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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
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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)
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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:
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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.
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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.
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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.
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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
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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.
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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-
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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.
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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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