SUSTAINABLE MANAGEMENT
Integrating Sustainable
Development in Corporate Strategy
Norwegian School of Management
1996
ABSTRACT
Sustainable management
is defined as value focused management based on a vision of creating a
sustainable enterprise in a sustainable society. The article describes the
integration of the goal of sustainable development in corporate strategy. The steps in the strategy process are
discussed and relevant management models are presented.
The
basic idea in the article is that sustainable management demands a three
dimensional management system including the environmental, social and economic
dimension. The conclusion is among other things that sustainable management is
an extended ethical responsibility
where there is no distinction between business, ethics and politics. The
superior goal will be sustainability,
which involves satisfying all stakeholders, instead of a bias towards profits
or value maximisation for the present owners.
1. INTRODUCTION
1.1 New challenges for the market economy
Choosing
strategy is a decision under uncertainty. Strategic decisions involve a long term
perspective. If the strategy is to be successful, the future has to be
estimated somewhat correctly regarding trends in society and market
development. According to Saemann (1992) the market economy has survived
because it has proven to be flexible and able to integrate constantly new
claims and dimensions:
Figure 1: New challenges for the market economy.
Today
the claim of a social and ecological market is expressed through the goal of
sustainable development. There are many indications that this will be an
increasingly more important goal for the society. I will not discuss this, but
take this as a premise. Then companies wanting to think in long terms ought to
relate their strategy to the goal of sustainable development. This article
describes how this can be done.
1.2 Sustainable development and management
This
paper is based on a previous article Sustainable
Development and the Concept of Profitability (Svae, 1995), which discusses
and defines the basic concept sustainable development in more detail:
Sustainable
development is improving the human quality of life while living
within the carrying capacity of supporting ecosystems (UNEP, IUCN and WWF)
(WRI, 1992).
The
premise of this article is that the company wants to be pro-active. That means
to be in the forefront of the process of creating sustainable development. This
has been suggested for companies for instance by the International Chamber of
Commerce (1991). When environmental management is systematically related to the
goal of sustainable development, I name it sustainable management.
Sustainable management is value focused management
based on a vision of creating a sustainable enterprise in a sustainable
society.
1.3 The strategy process
I will
describe sustainable management as management
philosophy and relate it to the steps
in the strategy process (Johnson and Scholes, 1993) (Roos et. al., 1994):
1. Preference analysis (Choosing vision,
business idea and goals)
2. Strategic analysis (Situation analysis and identifying strategic
alternatives)
3. Evaluation (Consequence analysis,
evaluation and decision making)
4. Implementation (Planning, implementation
and control)
2. PREFERENCE ANALYSIS
2.1 Vision
The
vision is the guiding star of the company. Where do they want to be in five to
ten years or even longer ahead? By sustainable management the vision is to
become a sustainable enterprise in a sustainable society. In addition the
company will have its specific vision related to its business idea. This might
be expressed for instance as:
XXX's
vision is to become the leading producer of YYY in market ZZZ,
and
by this contribute to sustainable development.
2.2 Business idea
The
business idea describes what the company does and from what it earns its
income. Traditionally business ideas have been production oriented
(produce, supply) or market oriented (selling, marketing). This ties
the company's thinking to a specific product or market. This might be a
disadvantage in the process towards a sustainable society. It is not unlikely
that production processes, products and markets will vanish in the process.
Then it is important that the company does not go the same way.
In
sustainable management the business idea ought to be related to the goal of
sustainable development, that is to increase the quality of life with less
environmental degradation. The business idea will then be needs oriented (satisfy
needs or functions), which implies a more fundamental perspective of the
business. A car producer might for instance gradually redefine itself to be a
supplier of passenger transport means and services. It is more probable that
man always will want or need to travel than that the sustainable society's main
transportation system will be private cars.
2.3 Goals
By value
focused management (Keeney, 1992) the goals shall insure movement in direction
of realising the vision. The goal of sustainable development and management is
to increase the quality of life. In the previous article (Svae 1995) four
definitions of quality of life are discussed. The analysis here is based on
a holistic definition of quality of life. The quality of life is then
assumed to be a function of the standard of living, environmental standard,
satisfaction of inner needs and the level of consciousness. This is
defined more precisely through the theory below:
Table 1: Svae's life dimension oriented theory of needs
|
DIMENSION |
EXAMPLES OF NEEDS |
|
|
Spiritual Mental Emotional Body |
Meaning, creativity, higher consciousness Learning, understanding, controlling Love, respect, support etc. Rest, activity,
sensuality, sexuality etc. |
Standard of life Demands time and
ability to satisfy needs |
|
Ecological |
Input: Air, water, nutrition and radiation. Output:
Discharges. Basis:
Preservation of the ecological niche. |
Environmental standard Demands
sustainable development |
|
Material |
Goods and services that: - Make life more pleasant, exciting etc. - Give status,
self-esteem etc. |
Standard of
living Demands
production and consumption |
The
theory of needs allows a more precise thinking based on quality of life as the
goal. According to the theory of needs, quality of life becomes a three-dimensional goal consisting of red
(standard of life), green
(environmental standard) and blue
(standard of living) values. From
this a goal hierarchy can be defined.
Table 2: A goal hierarchy for sustainable management
GOAL: Contribute to sustainable development, that is
improving the human quality of life while living within the carrying capacity
of supporting ecosystems.
OBJECTIVES:
1. MAXIMISE THE STANDARD OF LIFE
1.1 Maximise
time for satisfaction of needs
(That
is spiritual, mental, emotional and body-related needs)
1.2 Maximise
the level of consciousness
(That
is the connection with the real needs and ability to satisfy them)
2. MAXIMISE THE ENVIRONMENTAL STANDARD
2.1 Maximise
internal environmental standard
=
Minimise violation of health standards.
2.2 Maximise
external environmental standard
=
Minimise violation of ecological standards.
3. MAXIMISE THE STANDARD OF LIVING
3.1 Maximise net profits per unit
3.2 Maximise market share
3.3 Maximise long term competitiveness
3.4 Maximise employment
3.5 Maximise income distribution
The
objectives of a value focused goal hierarchy shall be open goals (Keeney, 1992), that is always wanting more or less of
something. The goal hierarchy defines the ideal alternative. In reality the
goals are always in conflict and involving a situation of evaluation. The goal
hierarchy is the basis for the evaluation of the strategic alternatives. This I
will come back to. The general goal hierarchy can serve as a frame of reference
in sustainable management. For a specific company, it has to be changed
according to the company's own values and the specific decision to be made.
Regarding standard of living, some might find the objectives of maximising
employment and distribution of income strange. These objectives relate to the
equality aspects of sustainable development. But remember that the objectives
are in conflict and have to be evaluated against other objectives as net
profits, competitiveness etc..
3. STRATEGIC ANALYSIS
3.1 The ladder of sustainable management
After
the preference analysis the next step in the strategy process is situation
analysis and to identify the strategic alternatives. In sustainable management
the purpose of the situation analysis is to identify how far the company has
come in the process of becoming sustainable. This might be summarised as a
ladder from complying with public regulations, via relative improvements (being
better than others) to absolute improvements (comply with standards, that is
becoming sustainable).
Table 3: The ladder of sustainable management
LEVEL ENVIRONMENTAL
SOCIAL
FINANCIAL
DIMENSION DIMENSION DIMENSION
3) Strong Ecological
sustainability: Social
sustainability: Financial
sustainability:
Living
within the carrying Internal
and external peace: Long
term value creation in
capacity
of the supporting Trust,
cooperation and the
green, red and blue
ecosystems,
including a creativity
creates dimensions
(sustainability)
fair
distribution of the satisfaction
of needs and always
prior to short term
worlds
resources. win-win
situations. profitability
in all decisions.
2) Weak Environment
as a market Needs-
and customer- Financial
profits through
strategy.
Pollution preven- orientation
in management value
creation in the forefront
tion.
Waste minimisation. of
the society in all dimensions
1) Very Comply with
public Comply
with public Profit
maximisation
weak HES-regulations social/work
regulation, within
today's public
union
demands etc. regulation
and ethics
0) No Environmental Social
irresponsibility Profit
maximisation
Sustain- irresponsibility
or or
criminality. via
ethical irresponsibility
ability criminality. or
economic criminality.
The
different aspects of each level have to be further specified and analysed related
to the specific company. Afterwards this has to be related to the traditional
situation analysis of resources (strength and weakness) and of the competitive
environment (opportunities and threats). From this the possible strategies are
identified. In sustainable management the task is to climb in the ladder of
sustainable management, and at the same time maintain or improve the financial
situation. Climbing the ladder, the company ethics and basic values will change.
The attitude changes from regarding red and green values only as means of creating profits, to gradually
regarding them as goals in themselves.
In the following I will explain the levels in the three dimensions in more
detail.
3.2 Three levels of ecological sustainability
If the
company so far has been opposed to new regulations, the first step is to begin
to accept and positively comply with stricter environmental regulations without
resistance and trouble-making. The second step is environmental friendliness as
a market strategy to create competitive advantages. Also in production this
level of ambition involves a new philosophy. To make money on the environment,
you have to weed out the evil at its roots. The key words are pollution prevention and waste minimisation.
Pollution abatement costs money. If it is possible to change products and
processes to make abatement equipment unnecessary and reduce waste, costs are
also reduced. This strategy will often bring the company into a positive and
reinforcing process of environmental improvement. Progressively environmental
concerns become a part of the company's culture and a value in itself, and not
only a means to create profits.
The
third level is to comply with absolute standards, not only be in front of
others in the market. The goal is not to compromise the carrying capacity,
which includes a fair distribution of the world resources. In Svae (1995) four
definitions of ecological sustainability are presented and discussed. The six
criteria below are according to the next most demanding definition, strong
sustainability (Turner, 1993). At
this level the company usually will have comprehensive environmental
accounting, so it can be used to measure how far the company is from 100%
compliance with the six criteria below.
Table 4: Six environmental commandments
To live within the carrying capacity implies to comply
with these criteria:
- Sustain
natural capital
1) Do not pollute more than the
absorption capacity of the nature.
2) Do not increase risk of lasting
eco-catastrophes or extinction of species.
3) Do not harvest renewable resources
more than growth.
- Sustainable
man-made capital
4) Do not deplete capital of
non-renewable physical resources.
5) Do not be dependent on
non-renewable energy resources.
- Minimise
global overconsumption
6) Minimise use of the environment and
resources above what is possible when the standard of living in the third world
is raised to solve the world's poverty and refugee problems.
If these
commandments are met, the company can be defined as ecologically sustainable.
In Svae (1995) there is a discussion of the sufficiency of the criteria and the
interpretation of them. For a specific company these criteria have to be
further detailed according to the nature of its environmental impact, for
instance as in the project on developing Environmental Performance
Indicators (European Green Table, 1993).
At the
societal level, strong sustainability can be said to be reached when the
environmental problems in the list below no longer exist as environmental
problems. They are environmental challenges that constantly have to be
addressed in the economy, and which will restrict economic activity. Together
the six environmental commandments and the list of environmental problems
give an overview of the challenges which have to be managed in a proper way in
sustainable management.
Table 5: Environmental challenges
Global environmental challenges
- Global
warming (greenhouse effect)
- Depletion
of the ozone layer
- Depletion
of soil
- Protection
bio-diversity and sufficient original nature
- Leveling
out the population growth and consumption growth
- Transition to renewable energy
resources and energy conservation
Regional environmental challenges in Europe
- Acid
rain and extinction of fish in Scandinavia
- Forest
defoliation in Central Europe
- Nuclear
waste and risk of industrial accidents
- Pollution
of the North Sea, The Mediterranean etc.
- Sustainable
administration of fisheries and forests
Local environmental challenges
- Restrict pollution from industry,
farming and households to soil, air and water.
- Clean
water and water conservation.
3.2.1 Steps in the process towards a sustainable society
One of the
key issues in sustainable management is to be in the forefront of the
development. An understanding of how the process towards sustainability might
evolve can be of great strategic importance. Below is an overview of the main
steps in the process so far and what I expect to come in the future.
Table 6: Four environmental
waves towards a sustainable society
YEAR 1900 1970 1990 20?0
ENVIRON- Extinction
of Local
and Global
ecocrisis Regional
MENTAL species
and regional
ecocrisis Industrial and
global
PROBLEM wilderness catastrophes health
crisis?
POLICY BLACK +RED +BLUE +GREEN
ASSUMED Single
Concentrated Millions
of small The
society
REASON phenomena pollution/changes environmental as
a whole and
problems man
himself
GOAL Economic Very
weak Weak Strong
growth sustainability sustainability sustainability
POLITICAL Law
and order Public
regulation Use
the Self
regulation
IDEOLOGY market
mechanism Human
growth
SOCIAL Protection
of Bureaucracy Green
consumers Own
responsibility
TECHNOLOGY species/areas
Permissions Environmental Ethical
management
Jail/fines taxes/tax
system Agreements
PHYSICAL Borders Higher
and Pollution
prevention New
technologies
TECHNOLOGY Guards/police longer
pipes Waste
minimasation New
infrastructure
Pollution
abatement Energy
saving New
lifestyle
EFFECT Absolute Less
pollution Change
in products Change
lifestyle
limits
to reduce
environ- and
processes which and
infrastruc-
what
can be mental
load reduce
environmental ture so that
done,
bought per.
produced load
per. produced total
number of
and
sold in unit.
Increased Unit.
Cost are units
are lowered.
the
market costs. reduced/increased. Quality
of life up.
Costs
reduced
For each
step in the process, new measures are added to those already used to try to
solve the problems. Despite this, the environmental problems seem to have
become more serious. Is it reasonable that this will be the outcome of the
ongoing blue wave too? In the previous article (Svae, 1995) a calculation is
made to determine if technological change can solve the problems created by
further economic growth, as the intention is in the blue wave. The calculation
shows that then the environmental pressure per. unit GDP has to be reduced to
1/5 to 1/10 of today's level. This I regard as rather unrealistic. If this is
true, we can expect even another environmental wave. I assume this will be the
green wave where the measures will be undertaken which the environmental
movements have continually stated to be necessary. Also the number of units produced and consumed has to be reduced through
technological shifts, new infrastructure and new lifestyle. General economic
growth (quantitative change) has to be replaced with a (strong) sustainable
development (qualitative change).
3.3. Three levels of social sustainability
If the
organisation has a non-cooperative relationship to the union, labour
authorities etc., the first step is to accept that also working conditions, a
fair income and reasonable working terms etc. are values to be emphasized. The
second level of social sustainability involves two dimensions. One is the quality of life of the employees during
and through work. The other dimension is the product's contribution to the quality of life of the customers.
The
quality of life of the employees will both be a means to increase profitability
and a value in itself. Through organisational development one tries to help the
employees to contribute with all their skills. The management style is
democratic. Demands from the union etc. are met positively, for instance
creating possibilities for part time work, flexitime, improve physical work
conditions etc.. Fløistad (1991) in my opinion has identified some of
the key differences between needs oriented and production oriented management.
Table 7: The professional and social culture
Professional culture dominated by: Social
culture dominated by:
- Professional
competence - Social
competence
- Objectivity,
impersonality - Personal
human relations
- Competition - Cooperation
- Employees - Human
beings
- Sex
neutrality - Men
and woman
- Wages,
economic values, revenues - Caretaking,
recognition
- Unions - Fellows,
Colleagues
The
professional culture has to do with producing a high standard of living. The
social culture has to do with producing a high standard of life.
Fløistad's point of view is that value management is needed in addition
to the rule- and goal-management in the professional culture. The goal is not
only to sell the product, but that the customer really shall be satisfied with
it, as in relation marketing. On the other hand such a customer orientation is
difficult to reach, unless the company internally has a orientation towards its
employee's needs. Because these are two sides of the same matter. By and by the
needs orientation will be integrated in the whole organisation and the single
employee, and turn into a competitive advantage for the company.
The
third level is a socially sustainable
company, which is characterised by the fact that all the employees have
developed such a high level of responsibility for themselves and the whole
company, that use of force is no longer necessary. The cooperation is without
frozen conflicts between employees, and customers also get help to solve their
problems and in the end become satisfied. This requires that the company has a
permanent process of self development and organisational development to
increase the level of consciousness of its employees and ability to cooperate
and take responsibility. The glue holding the organisation together in this
kind of creative management is shared
values. Therefore it is necessary with a process to identify these values,
as explained in the preference analysis.
3.3.1 An example of a company on the path towards social
sustainability
SL Buss
Søderhallen in Stockholm has 500 employees. This is a division (bus
garage) within the public transport system of Stockholm. Søderhallen
found out that the main problem was that the bus drivers had almost no
motivation for their work. They worked only for money. The work had low social
status and gave no self esteem. The work is characterized by stress, has a low
salary and is by all means not very attractive. The company also recognized that it was
may be not so smart to spend SEC five million a year on maintenance of buses,
and no money on maintenance of the bus drivers. The CEO himself had gone
through a process of self development, and made an initiative to change this
(Schneider 1994).
A self
development program was developed. A voluntary health examination served as the
entry ticket to the program. In return the drivers wanting to take part in the
program of self development had to sign a contract with the company that they
would work with a life problem they had. This could for instance be smoking,
overweight, loneliness or mastering stress at work. The next step was
participation in combined study and human relation groups. They talked together
about their work and the life situation in general, and studied how they could
master life better (theory of self development). The leaders of the groups were
after some time bus drivers ahead of others in the process. In addition
interval training, happy work out, water gymnastics, massage, chiropractor and
dynamic meditations where offered. After half a year in this program, a new
health examination was made to find out if the quality of life had improved.
And so the process goes on.
Bus
drivers reported that they found their work more meaningful. They mastered
stress better. The number of collisions were reported to be reduced to the
half. The use of gasoline was also reduced because the drivers drove less
aggressively and stressed, so that environmental benefits were also one of the
results.
The
drivers are in better a mood and have a better life. So they more easily make
contact and receive positive signals in return from passengers. Customer
satisfaction has also increased. Because of the bus drivers increased
consciousness and ability to master their own lives, the frequency of illness has
been considerably lowered. A positive feedback loop is established at the cost
of SEC
3.4 Three levels of financial sustainability
At the first
level of financial sustainability the issue is to comply with company laws, tax
regulations and good business ethics. At the second level of financial
sustainability, the issue for the company is to be in the forefront of the
society in the social and environmental dimension. An increased part of the
surplus stems from this, rather than lagging behind as at the previous level.
The
third level is financial sustainability, which is reached if the
company can give priority to environmental, social and real economic value
creation rather than to short term profits. Focus is changed from a bias
towards profits for the owners to a strategic thinking based on stakeholder
theory (Johnson and Scholes, 1993) (Roos et al. 1994). The managers always
consider the consequences of a strategic decisions for all stakeholders;
profits for the owners, income for the employees, jobs in the society,
usefulness of the product, environmental friendliness, etc..
At this
level of financial sustainability it is also necessary to start to think about
the company's relations to the global distribution of income and politics as
such. In rich countries it is the high standard of living which creates
environmental problems. In poor countries it is the poverty which creates
environmental problems. Maybe the most important contribution to sustainable
development is global redistribution of power and resources. This might be
demanded from business in the future. There is an increasing support to boycott
of companies and nations for ethical reasons, for instance child labour,
totalitarian regimes, nuclear bomb testing etc.. Many people no longer accept
that companies regard business, ethics and politics as separate issues. To an
increasing extent, it seems like public opinion demands ethical and political responsibility from the business
community. Sustainable management might be regarded as a pro-active
attitude towards this.
4. EVALUATION
The next
step in the strategic process is evaluation. Since the goal in sustainable
management is three dimensional, also three dimensional profitability
assessments are required. Multi criteria decision analysis is a flexible tool
for this which has proven useful in practice (Keeney, 1992). The paradigm of
decision analysis is to separate between preferences
(what do we want?) and consequences
(what happens if?), and analyse them separately. With such comprehensive and
important decisions as strategic decisions, it is relevant with a quantitative
decision analysis.
In the preference analysis the end is then to build a computer based preference model
representing the preferences of the decision maker, as for instance described
in Gottschalk and Wenstøp (1988). In the preference model weights are given (importance of the
objectives), utility functions for the objectives are defined
(importance of obtaining the best or avoid the worst consequences) and synergy is specified (if the whole is
more or less than the sum of the parts).
The
purpose of the consequence analysis is to make a decision table, that is scores on all the criteria of the
objectives in the goal hierarchy for all strategic alternatives. Putting this
into the preference model it is possible to make the computer rank the alternatives. Sensitivity analysis (the results sensitivity to change in the weights) and uncertainty analysis (sensitivity to change in uncertain variables) can be
made. As in other quantitative evaluation, for instance with the net present
value method combined with the capital asset pricing model (Bøhren and
Michalsen, 1994), the quantitative analysis gives support for the thinking and
input for the discussions leading to the final strategic decision.
5. IMPLEMENTATION
The last
step in the strategy process is planning, implementation, and control. The
implementation will be different for each company and the chosen strategy. But
some general remarks can be given. An implementation plan ought to be related
to and has to take care of all the dimensions in the matrix of sustainable
management. More on details in environmental management is found for instance
in Winter (1990), North (1992) og Welford (1995).
Table 8: The matrix of sustainable management
|
|
QUALITY OF LIFE OF THE EMPLOYEES Internal production |
QUALITY OF THE ORGANISATION Means of production |
SOCIETAL CONTRIBUTION External production |
|
SOCIAL SUSTAIN- ABILITY |
Standard of life = Satisfaction of needs at work Increased consciousness |
HUMAN RESOURCE MANAGEMENT: Value
system Business
idea Org. and management |
Ethical standard Social
usefulness Outer
relations Market communication |
|
ECOLOGICAL SUSTAIN- ABILITY |
Environmental standard= Health, environment and security issues |
ENVIRONMENTAL MANAGEMENT: Facilities, production, storage, logistics |
Integration in the ecosystems Marketing/ distribution |
|
ECONOMICAL SUSTAIN- ABILITY |
Level and distribution of
income Working
terms Economic security |
FINANCIAL MANAGEMENT: Financial
profitability, solidity
and market expectations |
Product Employment Tax
payments Interest, dividend |
The key
word in sustainable management is value
creation in all dimensions in the matrix of sustainable
management. Regarding implementation and control management systems are required.
As the goal in sustainable management is three dimensional, three dimensional management and accounting
systems are necessary. In Svae (1995)
it is argued that environmental, social and financial accounting is necessary,
and ought to be measured in real terms. In Welford and Jones (1994, 1995) there
are lists of relevant measures of sustainability. In addition it is useful to
aggregate indicators of sustainability both in each dimension and totally,
for instance by the use of multi criteria decision analysis as described
earlier.
6. CONCLUDING REMARKS
In the
the matrix of sustainable management the outer columns are goals and the
central column is means to reach the goals. Regarding micro economics the
matrix therefore defines two three
dimensional product functions which have to be optimised. In sustainable
management the task is to optimise the efforts in the different aspects to
maximise the total sustainability. The consequence is that the theoretical
assumption of profit maximisation as the goal of the company is not relevant by
sustainable management.
In
sustainable management the normative goal of value maximisation for the present
owners is also abandoned, and replaced by a value maximisation for all
stakeholders. In a financial perspective sustainable management might be
regarded as holistic value maximisation.
In an
organisational perspective sustainable management is based on stakeholder theory (Johnson and Scholes (1993), ch. 5). In a strategic
perspective the task is to identify
"win-win-strategies" to satisfy all stakeholders. When all the
stakeholders are satisfied and they do not fight each other, constructive
cooperation is released and confidence created which might increase value
creation in all dimensions, as in the example of SL Buss Søderhallen.
In an
ethical perspective sustainable management is to take responsibility both for
the company's and the society's development. That is an extended ethical responsibility and a new role for many
managers where there is no longer a distinction between business, ethics and
politics.
The
basic idea in this article is that sustainable management demands a three dimensional management system including the environmental, social
and financial dimension. This is a consequence of the theory of needs defining
quality of life in a three dimensional manner. Therefore multi criteria
decision analysis is a relevant method of evaluation in strategic decisions.
The superior measure of profitability is sustainability
which involves satisfying all stakeholders, instead of a bias towards profits
and value maximisation for the present owners.