bosch, and Volberda 2003; Hart and Milstein
1999; Lampel and Shamsie 2003; Lewin and Volberda 1999, 2003a, 2003b; Porter 2006;
Rodrigues and Child 2003; Schumpeter 1950; Volberda and Lewin 2003).
The management literature is replete with formulas for creating self-renewing
organizational structures. Volberda and Lewin (2003) examined many of these and
discovered among them three common principles for creating and maintaining
selfrenewing organizations. The first is “the principle of managing internal rates of
change” (Volberda and Lewin 2003, 2126), which says that internal organizational
change-management structures and routines should function at rates of change equal to
or greater than the rates of change in the external environment.
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The second is “the principle of optimizing self-organization” (Volberda and Lewin 2003,
2126), which says that managers should eschew the use of bureaucratic outcome control
mechanisms in favor of self-organizing principles that stress self-responsibility and selfcontrol, and they should push decision making down to the lowest level possible in the
organization. In these self-organizing systems, “managers function as stewards of the
evolutionary process and focus their managerial role on devising and articulating critical
values and on establishing boundary conditions that enable and guide decision making
at lower levels of the organization” (Volberda and Lewin 2003, 2126).
Third is “the principle of synchronizing concurrent exploration and exploitation” (Volberda
and Lewin 2003, 2127), which means that strategic managers should seek to balance
their organizations’ efforts to enhance their current competitive capabilities via product
and process improvements (called exploitation) with their efforts to find new ideas and
innovations that will improve their competitiveness in the future (called exploration).
Essentially, exploitation is about maintaining the viability of present market space, and
exploration is about identifying and developing new market space. Overemphasis on
exploitation creates the potential for the “competence trap” in which organizations protect
short-term gains but fall behind their competitors with regard to innovations.
Overemphasis on exploration creates the potential for the “renewal trap” in which
organizations expend energy and resources on future innovations, but in doing so lose
their current identity in the market. Thus, it is all in the balancing of the core competencies
within the corporate portfolio (Hamel and Prahalad 1994).
Structuring for Innovation
Essentially new technologies that create dramatic technological paradigm shifts that
transform entire industries, economies, societies, and/or ecosystems. Because of their
potential for creating new market space (or blue oceans), innovations tied to disruptive
technologies are considered by many to be at the heart of moving toward global
sustainability. Disruptive technologies hold the promise of providing both socio and ecoeffective means for developing products and services that can serve billions of untapped
customers in emerging markets in sustainable ways, thus making positive contributions
to the economic, social, and natural capital of those markets (Hart and Christensen 2002).
Example:
Health Point Services saw a latent demand for health care in the undeveloped and
developing markets of the world, creating new market space. Through an alliance with
NGOs, Health Point utilizes electronic medical records and video technology to overcome
the barrier of lack of transportation for potential consumers. It has established E Health
Points, clinics where consultations cost only a dollar, and many diagnostic tests are less
than fifty cents. The clinics sell clean water for five cents and provide health education
on-site. Thus, by thinking outside of the box and assuming that low-income consumers
are willing to pay what they can for quality health-care, Health Point is able to access
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previously underserved markets. Currently, it has plans to enter the Southeast Asian and
Latin American markets. This is an innovative business model resulting from questioning
some fundamental assumptions about low-income consumers (Drayton and Budinich
2010). This is the kind of multi-stakeholder, entrepreneurial, generative-learning
capability that forms the basis of SSM.
One key to successful sustainability-based innovation is to use nature as a model for
products and processes. Systems that mimic nature consider waste as lost profit and
create economic, social, and ecological value by design. Nature uses feedback loops that
trigger adaptations that lessen the physical constraints on species. Design efforts
structured around a model of nature provide for the same sort of systems thinking
processes in organizations, and they also encourage organizations to view the ecological
and social limits of economic growth as opportunities for new product development,
innovation, and entrepreneurial learning. These nature-based design efforts can motivate
managers to rethink their business models and to generate innovative new approaches
for sustainable product and service introductions in order to take advantage of these
opportunities, often in heretofore underserved developing and undeveloped markets.
Establishing Transformational Change Process
Transformational change is designed to lead organizations to entirely different qualitative
states. It requires dialogue-based change processes that allow organizations to reveal
and change the underlying core values upon which their decisions and actions are rooted.
As we have emphasized numerous times, changing these core value systems constitutes
a generative shift in how organizations think about the world and their role in it.
Transformational change has been a common theme throughout this book because, as
we have said many times, implementing SSM will require that most organizations
transform their value systems and their strategies in ways that reflect a deep abiding belief
in the sacredness of people and nature. Transformational change processes are required
for strategic managers and their organizations to become agents for social change.
In fact, strategic managers implementing SSM can choose to take one of two roads in
their quest for improved triple-bottom-line performance. The first is the adaptive,
incremental road, which is likely the more travelled of the two these days. On this road,
managers instil changes in an orderly linear fashion. Whereas incremental change
processes are effective in helping organizations do things differently, they are less
effective in helping organizations view things differently. For that, organizations must take
the least travelled road: transformational change.
Organizations that choose the incremental road may be capable of implementing the
basic practices of SSM, but developing such proficiencies will not necessarily lead them
to a fundamental transformation to a sustainability-centered value system. They may be
quite capable of doing things in more sustainable ways, but they may still lack the
capability to view things in more sustainable ways. Therefore, without a guiding
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sustainability-based value system in place, organizations are more likely to eventually
lose their way in their search for improved sustainability performance, and this threatens
their potential to continuously adapt to the increasing sustainability demands in the
environment.
On the other hand, organizations that choose the transformational road start their
environmental adaptation journeys by examining and changing the fundamental values
that guide what they do. This provides them with the underlying cognitive foundations
necessary for thinking in terms of sustainability, and thinking in terms of sustainability
makes acting in terms of sustainability a more natural, logical process. When this
happens, organizations’ roads to SSM become clearer and more navigable, and this
increases their chances of successfully adapting to the changing sustainability-rich
business environment. Thus, the transformational change road—the road least traveled
because the changes it brings are so fundamental—is the best route to the long-term
adoption and implementation of SSM where the firm becomes an agent of social change.
A very effective transformational change process that has gained popularity in recent
years is appreciative inquiry (AI), which “involves a systematic discovery of what gives
life to an organization or a community when it is most effective and most capable in
economic, ecological, and human terms” (Cooperrider and Whitney 2005, 8). AI seeks to
reveal, expand, and exploit the positive core of an organization or community. It always
focuses on the positive—inquiry, imagination, and innovation—rather than on the
negative—problem solving, criticism, and blame. AI explores “unconditionally positive
questions that strengthen a system’s capacity to apprehend, anticipate, and heighten
positive potential” (Cooperrider and Whitney 2005, 8). AI interventions essentially follow
a four-stage process of discovering what is good about the organization, dreaming about
a positive future for it, designing ways to make those dreams come true, and empowering
organizational members to employ these ways to pursue the organization’s destiny. By
using AI along with other organizational change processes, the top management team
can shepherd the vision of becoming an agent for social change.
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Exercise #7:
Draw and List Porter’s Generic Strategies.
Sample:
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Module 8
ORGANIZATIONAL GOVERNANCE AND STRATEGIC LEADERSHIP IN SSM
Week 15-16
Introduction
In this era of sustainability, we now turn our attention to corporate governance and
strategic leadership. Chief executive officers, chief operating officers, chief financial
officers, chief sustainability officers, boards of directors, and other top executives are all
responsible for the long-term direction of their companies. These are the executives in
charge of selecting and implementing strategy portfolios, instilling value systems,
developing spiritual capital, creating organizational designs, developing support systems,
and developing transformational change processes that support high levels of triplebottom-line performance. They are being asked to exercise leadership not only in their
own companies, but also in complex strategic alliances and business environments where
they are being called on to be agents of social change, in an atmosphere rife with growing
demands for improved economic, ecological, and social efficiency. Given this context,
effective governance mechanisms and strategic leadership processes are critical success
factors for firms implementing sustainable strategic management (SSM).
Learning Objectives:





Learn how to establish effective corporate governance mechanism for SSM
Listing the elements of corporate governance
Differentiate the types of leadership
Learning about the business ecosystem leadership
Learn how to build trusting relationship
Establishing Effective Corporate Governance Mechanism for SSM
Corporate governance is a series of processes for managing stakeholder relationships in
deciding the firm's strategic course, power, and efficiency. These mechanisms must at a
minimum focus on managing the relationships among three key internal stakeholders: (1)
the shareholders, the owners of the firm, (2) the board of directors, which has been
elected by the shareholders to represent their interests, and (3) the chief executive officer,
who is typically paid handsomely to create value for the firm. External market pressures
that can help or hurt a company's survival, such as external investors looking to buy
undervalued companies and transform them around through removing top management
teams, must be addressed through governance structures (Hitt, Ireland, and Hoskisson
2009). As a result, corporate governance entails putting in place strategic assessment
and control structures to ensure that strategic leaders' decisions and activities contribute
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positively to the firm's triple-bottom-line success. Control structures that help to ensure
that strategic leaders' decisions and actions benefit the firm's triple-bottom-line results.
The principal–agent issue, which occurs when an agent conducts actions on behalf of a
principal, is addressed by corporate governance. The owners (shareholders) and the
agents (professional managers) are separated in publicly traded corporations, with the
shareholders delegating power to professional managers to make decisions on their
behalf (Eisenhardt 1989). When strategic managers and boards of directors (agents)
follow their own personal interests that clash with the principals' (shareholders') interests
in optimizing overall returns, a conflict occurs. In situations like this, managerial selfinterest and opportunism will jeopardize the firm's long-term competitiveness and
shareholders' interests. When this occurs, it is referred to as an agency problem.
Where there is asymmetric knowledge, which means the agents know more than the
principals, agency problems arise. Asymmetric knowledge is caused by the separation of
ownership and administrative power (Rothaermel 2013). Strategic managers, for
example, usually have more information than other stakeholders including investors and
shareholders. The agents are free to behave in their own self-interests without the
presence of a control device. There is a potential moral hazard when this happens
(Eisenhardt 1989). Given that there is no ideal mechanism for tracking and managing
moral hazards, and even if there were, it would almost certainly be prohibitively costly,
agents would still be able to act unobserved. As a result, the degree to which the agent
exploits asymmetric knowledge for personal benefit will be determined by the firm's
enterprise strategy (discussed in the previous chapter), its fundamental value structure,
and spiritual capabilities that describe what it stands for.
Barclays' corporate governance processes were clearly ineffective, and the company was
unable to escape moral hazard. Because of their lack of management supervision and
control, both the chairman of the board of directors and the CEO resigned their positions.
Organizations may use a variety of governance tools for strategic influence to solve
agency issues like this. The firm's sustainability-based value system, the organizational
spirit, which forms the basis of organizational decision making, is, however, the best
control mechanism.
Boards of Directors
Boards of directors, as discussed above, are elected representatives of the shareholders,
and they are charged with ensuring that the interests and motives of management are
congruent with those of the shareholders. This is the fiduciary responsibility of boards of
directors, and it is the centerpiece of corporate governance (Rothaermel 2013). This
responsibility entails overseeing the strategic management processes of formulation and
implementation of the firm’s vision, mission, goals, and strategies, thus setting the
strategic direction of the firm. A recent survey of boards of directors found that 72 percent
identified strategic planning and oversight as their first priority (McPherson 2012). Board
composition is a key to its ability to function effectively. Inside directors generally come
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from the firm’s senior management team, a governance arrangement that provides
valuable internal information not available to those on the outside. Inside directors’
interests, however, usually align more with the CEO and less with the shareholders,
especially when the CEO serves as the board chair, which is often the case in the United
States. Outside directors, on the other hand, are not employees of the firm. Typically, they
are senior executives from other firms and organizations. Their independence makes
them more likely to watch out for shareholder interests (Rothaermel 2013). Thus, a
balanced mix of both inside and outside directors is generally desirable for fulfilling the
board’s full range of governance responsibilities.
Boards of directors have responsibilities for five governance functions (Hitt, Ireland, and
Hoskisson 2009): (1) As discussed above, they are responsible for overseeing the
strategic direction of the firm. (2) They are responsible for auditing the financial
performance of their firms, including being responsible for ensuring that the audited
financial statements represent a true and accurate picture of the firm. This is essentially
their watchdog role. (3) They are responsible for the selection and succession of CEOs
as well as the determination of CEO pay. If the CEO loses their confidence, they are
responsible for replacing him/her. (4) They are responsible for assessing risks and
developing strategies that mitigate risks. (5) They are responsible for ensuring the ethics
and legality of the firms’ activities, thus building and preserving reputational capital
(Rothaermel 2013).
Bringing Sustainability to Boards
Taking on sustainability means that boards must expand their responsibilities to include
their firms’ social and ecological as well as economic performance. In fact, it is
increasingly becoming the legal view that boards have a fiduciary responsibility to oversee
the pursuit of corporate sustainability (United Nations 2012). Adding social and ecological
performance to the traditional economic oversight responsibilities of board members
requires the creation of learning boards of directors capable of probing and questioning
the fundamental assumptions that underlie their firms’ strategic initiatives. The unique
perspectives attainable from learning boards provide organizations with a greater
capability to push their existing boundaries and create new triple-bottom-line
opportunities. John Elkington (1997), architect of the triple-bottom-line concept, says that
such boards are the best vehicles for incorporating sustainability into what he refers to as
the DNA of firms.
In order to provide the plethora of learning perspectives required for SSM governance,
boards need to be composed of members who have broad backgrounds that collectively
represent the economic, social, and ecological interests of the firm. Generally, this
requires going outside the traditional ranks of inside board members and outside senior
executives in order to find knowledgeable board members who represent the interests of
social and ecological stakeholders. The board members chosen to represent society and
nature should be both prepared and allowed to voice their perspectives and have them
incorporated into the strategic choices of the firm. Building these boards will likely require
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adding directors that represent non-shareholder interests, such as nongovernmental
organizations (NGOs), citizen sector organizations (CSOs), and labor unions. If this
cannot be achieved, then stakeholders’ interests can be brought to the board via
stakeholder engagement processes (United Nations 2012).
Having the appropriate board structure is crucial in establishing a board that stands for
sustainability. Board structures normally include standing and ad hoc committees that
focus on governance functions such as risk management, compliance, auditing, and
executive compensation. Boards of organizations pursuing SSM have a need for
sustainability to be specifically integrated into these committees. In this way, boards will
have the potential to fully explore the legal requirements and fiduciary responsibilities of
their firms related to environmental and social performance in areas such as pollution
prevention, human rights, worker safety, product safety, community safety, and so forth.
Given the increasing pervasiveness of sustainability in the business environment, there
is now a trend toward establishing a separate board committee, called the sustainability
committee or corporate responsibility committee, to oversee the integration of
sustainability into the operations of the firm (United Nations 2012). Also, more and more
firms, such as Eastman Chemical, are appointing chief sustainability officers to give
sustainability a formal voice in corporate governance.
Board members today are more concerned than ever that they will be held legally liable
for the actions of the corporation, risking their own assets (and possibly even
imprisonment) for their actions on the board. For example, shareholders may sue boards
for selling the company for too low a price. With regard to their fiduciary responsibility for
their firms’ sustainability performance, board members can be held legally accountable
for developing non-recyclable packaging in Germany, cutting hardwoods in Canada,
importing ivory from Asia or East Africa, or polluting waterways in England. Thus, boards
today have a strong self-interest in implementing a value system based on sustainability.
Executive Compensation
Executive compensation is a governance mechanism that seeks to align incentives of
shareholders and management through strategic manager salaries, bonuses, and long
term incentive compensation. Boards typically use stock options as the basis of their longterm equity compensation packages for executives. Stock options give the recipient the
right to buy a firm’s stock at a predetermined price sometime in the future. If the stock
price rises above the price of the stock on the day the compensation was negotiated, then
the executive stands to reap significant gains (Rothaermel 2013). Theoretically stockoption plans address the agency problems by linking managerial compensation with the
creation of shareholder wealth. However, major agency problems still exist with the use
of stock-option incentives.
CEO compensation is increasingly becoming a target for media, activist shareholders,
and regulators. This stakeholder anger coalesces around two common issues: (1) the
absolute size of the CEO compensation package compared to the average worker, and
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(2) the relationship between firm performance and CEO compensation. In the United
States the ratio of CEO pay to the average worker pay is 300 to 1, up from 40 to 1 in 1980
(Rothaermel 2013).
Golden parachutes are typically part of the CEOs compensation package. Recall that
these are contractual provisions that compensate executives in the event of a hostile
takeover or termination without a cause. There has been growing public and shareholder
outrage about executive pay packages for poorly performing CEOs.
Example:
In the wake of the 2008 financial crisis, the right to reclaim compensation from executives
who engage in ethical or financial misdeeds is becoming a part of executive
compensation packages. An astounding 86.5 percent of Fortune 100 companies have
adopted clawback provisions that allow them to recover cash bonuses or stock from
unethical and poorly performing executives (Olson 2012). The clawback was the first thing
invoked by JPMorgan Chase’s board to fend off criticism of its billions of dollars in trading
losses discussed above. Similar to other corporations, JPMorgan Chase adopted a
clawback policy to discourage the practice of rich rewards for short-term gains that later
evaporate. Referred to sometimes as “If you didn’t earn it, you must return it” provisions,
these are typically reserved for serious misdeeds, such as accounting irregularities,
before triggering the right to reclaim back compensation. The JPMorgan Chase board of
directors used this policy to dock the pay of CEO Jamie Dimon and the other executives
who oversaw the hedging and resulting losses from the firm’s trading in 2012.
Strategic Evaluation and Control
Strategic evaluation and control mechanisms are used to determine whether or not a
company's plan is achieving its goals, both indirectly and directly. This mechanism should
be implemented across the board so that managers at all levels are constantly reviewing
the firm's actual output in relation to anticipated outcomes. As discussed above, corporate
governance is concerned with mechanisms that ensure that management’s motives are
consistent with stakeholder interests. As shown in Figure 43, SSM strategic assessment
and control offers additional mechanisms that allow strategic managers to identify
performance gaps and the level of change required in current strategies in order to
achieve their strategy's expected results. The size of the performance gap decides what
steps need to be taken in current strategies to close it. The wider the gap, the more
strategic managers would need to rethink their existing plans in light of new objectives. In
order to close a significant performance gap, the strategic option is either to adjust tactics
or to update the firm's targets. In SSM, gap analysis is viewed as a continuous, coevolutionary process where collectively managers ask if their actions are achieving the
goals that were formulated in the participative SSM planning process.
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Figure 43. Performance Gap Analysis
To ensure that strategic managers and stakeholders' triple-bottom-line interests are
aligned, SSM corporate governance frameworks are needed. Because of the firm's coevolutionary relationship with its external environment, a continuous process of assessing
and challenging outcomes is required, and it should occur at each point of the SSM
process. Environmental scanning capabilities provide strategic managers with data on
the firm's external environment's complex shifts on a continuous basis. Strategic
managers may use this information to make constant adjustments to internal resource
deployments and plans in order to adapt their companies to changing conditions and
ensure target achievement (see Figure 44). These strategic evaluation and control
mechanisms are like a compass is to a sailor, providing data so the firm can stay on
course to its desired future.
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Figure 44. SSM Evaluation and Control
Emerging Perspectives on Organizational Leadership
Leadership has long been a subject of discussion in management education, science,
and practice. Leaders are often portrayed as larger-than-life figures who are more
powerful, intelligent, charismatic, and have more influence than their followers. Theory I
leadership, as described by Freeman et al. (2007), proposes that leaders who act
appropriately at appropriate times and provide appropriate reinforcements will inspire
their followers to perform effectively and efficiently. The common thread here is that
previous leadership theories centered on leader–follower relationships, with leaders cast
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as all-knowing, all-powerful, out-front supervisors and followers cast as less educated,
less powerful, willing-to-fall-in-line subordinates.
Practicing Humble Leadership
One of the most recent and most valuable models of leadership appropriate for modern
network-based organizations is Owens and Hekman’s (2012) portrayal of Humble
Leadership. They point out that humility is a core human virtue that lies at the foundation
of most of the world’s philosophies and religions. As a core human virtue, humility spawns
other key virtues, such as moral strength, wisdom, courage, compassion, and knowledge
beyond self. The word “humility” is derived from the Latin word humus, which means
“earth” or “ground.” Thus Humble Leadership can be defined as “leadership from the
earth,” “leadership from the ground,” or “bottom-up leadership.” As such, the term
connotes a completely opposite perspective from the old leader–follower models (Owens
and Hekman 2012). Especially notable here are the implications these definitions hold for
strategic leaders employing Humble Leadership to guide their organizations on an SSM
journey. Together they say that Humble Leadership is grounded in the laws of nature,
built on deeply held values for the sacredness of the earth and its people, and practiced
from a position of service to others.
Owens and Hekman (2012) conducted in-depth interviews with 55 managers from
multiple levels in manufacturing, financial services, retail, religion, and the military. They
identified three characteristics of Humble Leadership from these interviews: (1) Humble
Leaders acknowledge their own personal limits, weaknesses, mistakes, and so forth.
Assuming that leaders are perceived to be competent, admitting their weaknesses will be
seen as one of their strengths. Leaders perceived as competent will likely be viewed as
being intelligent, resolute, and persuasive in addition to being humble. (2) Humble
Leaders extol the strengths and contributions of their followers over their own. Assuming
that this praise is honest, genuine, and substantive, this shines light on the efforts of
others and motivates them to continue to contribute real value to organizations. (3)
Humble Leaders are models of learning. They show openness to new ideas and
information; they tend to listen before they speak; and they are open to feedback
regarding their own ideas and inputs.
From their interviews, Owens and Hekman (2012) gleaned five outcomes of Humble
Leadership: (1) Humble Leaders tend to increase the satisfaction with organizational
relationships. Given that SSM is being played out in a world of complex relationships
involving multiple stakeholders, networks of organizations, and so forth, this is critical. (2)
Humble Leaders foster a high level of loyalty in organizations. By revealing their
weaknesses, praising others, and showing a willingness to learn, Humble Leaders evoke
commitment to the organization and its vision. (3) Humble Leaders foster a high level of
trust (which we will discuss in more depth later in this chapter). (4) Humble Leaders help
to legitimize the developmental journey of all employees by giving them the psychological
freedom and organizational engagement opportunities to work creatively and bring their
ideas to fruition. (5) Humble Leaders legitimize uncertainty as an organizational state.
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They encourage people to work in a learning environment with open dialogue and
organizational fluidity.
Practicing Ethical Leadership
Freeman et al. (2007) also say that modern leaders must go well beyond the leader–
follower relationship. They say that leaders today must be able to release the human
potential of all employees and stakeholders, they must be able to integrate their
organizations into the larger community, they must embody and defend the values of the
organization, and they must establish and live the vision of the organization, and (as
discussed in Chapter 6), they must become agents of social change. This requires Ethical
Leadership, which is defined as the ability of leaders to embed ethical expectations into
the culture of the organization (Schaubroeck et al. 2012). Schaubroeck et al. (2012)
describe the value-embedding process of ethical leadership as “cascading,” meaning that
the ethical values flow down through each organizational level from top to bottom.
Freeman et al. (2007) say that ethical leadership is absolutely required for managing at
the enterprise strategy level (discussed in the previous chapter). They say, “Enterprise
strategy must be executed in the spirit of Ethical Leadership. Given that there is … an
increasingly demanding public that expects the worst from business, we must build ethics
into the foundations of how value gets created…. We need a framework that expects
them to be ethical leaders rather than stick with the current view of capitalists as a bunch
of ‘greedy little bastards’ trying to do each other in” (pp. 13–14). Ethical Leadership
incorporates six basic principles. According to these principles: (1) ethical leaders act for
the benefit of all stakeholders; (2) ethical leaders view all constituents as stakeholders
with a common vision; (3) ethical leaders connect organizational goals with stakeholders;
(4) ethical leaders establish open dialogue with stakeholders; (5) ethical leaders use
moral imagination to make tough ethical judgments; and (6) ethical leaders base all
actions and purposes on a sound ethical framework. Ethical leaders perform several
important functions. First of all, ethical leaders articulate the purposes, values, and visions
of their organizations. This begins with openly displaying what the organization is and
what it stands for, but it also requires that leaders live their organizations’ values in both
private and public life. Also, like humble leaders, ethical leaders extol the successes of
their organizations, not themselves. They celebrate the achievements of others, and they
eschew stroking their own egos. Ethical leaders also recruit, select, and develop the best
people they can find. This means going beyond simply identifying people with the
knowledge, intelligence, abilities, and skills to do the job. It also means finding those with
high principles of integrity, honesty, humility, and so forth. Further, ethical leaders
encourage open conversations around ethics, values, and stakeholder value creation.
Ethical leaders also create dissent mechanisms that allow for alternative views in order
to neutralize any potential authority traps present in the system, and they work hard to
understand and appreciate the values of their stakeholders, especially when they conflict
with their own.
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Practicing Spiritual Leadership
Spiritual leadership is an important aspect of successful SSM strategic leadership.
Spiritual leadership exposes the organization's higher meaning and awakens the hearts
and minds of its constituents. Spiritual leadership, according to Fry (2003, 2009), entails
developing transcendent organizational visions, establishing organizational cultures
based on principles like altruism, inclusive membership, appreciation, and caring, building
stakeholder relationships based on service to others, and realizing that organizational
members and stakeholders have an inner life that needs to be nurtured. Since the
connection between employees' personal visions and the transcendent mutual visions of
organizations is fundamentally spiritual, spiritual leadership, according to Fry, is required
for building self-renewing, learning organizations like those mentioned by Senge. After
all, both dreams are focused on a greater goal for the individual and the company.
Spiritual leaders strive to stimulate not only the minds and bodies of those they represent,
but also their hearts and spirits. Spiritual leadership demonstrates a sincere attempt to
create strategic programs that benefit from contributing to the common good and creating
a difference in the wider community. Spiritual leadership has been shown to have a
positive impact on strategic leader effectiveness, in terms of both relationships with
employees and relationships with stakeholders outside the organization (Fry 2003;
Nahavandi 2009). Given that transforming to a sustainability-based organization requires
developing a transcendent vision for earning profits in ways that serve society and the
planet, and given that such transformation requires basing an organization’s culture on
deeply held values for the sacredness of nature, humankind, and posterity, it should be
clear why shifting to a sustainable organization requires effective spiritual leadership.
Practicing Servant Leadership
Humble leaders with their deep appreciation of others and their thirst for creativity and
innovation, ethical leaders with their emphasis on establishing ethically centered
relationships with all stakeholders based on mutual respect, strong convictions, and open
dialogue, and spiritual leaders with their sense of greater purpose and greater value for
humankind and nature represent the essence of modern leadership thinking. Those
following these frameworks are viewed as highly competent, highly principled, very
encouraging, trusting, charismatic leaders who treat everyone and everything with a deep
and abiding respect and who are capable of tying together the diverse visions of their
firms, employees, and stakeholders.
Yet as contemporary as these modern leadership frameworks are, all have elements of
servant leadership as described by Robert Greenleaf (1977, 1996) over 30 years ago. In
essence, servant leadership rests on a core value of steward-ship, keeping things in trust
for others. As stewards, servant leaders use their leadership capabilities to serve the
needs of others. Servant leaders consciously choose to lead for reasons beyond ego
satisfaction and wealth. That is, they are not leaders because they want to gain power or
acquire material possessions for short-run personal gain. Rather, they truly desire to
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serve others over self. They believe that a good society is built upon caring relationships
in which the more able and the less able serve each other’s needs, and they believe that
servant leaders who build and maintain caring relationships can tap the human spirit
within their organizations and become agents for social change toward a more caring and
just society (Greenleaf 1977, 1996).
Effective Business ecosystem Leadership
As can be gleaned from the above discussion, leading business organizations as they
make the transition to SSM in today’s complex, ever-changing global economy is no
simple task. Leaders are faced with guiding their organizations as they transform their
visions, establish new cultures with new systems of values and beliefs, encourage
continuous creativity and innovation, and in some cases redefine their very souls. Further,
as if the modern leadership situation is not complicated enough, in today’s world of
expanding SSM-based business ecosystems the roles of strategic leaders are by
definition expanding from a single-organization perspective to a multi-organization
perspective, where some of the organizations may not even be profit oriented.
Recall that SSM-based business ecosystems are networks composed of an ecosystem
leader (keystone firm) and a variety of niche organizations (i.e., corporations, small
entrepreneurs, NGOs, CSOs, or public agencies) that share platforms and information
that allow them to pursue their triple-bottom-line goals under the umbrella of the
ecosystem leader’s transcendent sustainability-centered vision. Joining SSM-based
business ecosystems is designed to provide organizations with opportunities to come
together to do something for the planet and its people that they cannot do alone.
It is the responsibility of the ecosystem leader to make sure that this happens through
effective alliance management capability. Specifically, this requires that business
ecosystem leaders: (1) provide the transcendent vision for the ecosystem; (2) build
shared stewardship of the vision among ecosystem members; (3) provide the shared
ecosystem platform; (4) define the boundaries of the ecosystem; (5) define and maintain
the relationships among ecosystem members; (6) provide space in the ecosystem for
value-sharing opportunities for the members; (7) build and maintain an innovative core;
and (8) build community-based learning structures that allow the ecosystem members to
translate their shared platforms and standards into coordinated collective actions.
Central to effective alliance management capability is building strong trusting
relationships among ecosystem members—managing the collaboration, inclusion,
diversity, and open dialogue processes necessary for sharing knowledge, structures,
governance mechanisms, platforms, resources, capabilities, and risks among the
ecosystem members. The firm’s spiritual capabilities provide the foundation for effective
alliance management capability that results in trusting relationships among ecosystem
members.
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Building Trust Relationships
Freeman et al. (2007, 3) define a business as “a set of relationships among groups of
[stakeholders].” They say, “To understand a business is to know how these relationships
work. It is the responsibility of the executive or entrepreneur to handle and form these
relationships.” We've emphasized throughout this book that efficient SSM implementation
necessitates strategic managers building and maintaining effective sustainabilitycentered relationships within their organizations and among their diverse set of
stakeholders. It is the responsibility of the executive or entrepreneur to handle and form
these relationships.” We've emphasized throughout this book that efficient SSM
implementation necessitates strategic managers building and maintaining effective
sustainability-centered relationships within their organizations and among their diverse
set of stakeholders.
In fact, all organizations are composed of networks of human relationships that emerge
through systems of mutually beneficial interpersonal exchanges. These mutual benefits
may be tangible (i.e., financial gain) or intangible (i.e., personal attraction), but in the long
run organizations cannot exist without a strong system of mutually beneficial relationships
among all parties involved, including strategic managers, employees, business
ecosystem partners, investors, customers, and so forth.
This is significant because, while entropy is a physical transformation law, it also has
important social consequences. Entropy limits the value of social capital, which is made
up of relationships between organizational actors, in the same way that it limits the value
of physical capital (Portes 1998). Relationships are entropic because they take a
considerable amount of human time and energy to establish and sustain (Tymon and
Stumpf 2003). Human mortality, of course, puts utter entropic limits on human
relationships, but entropy does not require aging or death to weaken or kill them. They
will change, fade, and eventually disappear if the necessary human time and energy are
not invested into them.
Building and sustaining the complex human relationships needed for things like creating
healthy business environments or implementing base-of-the-pyramid SSM strategies
involves a number of interrelated factors. Differences in orientation and needs among
ecosystem members can cause incentive problems and the risk of self-serving behavior
from opportunism, preventing partners from fully participating in the ecosystem. And
recall, the essence of effective alliance management is building trust among ecosystem
members, and these trust-based interorganizational relationships are important sources
of competitive advantage for the business ecosystem (Dyer and Singh 1998). As a result,
good ecosystem leadership necessitates strategic leaders possessing the spiritual
intelligence to build spiritual capital among ecosystem stakeholders, allowing trust-based,
interorganizational, spiritual capabilities to become a competitive advantage for the
business ecosystem.
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Trust is reliance or dependence on the ability, character, strength, or truth of others.
According to Tymon and Stumpf (2003, 16), “When trust is developed the relationship
akes on longer lasting qualities and thereby requires less maintenance.” Thus, when there
is trust, years can pass with minimal interaction while the relationship continues to grow
strong. However, the opposite is true as well. Loss of trust is one of the quickest and
easiest ways of choking off the flow of the human time and energy needed to maintain
viable relationships, and once trust begins to deteriorate, the process is often irreversible.
Therefore, trust is a key to slowing and arresting the entropic flow related to relationship
building and maintenance (Prusak and Cohen 2001; Putnam 2000; Tymon and Stumpf
2003).
We've included an extra note because confidence is so important in building and
sustaining relationships. Strategic managers must possess the ability to be trustworthy.
Their success or failure in developing strong relationships with ecosystem partners and
others is determined by whether or not their partners and potential partners regard them
as trustworthy. Also, keep in mind that being trusted is not the same as being liked. Being
liked is the product of personal attraction, whereas being trusted is the result of one's
ability and willingness to take action. This is particularly true in the business world of
coevolving business ecosystems, where being liked is significant, but being trusted is
even more so.
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Exercise #8:
Conduct and interview with a business about their compensation scheme and how they
build trust with their employees and customers.
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MAC 301 SUSTAINABILITY AND STRATEGIC AUDIT
Reference:
Stead, J.G. and Stead, W.E., 2014. Sustainable Strategic Management Second Ed.
Greenleaf Publishing Book
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