This paper provides some preliminary answers to these questions based on the Iindings oI the SustainNovation! project. The article provides some insights into the use of the Balanced Scorecard as a possible methodology to help corporations translate their sustainability strategies in business reality.
This paper provides some preliminary answers to these questions based on the Iindings oI the SustainNovation! project. The article provides some insights into the use of the Balanced Scorecard as a possible methodology to help corporations translate their sustainability strategies in business reality.
This paper provides some preliminary answers to these questions based on the Iindings oI the SustainNovation! project. The article provides some insights into the use of the Balanced Scorecard as a possible methodology to help corporations translate their sustainability strategies in business reality.
CORPORATE SUSTAINABILITY MANAGEMENT - TOWARDS CONTROLLING
CORPORATE ECOLOGICAL AND SOCIAL SUSTAINABILITY Kai Hockerts INSEAD - Center for the Management Universitv St. Gallen - Institute for the of Environmental Resources (CMER) Environment and Economv (IWO-HSG) Boulevard Constance Tigerbergstrasse 2 F-77300 Fontainebleau (France) CH-9008 St. Gallen Kai.Hockertsinsead.fr, www.insead.fr/CMER www.iwoe.unisg.ch Tel. 33 (1) 60 72 43 86 Tel. 41 (71) 2242 595 Fax. 33 (1) 60 74 55 64 Tel. 41 (71) 2242 722 ABSTRACT How do environmental management and corporate social responsibility strategies become relevant Ior the core business strategies? And how can Iirms eIIectively plan and control the implementation oI their sustainability strategies? This paper provides some preliminary ans- wers to these questions based on the Iindings oI the SustainNovation! project, a Ph.D. research project carried out over the past three years at the Institute Ior Environment and Economy at the University St. Gallen (IW-HSG) and the Centre Ior the Management oI Environmental Resources (CMER), a dedicated research Iacility at INSEAD, the international business school. The article, Iurthermore, provides some insights into the use the Balanced Scorecard as a possible methodology to help corporations translate their sustainability strategies in business reality. These reIlections draw on a research project which started this year jointly by the IW-HSG, CMER, together with the University Lneburg and Iinanced by the German Research ministry BMBF. Key words: Corporate Sustainability; Strategic Environmental Management; Corporate Social Responsibility; Balanced Scorecard 1. TOWARDS A MODEL FOR CORPORATE SUSTAINABILITY 1.1. Working Definition For Corporate Sustainability Like "green", "eco-eIIicient", "ethical", or "socially responsible", the term "sustainable" has proved to be remarkably diIIicult to boil down to one generally accepted deIinition. "Sustain- able" has become a buzzword, which everybody interprets in a diIIerent way. Things become even more complicated once the term is associated with Iirms. Some business people simply proclaim "corporate sustainability" to be their overall goal, and equal corporate sustainability to successIully surviving in the market place. It is not so easy. In the early days the very Iuzziness oI the term "corporate sustainability" was a valuable asset. It has allowed diverse Sustainability at the Millenium: Globalization, Competitiveness and the Public Trust J anuary 21-25, 2001 Ninth International Conference of Greening of Industry Network Bangkok 2 groups to join a broad debate. However, now more diIIiculties arise as Iirms have to make day-to-day-decisions about sustainability issues. DeIinitions Ior sustainability are abundant. Already as early as the 1970s the MIT employed the term "sustainability" to describe "an economy |...| in equilibrium with basic ecological support systems |...|" (Stivers, 1976:187). However, it took more than a decade until (in the wake oI the predominant interpretation oI "sustainable development" in the Brundtland Commission's report oI 1987) the term was also applied to corporations. Since the early 1990s it has become the synonym Ior a corporation`s ability to survive in the Iace oI rising environ- mental and social stakeholder pressures. A recent survey on business and sustainable development, Ior example, Iound that 95 percent oI companies responding viewed sustainable development as genuinely important, and 83 per- cent saw business value in implementing sustainability initiatives (Hedstrom et al., 1998: 5). In an attempt at a global business response the World Business Council Ior Sustainable Development (WBCSD) has coined the principle oI "eco-eIIiciency", addressing both econo- mic and environmental sustainability (Schmidheiny, 1993). Consulting publications on eco- eIIiciency (e.g. Ayres et al., 1995; DeSimone and PopoII, 1997) gives birth to the hope that sustainability is just a question oI higher eIIiciency. Reality is, oI course, more complex than that. EIIiciency may contribute its share. However, it alone is not enough to Iit the bill oI sustainability. Critics even point out that the gospel oI eco- eIIiciency provides the belieI in an easy way out through eIIortless technological change (King, 1997; WelIord, 1997). Such voices demand more Iundamental change in the way we conduct business and as a matter oI Iact make our choices as consumers. A draw-back oI many business interpretations oI sustainability lies in Iact in its implicit reductionism. It aims at meeting given consumer needs in a more eIIicient way. The concept does not address the problem oI increasing overall consumption which oIten over-compensates eIIiciency gains. Alternative concepts are required addressing that consumers also have to review their needs towards a mode oI "suIIiciency" (Gladwin et al., 1995a: 878). Besides sustainable consumption another topic is oIten neglected by the mainstream under- standing oI sustainable development: the question oI social sustainability. Several initiatives were recently started to address this issue. Organization such as the UK-based AccountAbility, or the Council on Economic Priorities (CEP) in the USA push companies towards imple- menting standards oI social auditing and reporting equivalent to environmental and economic auditing (Zadek et al. , 1997). Even the WBCSD has devoted a working group to this topic (1999a). 1.2. Does it Matter that there are Different Definitions of Corporate Sustainability? Judging by the diIIerences between such authors as DeSimone and PopoII (1997) on the one hand, and Richard WelIord (1997) on the other hand, it seems impossible to Iind one deIini- tion oI sustainability that accommodates everybody. In Iact it is generally expected that "the notion oI sustainable development will remain Iuzzy, elusive, contestable, and/or ideologically controversial Ior some time to come." (Gladwin et al., 1995a) 3 HoIIman, Ior example, predicts that merging the diverse perspectives oI environmentalists, academics, international regimes and corporations will only come "when a critical mass coupled with a Iormative event Iorces them into institutional 'war', out oI which will precipitate a new set oI institutional conceptions oI environmental management that include considerations Ior sustainability" (1997). One might argue, that given the Iuzzy understanding oI sustainability, the term should better be avoided Ior the time being. Why not look at such issues as "environmental protection", "social responsibility", and "economic proIitability" separately avoiding the slippery slope oI corporate sustainability? Yet, deIinitional diversity is only to be expected during the emergent phase oI any new idea (Gladwin et al., 1995a). In Iact many business concepts remain notoriously diIIicult to deIine. As an illustration take the buzzword oI shareholder value. It emerged in the strategic manage- ment debate around mergers and acquisitions (M&A) in the 1980s. In the Iorm oI the Capital Asset Pricing Model (CAPM) it provides very a speciIic answer to the question how share- holder value can be calculated (Rappaport, 1986). However, CAPM is not the only deIinition Ior shareholder value. Should the term thereIore be avoided altogether? Most people will reject this idea. Gladwin et al., Ior example, explicitly support an open attitude: "Rather than lament or withdraw Irom this embryonic state oI aIIairs, we hope that management scholars will proactively embrace the unIolding process oI paradigmatic debate, Ior the advance oI all sciences requires conIlict between competing schools oI thought." (Gladwin, 1995a) For the sake oI this paper (and to Iurther stimulate the debate) the Iollowing deIinition oI corporate sustainability, drawing heavily on the deIinition introduced in the Brundtland report's (1987): A strategy Ior corporate sustainability must meet the needs oI a Iirm's stakeholders without compromising its ability to also meet the needs oI Iuture stakeholders. Firms must develop a capability to anticipate changes in the needs oI their stakeholders. They must also acquire the capacity to adapt their strategy to the new requirements. One important element oI this deIinition lies in the recognition that sustainability can not be deIined in a static way. As points out WelIord (1997: 179) "we are really talking here oI a process rather than a tangible outcome." On the level oI a corporation this means that companies have to struggle constantly to adapt their business strategy iI they want to remain sustainable. Mark Wade oI Shell clearly identiIies this process perspective oI sustainability (Interview October 1998): "Time is probably the most important dimension oI sustainability. Whether a Iossil Iuel company is sustainable or not, depends on how Iast it can turn itselI into a renewable energy company." 1.3. The Shear-zone Concept In recent years the analogy oI the triple-bottom line (Elkington, 1997) has emerged as the pre- eminent model Ior Iirms to interpret sustainability. It presumes that sustainability requires Iirms to consider not only the Iinancial bottom-line, but as well its social and ecological "proIit and loss accounts". This point oI view is increasingly adopted by the business practice (e.g. British Telecom, 1998: 1, Shell, 1998: 2, Hindle and White, 1999: 26, WBCSD, 1999b: 4 11-12). Among the multinational corporations it is nearly industry standard to oIIer an environmental report alongside the Iinancial annual report. In trying to deal with the triple bottom-line challenge these companies oIten opt Ior a step-by-step motion. Zadek and Gonella (1998: 5) point out that "while there are examples oI social and ethical accounting and auditing initiatives which include elements oI Iinancial and environmental issues, data and perspectives, they tend to involve compilation rather than the required integration." Zadek (1999: 22) stresses that the issue oI an "integration oI the three spheres is not Ior the sake oI conceptual completeness or tidiness. It is because organizations need to understand and at times make trade-oIIs between options, each oI which oIIers a menu oI possible costs and beneIits. Integration is critically important Ior organizations to understand the Iull implica tions oI the options they Iace and decisions they make." OI course, it is better Ior a company to take a 'piecemeal' approach rather than not considering the triple bottom line at all. How- ever, can an isolated approach ever appreciate the complexity oI the sustainability challenge? Gladwin et al. Iear that in absence oI an integrated approach eIIorts only towards one dimen- sion oI sustainability "may produce trivial results at best" (1995a: 879). Terry puts it more concisely (1999: 16): "Sustainability is not about adding up values in three diIIerent columns but about systems analysis, integration and holistic thinking." Tuppen makes a very similar point (interview 1998): "II we at British Telecom add an environmental and a social report on top oI the Iinancial report this does not automatically result in a sustainability report." Each sustainability dimension at a time represents already an immense challenge. So how can companies be expected to address the three dimensions simultaneously without increasing complexity beyond impossibility? Elkington suggests that partial integration may be the answer (1997: 70): "Some oI the most interesting challenges, however, are Iound not within but between the areas covered by the economic, social, and environmental bottom lines. |...| New concepts and requirements (are) emerging at the interIaces between each oI these great agendas, in the 'shear zones'." By concentrating on the "shear zones" between two dimensions Elkington opens the possibility Ior companies to link both environmental and social sustainabi lity to the economic dimension (1997: 78; 91). The approach has, however, a downside as well. On the one hand is leads to more business-compatible concepts such as eco-eIIiciency and social productivity. However, through the ecological-social shear zone it opens up the 'eIIiciency versus eIIectivity' debate. This latter shear zone may well prove a real Pandora's box Ior industry as it goes straight to the Ioundations oI modern business practice. OI course, the dimensions may be complementary in some cases but they also may be conIlic- ting. The main challenge Ior a shear zone management is, thereIore, to understand the interde- pendencies. By reducing problems to only two dimensions complexity is still immense. How- ever, the understanding and negotiation oI trade-oIIs is nonetheless easier than in the case oI simultaneous integration. 5 Ecological Sustainability Social Sustainability Economic Sustainability Eco- Efficiency Social Productivity Sufficiency / Ethical Dilemma Figure 1: The Shear Zones oI Corporate Sustainability Source. Adaptation of Hockerts (1996, 1999) From these considerations the Iollowing three shear zones emerge (see Hockerts 1996; 1999): "Eco-Efficiency" is the shear zone oI economic and ecological sustainability; This concept has been largely publicized by the WBCSD (DeSimone/PopoII, 1997). Although many diIIerent deIinitions exist Ior eco-eIIiciency the idea that environmental and economic goals may be reached at the same time is today increasingly accepted. "Social Productivity" describes the shear zone oI social and economic sustainability; The notion that "social productivity" exists alongside "eco-eIIiciency" is, however, much less established. Although, there exist some publications claiming that "good ethics is good business" the majority oI publications reIers to social responsibility or accountability. The third shear zone oI environmental and social sustainability is Iinally the least under- stood area. One might talk here about "sufficiency" which dwells on the question what level oI consumption is "suIIicient" in the Iace oI limited environmental resources. More towards the social dimension the Iield oI "ethical dilemma" opens. It is concerned with situation in which the "right" (i.e. sustainable) thing to do is not the proIitable choice. While the two Iirst shear zones are mainly in line with the win-win philosophy (social productivity and eco-eIIiciency achieve their goals while at the same time Iurthering economic sustainability) the third shear zone goes beyond this notion. In this paper, how- ever, the Iocus shall remain on the two Iirst shear zones. 6 2. TOWARDS A LOGIC OF SUSTAINABILITY TRANSFORMATION But how do the environmental and social impacts corporations have on society Ieed-back into the business world? To answer this question a theory is needed to explain how stakeholder needs become relevant to the corporate realm in the Iirst place. Towards this end the article will extend the "logic oI ecological transIormation" (Dyllick, Belz, and Schneidewind, 1997: 5-7) towards social and sustainability aspects. The logic oI sustainability transIormation does not engage in a debate about whether companies are ethicallv obliged to care about environ- mental and social issues. The concept rather assumes that companies can obtain competitive advantages Irom being socially and environmentally sustainable. The logic oI social and ecological transIormation departs Irom the realization that corporate activities must be analyzed on 3 distinct levels (as displayed in Figure 2): On the cognitive level direct sustainability measures oI corporate social and environ- mental impacts prevail. In the environmen tal dimension a company can, Ior example, account Ior its energy consumption, waste creation, or air pollution in terms oI kilowatts or kilograms. Its social impacts can be accounted Ior in terms oI the total number oI jobs created, the investment directed towards developing countries, or number oI social audits carried out. However, on their own such indicators have hardly any meaning at all. Only when the normative level is taken into account as well, become the environ- mental and social impacts relevant Ior business. On this level Iirms conIront societal expectations and values, political priorities, regulatory norms, customer and employee behavior, etc. It is on the normative level that stakeholders groups express their claims about certain corpo- rate impacts. Stakeholder concerns usually Iollow a liIe cycle oI sorts. They start as EcoIogicaI and SociaI Impacts are transformed by StakehoIder Perceptions and CIaims Voiced Via the Public Politics Market and turned into FieIds of Competitive Advantage potential latent current Figure 2: The Logic oI Social and Ecological TransIormation Source. Adaption of Dvllick et al.(1997. 7) weak signals voiced by arbitrary groups. Over time the concerns gather speed as more powerIul stakeholder groups pick up the issue. Finally mass media and politics become aware oI the topic as the issue matures. But the same logic that requires media to constantly pick up new stories also implies that societal demands once they have reached their peak oI publicity start to Iade away again. 7 On the competitive level the stakeholder claims emerge either through the market, politics, or the public as Iields oI competitive advantage or risk. These Iields come in diIIerent categories: Current issues are those which command the attention oI businesses, politicians, and media today. Latent issues only start to be addressed by stakeholders. Their transIormation process is still underway. It can be said Ior sure in which time (or as a matter oI Iact whether at all) this process shall result in a current Iield oI competition. Finally potential Iields relate to those impacts on which no stakeholder group has made any claims yet. 2.1. Social and Environmental Impacts Analyzing the social and environmental impacts oI corporations is a demanding task. So Iar only Iew accepted instruments exist to assess such impacts in a systematic way. In the environ mental domain instruments such as the Environmental Impact Assessment (EIA) or LiIe Cycle Analysis (LCA) are still in the process oI being developed, although standards (such as the ISO 14040 series) oIIer some orientation on general questions. Starting Irom mere input/ output inventories the discussion has evolved to a point where agreement has been Iound regar ding the assessment oI several global impacts such as the global warming potential (GWP), or the ozone depletion potential (ODP) (e.g. CML, 1995: 34, Ayres, 1995: 4). Nonetheless many local impacts such as land use or noise emissions remain notoriously diIIicult to assess (e.g. Mller-Wenk, 1999b). Even more disputed remain attempts to aggregate diIIerent impact categories to total scores (as, Ior example, in the case oI Eco-Indicators 1998 and 2000). The social dimension is yet more diIIicult to assess. In recent years attempts have been made to reestablish a social auditing and accounting discipline (e.g. Zadek and Raynard, 1995; Gray et al., 1996; CEPAA, 1997; Zadek et al., 1997; PWC, 1999). First reports have surIaced that try to assess the social impacts oI companies (e.g. SBN Bank, 1990; Ben & Jerry's, 1995; Body Shop, 1997; BP, 1997; Shell, 1998). Nonetheless some time will pass beIore we see the emergence oI a global standard comparable to the ISO 14,000 series. Dyllick et al. (1997: 9-10) suggest Iirms aiming at a comprehensive impact assessment should meet the Iollowing requirements: They must take into account a life cycle perspective even beyond their own Iactory gates. Too oIten companies have ignored upstream impacts (e.g. raw material extraction or child labor at a supplier) or downstream impacts (e.g. product disposal or usage). They must also include all potentially relevant impacts. This requires a systematic ap- proach that goes beyond the mere 'issue management' many companies have in place to- day. Firms should accordingly involve actively all stakeholders to identiIy not only current issues but also understand potential and latent problems. At the same time they must nonetheless seek to reduce complexity. Given the lack oI a comprehensive method to assess social and environmental impacts in an easy to handle way, they must take care not to be overwhelmed by the shear amount oI data and inIormation. But isn't this contradicting the two Iirst requirements? Not necessarily! To understand the current, latent, and potential problems in a Iirm's competitive Iield a 'screening analysis' oI all relevant impact categories over the liIe cycle can suIIice (Dyllick 8 et al., 1997: 10). Only later stages may require more sophisticated tools to assess corporate impacts on sustainability. Firms must meet two last requirements: Their tools should remain easy to handle by non- specialist line managers and they must be relevant to decision makers in businesses Iitting into other strategic management tools. 2.2. Stakeholder Perceptions and Demands Many contributions to the corporate sustainability debate are satisIied with analyzing the social and environmental impacts oI corporations. For the "logic oI transIormations" these are, however, only the starting point. In order to understand the process oI transIormation one must also consider which stakeholders are concerned about an impact and how they voice this concern. The logic oI transIormation diIIerentiates three systems allowing any person Ieeling aIIected by a Iirm to voice its concern (Dyllick et al., 1997:27-28; Dyllick, 1990: 127-229): The market is oI course the most direct way Ior stakeholders to make their concerns Ielt. A product boycott is one example how stakeholder groups can make companies listen to their concerns. By hitting directly at the bottom line they endanger the economic sustainability oI companies. A more subtle way is the boycott oI a Iirm as an employer. Once a company can only recruit the 'high potentials' Ior its R&D operations at an extra premium it will start to reconsider as well. II stakeholders can not directly inIluence the market (Ior example because the stakeholder group is to small to make a boycott Ielt to a Iirm) politics is a second system that allows to put pressure on corporations. Lobbying Ior tougher regulation, increased taxes, or in some cases even the ban oI a Iirm can be results oI this systems activation against a Iirm. Such consequences are oI course Ielt on the market and thus touch again the economic sustainability oI a Iirm. Finally the public opinion remains the last resort Ior stakeholder groups that can neither impress the market nor politics with their concerns. By swaying public opinion stakeholder groups can seriously damage the acceptance and legitimization oI a corporation. OI course the public reputation oI a Iirm must not have direct eIIects on the economic sustainability oI a Iirm. But in most cases a scornIul public will also aIIect politics and the market. Whether a stakeholder group is relevant Ior a Iirm or not relies on two Iactors: First it must be concerned by a social or environmental impact caused by the company and secondly it must be able to make its demands Ielt through one oI the three systems. The link between impacts and related claims must not always be 'logical'. In Iact oIten stakeholder groups get all worked Shell: 'Sound' Science versus 'Acceptable' Science Based on a 3-year scientiIic analysis (including an environmental impact assessment) Shell in 1995 decided to dump its Brent Spar platIorm in deep-sea rather than to disassemble it on land. Environmentalists opposed the idea. Shell, however, dismissed the critics argueing that it had applied sound scientiIic judgement and chosen the solution with the least environmental impacts. However, in the wake oI this major PR Iiasco Shell learned that 'sound science' was not enough it had to be 'acceptable science' as deIined by its stakeholders. 9 up about an issue which is 'objectively' harmless while other topics with a higher potential to impact sustainability are ignored. 2.3. The Competitive Field The logic oI sustainability transIormation Iinally draws on competitive theory to explain how changing rules within an industry sector or a strategic group change the competitive Iield. Companies which anticipate these changes and adapt their strategy accordingly will be able to realize competitive advantages. II they don't act existing competitors or new market entries may seize the opportunity. Hesitant Iirms risk also to lose market share to an unexpected sub- stitute product or changes in consumer behavior. Dyllick et al. (1997: 6-62) stress that the eIIects a sustainability issue has on the competitive Iield underlie a liIe cycle. While the im- pacts are rather small early on they accumulate over time until they start to decline again. Competitive opportunities Irom the transIormation oI sustainable issues may either arise as cost advantages or as increased product quality. Furthermore, Iirms should look out Ior rela- tive advantages as well as absolute competitive advantages (see Table 1). Cost Advantages Differentiation Advantages Relative Changes in the competitive Iield induce cost increases Ior all actors in the competitive Iield. Corporate sustainability strategies can, however, allow Iirms to meet the new require- ments at relativelv lower cost. However, the advantage is lost again when the transIorma- tive inIluence recedes and the competitive Iield returns to its original cost structure. Changes in the competitive Iield oIIer possibi lities to diIIerentiate products based on sus- tainability-related criteria. These opportu- nities, however, rely on prior changes in the competitive Iield and are lost when the transIormative inIluence ends. Absolute Changes in the competitive Iield have a discovery Iunction. They change the pers- pective oI a company and thus allow to Iind economic improvements which were over- looked so Iar. The new perspective allows to realize cost advantages that set oII the investment costs and even yield a positive return when the transIormation which induced the discovery is non-permanent. Changes in the competitive Iield change the perspective oI a company and alert it to new market chances which had not been seen so Iar. This discovery Iunction oI sustainable innovations creates new competitive space which may persist even iI the transIorming inIluence is non-permanent. Table 1: Sustainability-Induced Changes in the Competitive Field and Resulting Possible Advantages To illustrate the concept oI relative cost advantages one might consider a transIormative inIluence imposing higher costs on all Iirms in a competitive Iield. A Iirm that can adapt better to the new situation will obtain a relative cost advantage over competitors which continue to operate in the traditional way. Such a change in the competitive Iield could, Ior example, be caused by the introduction oI an energy tax. Companies having already in place processes to ensure a high energy eIIiciency would be less hurt by the tax than competitors who have igno- 10 red the topic so Iar. A Iirm having already experimented with shorter working hours and job sharing would also have advantages in the case oI labor laws limiting the maximum number oI working hours per week. Firms may, however, lose their advantage iI competitors succeed in externalizing the newly imposed costs. They might, Ior example, move their production Iacili- ties in countries with less regulations and thus avoid paying the extra costs. Besides relative cost advantages Iirms can also obtain relative product differentiation advantages: Responding to a growing concern among consumers about suppliers in the Third world has, Ior example, prompted several Iirms to sell products with a 'Fair Trade' label at a higher price than normal products. Relative market advantages are 'added value' Irom a customer perspective. Clients will not buy the product Ior the sustainability Iunction only. However, given otherwise identical products and services the sustainability argumentation helps to diIIerentiate. Increasing environmental sensitivity as well as rising Iuel prices, Ior example, oIIer Iirms an advantage iI they can provide their customers with smaller and more Iuel-eIIicient cars. However, the advantages perish (and may indeed become a liability) in markets with an unchanged competitive Iield. This explains, Ior example, why auto makers eagerly introduce Iuel eIIicient cars in Europe (where both environmental sensitivity and Iuel prices are relatively high) while they introduce bigger and heavier cars in the United States (where environmental concerns as well as Iuel prices give opposite signs to the market). So Iar the sustainability debate has been mainly dominated by a discussion about relative com- petitive advantages. However, in some cases transIormation may even induce absolute compe- titive advantages to a competitive Iield. Absolute cost advantages, Ior example, may emerge when a sustainable innovation reduces the cost below the level which a company enjoys that can externalize its environmental and social costs. This implies that the costs oI a sustain- ability-related investment are not only lower than the costs a competitor has to bear due to the transIormed competitive Iield (as would be in the case oI relative advantages); the investment even creates a positive return in an unchanged competitive Iield. Rising disposal costs, Ior example, have prompted many Iirms to investigate and optimize their material Ilows. In this process many Iirms have Iound that the internal procurement, inventory, and handling costs oI waste can be much more relevant than the mere disposal costs. Thus the rising disposal costs have had a discovery Iunction. Yet even iI disposal cost were to Iall again this would not challenge the cost advantages achieved internally. Absolute product differentiation opportunities arise Irom sustainable innovations that help to identiIy customer demand, which had not been understood beIore. With other words, it helps to meet unarticulated client needs. The Smart car, Ior example, had been introduced by Daimler-Chrysler originally as a 2-seater aimed at young and trendy people who did not want a large and environmentally questionable limousine. Only aIter they had launched the product they Iound that besides the intended target group the Smart is also bought by elderly people who do not need large and Iast cars. 'By accident' a new market niche had been discovered. Similarly banking Iirms wanting to improve their social reputation Iound that by Iocusing on the very poor, they can nonetheless open up new and proIitable market segments which had so Iar been overlooked. 11 2.4. Do Win-Win Opportunities exist? While relative improvements are easy to understand absolute advantages are less intuitive: Why should sustainable innovations lead to optimizations that could also have been exploited without an explicit environmental or social motivation? Surely somebody would have already exploited this opportunity iI it really existed? Actually many economist Iollow this line oI argu ment in assuming that economic systems usually are very near an optimum state (the so called Walrasian equilibrium, Ayres, 1997: 7). Walley and Whitehead (1994, 46), Ior example, cate- gorically reIuse the existence oI absolute opportunities or 'win-win' solutions: "Questioning today's win-win rhetoric is akin to arguing against motherhood and apple pie. AIter all, the idea that environmental initiatives will systematically increase proIitability has tremendous appeal. UnIortunately, this popular idea is also unrealistic. Responding to environ- mental challenges has always been a costly and complicated problem Ior managers. In Iact, environmental costs at most companies are skyrocketing, with little economic payback in sight. |...| To achieve truly sustainable environmental solutions, managers must concentrate on Iin- ding smarter and Iiner tradeoIIs between business and environmental concerns, acknowledging that, in almost all cases, it is impossible to get something for nothing." According to this position no absolute business opportunities Irom sustainability exist. Firms can only aim at Iinding "smarter and Iiner tradeoIIs" (ibid). With other words they must con- centrate on relative opportunities. They can try to gain advantages by handling costs imposed by sustainability better than their competitors. But they can never reach a position in which they are absolutelv better oII than they were beIore the change in the competitive Iield hap- pened. OI course, this position is not unchallenged. Reinhardt (1999: 83), Ior example, agrees with Walley and Whitehead in pointing out that not everv investment in environmental protection oIIers a double dividend. But he neither rules out that such possibilities may exist: "Does it pay to build your next plant in Singapore? To increase debt-to-equity ratio? To sue your competitors Ior patent inIringements? The answer, oI course, is 'It depends.' And so it is with environmental questions. Much writing about business and the environment ignores that basic point. The underlying assumption is that the earth is sick and that thereIore it ought to be proIitable to Iind ways to help it return to good health. At the same time the opposite stance that it never pays Ior a company to invest in improving its environmental perIormance is also incorrect." The assumption oI a Walrasian equilibrium is indeed rather weak (e.g. Ayres, 1994). II it were correct no company should be able to achieve a long-term above average return. Indeed no investment (be it a plant in Singapore or a sustainable innovation) could expect to reap anv exceptional proIit opportunities at all. Ayres (1997: 7), thereIore, points out: "|II the Walrasian equilibrium was true|, when a scientist or engineer identiIied an opportunity to save energy, or reduce pollution, while simultaneously reducing costs, the believers in equilibrium would say that the opportunity is probably illusionary, because there must be hidden costs that the scientist or engineer Iailed to take into account. II the opportunity were real some entrepreneur would have taken advantage oI it. Obviously, in such a world it is hard to Iind win-win opportunities. But that is not the world we live in." 12 Consider, Ior example, logistics or quality management. For long they were thought oI, as being perIectly boring parts oI operations manage- ment. OI course, marginal advanta- ges could be achieved by squeezing these activities yet a bit more. But surely no exceptional opportunity could be realized here? This assum- ption was turned on its head when in the 1990s ideas such as total quality management, and just-in- time logistics emerged. Suddenly huge cost opportunities were unco- vered and companies Iell over their Ieet to realize these advantages. However, this bonanza was not caused by externally induced changes in logistics costs. In the very contrary the opportunity had been waiting Ior industry to exploit it. Already well over a decade beIore the US-American (and even later the European) industry woke up to the challenge oI quality management and just-in-time logistics, Japanese Iirms had been silently reaping beneIits Irom systematic quality management and logistics management. 2.5. The Life Cycle of Sustainability Issues The diIIerentiation between relative and absolute advantages is relevant because it has impor- tant consequences Ior the "durability" oI a sustainability strategy. Firms aiming Ior relative ad- vantages will only do so while the competitive Iield remains changed in the Iavor oI sustain- ability. However, we have already experienced quite oIten that the competitive Iield may also change back again. For example, concern about environmental issues peaked in 1970 only to recede over the next decade. It was Iorced back on the corporate agenda in the late 1980s only to retreat again the early 1990s in the Iace oI economic recession (HoIImann, 1997: 144). Concern Ior corporate social responsibility experienced a similar Iate. It boomed in the 1970s, however, interest in the topic dropped on the eve oI the second environmental wave. Now corporate social responsibility is set to win back its erstwhile position (Zadek et al., 1997: 16- 19). It even seems possible that it may relegate environmental issues to second place in the public concern about sustainability. This leads to an important second realization about the eIIects sustainability issues can have on the competitive Iield: They usually undergo a liIe cycle (Figure 3). "Put On Your Creen Classes" Hans KorImacher responsible Ior waste management and "Green Field Eco-Innovations" at 3M Deutschland explains how double dividends can be Iound (interview, 1999): "For years you look at your warehouses and see nothing but dusty shelves. Then you put on the 'just-in-time spectacles' and suddenly you see a chance to reduce costs. The same is true Ior ecological innovations. Unless you introduce a new perspective you will be blind to the hidden competitive advantages oI environmental protection. To identiIy the opportunities inherent in environmental protection, one must make it an explicit priority." KorImacher knows what he is talking about. Long beIore eco-eIIiciency became Iashionable his company invented the "Pollution Prevention Pays" (3P) program. Since its inception in 1975 until 1995 the program is reported to have originated 4,450 projects and thus generated Iirst- year savings oI more than US$750 million. This translates into average Iirst year savings oI US$170,000 per project (3M, 1999). 13 growing mature decline issue becomes 'hygiene factor' and is accepted as the cost of doing business; no more positive recognition strong competition for recognition as proactive latent emerging Relevance of the issue as a competitive advantage leader advantages for best practice selected pioneer advantages for 1st mover possible potential threat, so far no costs or profit associated Figure 3: Typical LiIe Cycle oI Sustainability Issues and Their InIluence on the Competitive Field Source. Adaptation of Dvllick (1990. 246) Actually most corporate social or environmental impacts are irrelevant to the competitive Iield when they surIace. As none oI the three transIorming systems (market, politics, or public) has yet started to worry about the impact it remains latent. In this phase to do nothing about the issue will not induce costs on the company. Firms that act proactively (Ior example, because they Ieel ethically obliged) can not reap any proIits Irom this. Any investment in easing the social and environmental consequences oI the corporate impact generate a Iinancial loss. Later when Iirst players start to pick up the problem (e.g. an article is published in a scientiIic journal, or a concerned citizen writes a letter to the local newspaper) the issues start to emerge and begin slowly to transIorm the competitive Iield. In this phase some Iew pioneers can reap beneIits Irom acting proactively. Actually, at this point oI time a mere token initiative can be enough to generate a considerable amount oI goodwill. Companies that have, Ior example, proIited Irom a pioneer stance on environmental and social issues are the Body Shop and Ben & Jerry's. Both Iirms have been early movers on such issues as corporate discrimination, Iair trade, recycling oI production and product waste etc. Indeed their image among consumers and investors is still that oI environmental and social pioneers, although their overall perIor- mance has long been exceeded by Iirms that have entered later in the move towards sustain- ability. Based on this incongruency between image and action several activist have started to accuse them oI hypocrisy. The issue, however, underpins the Iact that early movers may gain long-term good-will putting them at a competitive edge against their rivals. Competitive advantages (e.g. higher proIits or reduced costs) accumulate as the issues grow. Now token initiatives will no longer be accepted as suIIicient by the transIorming powers. Firms have to compete Ior a leading position. In this phase usually award schemes are intro- duced to laud the 'best practice' in the industry sector. On the other hand Iirms that have been 14 inactive until now, may Iace considerable costs as NGOs, politicians, and consumers start to turn viciously anti-business concerning the issue at hand. At this point usually all Iirms in the competitive Iield are inIluenced by the transIormation oI the competitive Iield. The issue has matured. In order to realize competitive advantages in the late phase Iirms have to compete Iiercely. On the other hand, businesses that were able to thwart extra costs so Iar (e.g. because they were to small to be considered by activists, or be- cause they had been able to appear inconspicuous) now get also drawn into the dispute as well. Eventually, public interest in any issue is bound to decline at some point. However, this does not mean that the issue disappears Irom the corporate radar screens. It has merely become a "hygiene Iactor". The expenditure related to the issue is accepted by everybody as the cost oI doing business. On the other hand taking a proactive stand will no longer raise much attention. 'Equal opportunity employment', Ior example, can be seen as an example Ior a recent issue oI concern about corporate behavior that is on its way to become a hygiene Iactor. A Iirm stressing in its job advertisement that it is encouraging women and minorities to apply, will no longer receive any positive consideration. On the other hand being Iound to have discriminated against an employee on the grounds oI sex, race, or religion, usually comes at a high cost to businesses. The knowledge oI the liIe cycle oI issues relating to corporate sustainability is highly relevant to managers because it deIines their zone of discretion (Ackerman and Bauer, 1976: 38-39). Managers Iacing latent or emerging issues have a variety oI options available Ior the approa- ching problem. Their options are narrowed down or even eliminated as the issue matures and the transIormation oI the competitive Iield dramatically reduces the alternatives they can chose Irom. While early action may come at relatively low costs but a high uncertainty, inactive managers risk to pay a higher price iI they get caught in the act later. The liIe cycle described above is, oI course, an ideal development. Three important atypical pathways shall be mentioned brieIly. Firstly, the decline oI an issue as a competitive Iactor does not mean that the problem has been completely mended! The impact may well persist in a reduced Iorm once the transIormation oI the competitive Iield is over. In such a case the issue may be subject to a revival in the Iuture. A topic that has come back to haunt industry very recently is the demand to publish social accounts alongside their Iinancial reports. Such demands had been vivid in the 1970s and lead to the inclusion oI a chapter on workers rela- tions in most annual reports (and some rare cases even to the publication oI social reports). Now calls Ior social audits and reports are back (e.g. Zadek et al., 1997). Firms can also try to prevent an issue reaching maturity by taking a preventive stand and eIIectively "hijacking the agenda" (WelIord, 1997). A possible backdoor to deflect public con- cern, Ior example, can be voluntary industry agreements. By opting Ior a coordinated approach early on, industry associations can avoid the transIormation oI the competitive Iield to some degree. Voluntary industry agreements have, Ior example, delayed and weakened attempts by the EU to introduce take-back regulations on old electronic products and cars. Industry codes oI conduct Ior suppliers and subcontractors to the apparel industry in the developing world try to reach the same goal (Economist, 27 February 1999). 15 Finally issues that have been transIormed to hygiene Iactors can also be countered by a back- lash. Many 1 st world labor standards (e.g. a quasi non-layoII politic, high social beneIits) were challenged in the 1980s/1990s. What had been considered 'cost oI doing business' was ques- tioned by Iirms and today many workers are worse oII than they were beIore the roll back. back-lash revival an issue that had not been completely solved bounces back into the public arena a roll-back in the competitive field undoes the achieved transformation deflection Relevance of the issue as a competitive advantage voluntary industry agreements to avoid further transformation Figure 4: Some Deviations From the Typical LiIe Cycle oI Sustainability Issues 3. TOWARDS A CORPORATE SUSTAINABILITY BALANCED SCORECARD The logic oI transIormation has made it plain that a strategy oI corporate sustainability can oIIer both relative and absolute business opportunities. However, most Iirms lack systematic instruments to develop sustainability startegies that Iit into their overall business startegy. Too oIten environmental or social policy are draIted by special committees or departments that do not take into account (and sometimes aren't even aware oI the) Iinancial corporate objectives. Examples oI successIull integration oI either eco-eIIiciency or social productivity into Iinan- cial controling remain the exemption rather than the rule. Most environmental and social management systems are separeted Irom the traditional controlling processes "like Iree spinning wheels", as a manager at an important multinational has put it recently in a workshop on the topic. A second important shortcoming oI the existing environmental and social controlling systems lies in the Iact they oIten Iocus on "lagging" indiactors only. Such indicators assess environ- mental and social impacts aIter they have occured. Also they can only consider competitive issues that are already mature or even declining. Thus they are very bad evidence to decide on Iuture strategies. Considering what has been said earlier about the liIe cycle oI sustainability controlling system must mix lagging with leading indicators which allow to recognise shiIts in the competitive Iield ahead oI time. Furthermore, Iirms that want to know what their impacts will be in the months and years to come must add the drivers oI environmental and social impacts to their radar screens as well. There is another important reason why Iirms should act integrate their environmental and social accounting systems with the Iinancial controlling: AIter a decade in which business has 16 rather Ireely invested in environmental management systems and corporate social responsibili- ty, senior environmental and ethics oIIicers Iace increasing demands to justiIy exactly how the magic oI "eco-eIIiciency" and "social productivity" shows up in the bottom line. Sustainability activities must become more relevant to the top management. StraightIorward tools are sought that allow to tie environmental and social perIormance indicators (both Iinancial and non- Iinancial) into the traditional business planning processes. A tool with the capability to do so, may be the Balanced Scorecard, developed by Kaplan and Norton in the early 1990s. It allows to communicate to the top management both quantitative and qualitative data in a meaningIul way. This happens via a management cockpit that makes transparent the eIIects oI a management decision in the Iinancial perspective, the process per- spective, the client perspective, and the development perspective. By drawing together qualitative and quantitative indicators the Balanced Scorecard may prove a valuable tool Ior Iirms to manage their sustainability strategy. In general there are three possible applications Ior the Balanced Scorecard: Firstly, Iirms can build selected bridges between their environmental and social accoun- ting systems and the existing Balanced Scorecards. Such approaches would usually look at only one or two dimensions oI the Balanced Scorecard in which environmental or social impacts are oI speciIic strategic relevance. Here they would add two or three core sustain- ability indicators to the Balanced Scorecard. These indicators would then be the Iirm's main gauge Ior their most important sustainability problems. Chemical companies, Ior example, oIten consider environmental and saIety indicators in their process perspective. Service Iirms, on the other hand, tend to integrate social indicators into their development perspective in order to account Ior human and stakeholder capital. The disadvantage oI such an approach lies, oI course, in the Iact that the majority oI sustainability issues remains outside the traditional controlling system and within the environmental or social department. The Center Ior the Management oI Environmental Resources (CMER) is now conducting a research project in the current application oI this option in business practice. Results Irom this review are expected by Spring 2001 and will be published in Summer 2002. A second approach would go Iurther by completely integrating environmental and social accounting systems into the Balanced Scorecards. Such a comprehensive approach has the advantage that sustainability is not only reduced to one or two core indicators. In this approach all divisions would have to develop and report their own Sustainability Balanced Scorecards. As a consequence corporations can much better align their sustainability strategy with their overall strategy. The disadvantage lies, oI course, in the enormous complexity oI such an endeavor. Only the most committed Iirms will be able to achieve such an ambitious goal. The IW-HSG at the University oI St. Gallen is now starting a two year research project with eight German and Swiss Iirms looking into this topic. Yet there may still be Iirms that do not have a Balanced Scorecard or that want to keep the environmental and social accounting separated Irom their global Scorecard Ior the time 17 being. They may nonetheless develop a "stand-alone" Sustainability Balanced Scorecard to be used by the Environmental or Social Department internally. It would be primarily intended to help these departments to elaborate, implement, and control their sustainability strategy. By illustrating the sustainability strategy across all Iour perspectives such an approach may help considerably to improve the sustainability management. The Iollowing Iigure 5 illustrates how a balanced scorecard may help to eIIectively communi- cate and control decisions pertaining to ecological sustainability in the Iirm. SustainabIe Profit lagging indicators Top Line Growth (turn-over driven by environmental excellence) ROCE (Return on Capital Employed) Bottom Line Efficiency (Raw material and energy cost, waste disposal, eco- taxes, fines, insurance) SustainabIe Market Growth Eco-Niche Strategy (Customer acquisition) Greening the Mass Market (Customer retention) SustainabIe Processes and R&D leading Eco-Design and Eco-nnovation (Systems innovation, disruptive techno- logies, design-for- remanufacturing) Life Cycle Assessments (Supply chain optimisa- tion, impact reduction from 'cradle to grave', global perspective) Envir. Managm. Systems (EMS) (Plant-specific energy & material reduction, waste revalorization, pollution prevention) indicators SustainabIe CapabiIity DeveIopment Ecological Co-operations ("Uncomfortable partnerships" with environmental pressure groups, borrow ecological know- how from academic partners) Ecological Capability Base (Ecological know-how, skills and motivation; employee suggestion schemes; availability of key tech- nology; room for innovation) Eco-Marketing Eco-Efficiency Strategic Intent (Sustainability as a systematic element of the corporate culture; clear signalling of the priority for sustainability on all levels) Figure 5: Illustrative Example Ior an Eco-EIIiciency Balanced Scorecard 18 The example starts Irom a Iictive objective Ior the financial perspective (in this case the return-on-capital-invested, ROCE) and breaks this down in two possible ways to achieve this goal. Focussing on bottom-line eIIciency eIIects oI environmental stategies Iirms may want to assess and control such indicators as material and energy costs, waste management, handling and disposal costs, eco-taxes, Iines, or environment-related insurance costs. By setting cost reduction targets and Iollowing them over time they can see how eco-eIIiency helps to keep costs down. By projecting these costs into the future (taking into account potential changes in the competitive Iield) Iirms may also add some leading indicators to these considerations. On the other hand the eco-eIIiciency strategies may also drive top-line growth. In the market perspective this may be achieved through an eco-niche startegy that aims at winning new customers with a high concern Ior environmental quality. Possible indicators may be the sales growth oI dedicated eco-products, or the mark-up customers are willing to pay Ior "green" products. However, as the eco-niche potential is limited in most markets Iirms may also aim Ior a strategy oI greening the mass market. In this approach Iirms slowly add environmental improvements to their existing product line. Usually these subtle changes will not be the decicive reason Ior customers to chose a product. However, by adding environmental quality to the overall list oI selling propositions Iirms may be able to bind their existing clients yet a bit more to their products. Indicators may the awareness among clients about environmental attributes oI speciIic products as well as the general image the company has as being green or sustainable. In the process dimension Iirms may look at three diIIerent strategic elements. Environmental management systems may be monitored Ior the impact they have on process optimization and material Ilow management. Such an assessment would mainly Ieed into Iinancial bottom-line eIIiciency. However, indicators may also be chosen in respect to the products at hand. Life cycle analyses (LCA) may contribute to both bottom-line eIIiciency and top line growth. By taking a liIe cycle perspective LCAs also allow Iirms to Ioresee problems in their supply chain early on and to prepare Ior alternatives. Indicators may either assess direct impacts (e.g. accu- mulated global warming potential, total eco-indicator scores) or take a more indirect approach by monitoring the number oI products Ior which (screeing) LCAs have beeen conducted, or the number oI suppliers that systematically provide LCA inventory data. Finally eco-design controlling allows to assess the potential Ior ground-breaking product innovations thus prima- rily contributing into eco-marketing. However, Xerox' proactive remanuIacturing programme (which was build on a major product innovation project) has also demonstrated that eco- design eIIorts can also reduce costs considerably. Finally the capability development perspective considers how Iirms build up their internal ecological know-how base. Indicators include the amount oI environment-related employee suggestions, the motivation oI staII to consider the environment as important, or an atmosp- here oI eco-innovation and eco-intraperneurship. However, as environmental problems are changing Iast and Iirms can not have the required skills and capabilities available at any time a second dimension might reIer to the extent to which Iirms suceed in borrowing skills Irom external partners. Indiactors may track the amount oI "uncomIortable partnerships" (e.g. with pressure groups) or the number oI academic research projects in which the company is involved. 19 4. CONCLUSIONS The paper has Iurther developed the logic oI environmental transIormation and applied it to the wider area oI social responsibility and corporate sustainability in general. It has detailed the elements oI this model and then described the Balanced Scorecard as one potential tool to elaborate, implement and control a corporate sustainability strategy. The research pertaining to the Balanced Scorecard is still at a very early stage and Iurther eIIorts will be required to understand the potential and limitation oI this tool Ior corporate sustainability management. Questions that remain to be answered by Iuture research include: To which extent is an integration oI environmental and social controlling into the Balanced Scorecard practical and possible? How can Iirms better learn to develop and track leading indicators that help them to identiIy transIormations oI the competitive Iield early on? Where are the limits oI linking environmental and social indicators to the Iinancial perIor- mance? What are the business options beyond win-win strategies? Can Iirms actively embrace suIIiciency and ethical strategies? 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