eBooks

Sustainable Business Management

0422
2015
978-3-8649-6820-4
978-3-8676-4622-2
UVK Verlag 
Dietmar Ernst
Ulrich Sailer

With the book the authors want to make a contribution towards discovering and developing the subject of sustainable business management. To do so, they initially put sustainable business management in its scientific context and then illuminate the areas of direct relevance for management. This includes the positioning within strategic management, the demands of sustainability on personnel management, innovation management, international management as well as operative environmental management. With a focus on corporate leadership, sustainability is discussed in the context of financial management and controlling, including the already existing instruments for implementing sustainability used by practitioners as well as legal requirements. Next, the reader learns how the value chain and marketing activities can be structured in a sustainable fashion. Finally an outlook on the possible future development of sustainable management is provided.

<?page no="2"?> Dietmar Ernst / Ulrich Sailer (Eds.) Sustainable Business Management <?page no="4"?> Dietmar Ernst / Ulrich Sailer (Eds.) Sustainable Business Management UVK Verlagsgesellschaft mbH · Konstanz mit UVK/ Lucius · München <?page no="5"?> Bibliografische Information der Deutschen Bibliothek Die Deutsche Bibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet über <http: / / dnb.ddb.de> abrufbar. ISBN 978-3-86764-622-2 (Print) ISBN 978-3-86496-819-8 (EPUB) ISBN 978-3-86496-820-4 (EPDF) Das Werk einschließlich aller seiner Teile ist urheberrechtlich geschützt. Jede Verwertung außerhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulässig und strafbar. Das gilt insbesondere für Vervielfältigungen, Übersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. © UVK Verlagsgesellschaft mbH, Konstanz und München 2015 Einbandgestaltung: Susanne Fuellhaas, Konstanz Cover-Illustration: © iStockphoto / mashuk UVK Verlagsgesellschaft mbH Schützenstr. 24 · 78462 Konstanz Tel. 07531-9053-0 · Fax 07531-9053-98 www.uvk.de <?page no="6"?> o see Glossary @ www.uvk.de PPrreeffaaccee For us, sustainable business management focuses on the economic activities of companies that reconcile economic success with the responsibility for people, society and the environment. To feel responsibility for ones actions is above all a normative decision. We, 14 professors of Nuertingen-Geislingen University (Germany), have made this decision. With this fundamental volume on sustainable business management, we want to convey to students of business management and those business managers with operative responsibility that the economic, social and ecological consistency of their decisions makes good business sense and at the same time addresses fundamental economic challenges. Those involved with sustainable development often feel the need to justify their choice. The term sustainability is used everywhere and is even abused on occasion. Distance from the subject may be required simply to avoid the accusation of acting opportunistically and benefitting from the current sustainability boom. But there are also supporters of sustainability who think that business is the source of all evil and purposefully seek the confrontation with the field of business management. Others think that sustainable development is not so much the responsibility of business management, but rather of the legislator. If society and politicians want tighter environmental standards, laws have to be passed and the companies will obey them. In this case, sustainability amounts to little more than adherence to additional legal requirements. Finally the supporters of sustainable behavior are frequently seen as naïve do-gooders, who do not merit a serious debate. Against this backdrop it certainly seems appropriate to ask why we want to deal with sustainability in the context of business management. Should we refuse to discuss sustainability simply because the term is fashionable these days? Instead we address the topic because we are convinced that business sustainability is an important aspect of business management and sustainable economic behavior should be seen as a competitive advantage. The current fashion may have certain helpful aspects (for example political acceptance, support of sustainability initiatives, and so forth), but can constitute a true hindrance when terms are overused and the repetitive admonishments only reduce our interest instead of increasing it. We do not deal with sustainability simply because it is currently fashionable, but for the same reason, we also do not ignore it. Fashion should not be a relevant scientific criterion. We also do not think that there is a conflict between business sustainability and classical business management and its teachings. Instead sustainability can move business management forward. The realization that we need to react in the best possible way to changing framework conditions always leads to a forward move. <?page no="7"?> 6 Preface @ www.uvk.de Thus criticism is not a hindrance, but supportive instead. Especially as advocates of business management we see the discussion about sustainability as an enormous opportunity. After all, we always thought of our USP as providing the best possible results given scarce resources. We are specialists in dealing with scarce resources. Now we are not only confronted with scarce financial means, but also scarce raw materials, a limited environment, scarce labor, scarce attention and so forth. We need to continue our learning process in order to understand how to deal with these types of scarcity as well. We do not think that the responsibility for sustainable development lies only with legislators. They merely define the framework conditions for sustainable economic behavior. Successful sustainable economic behavior will always be the task of companies and is an absolute prerequisite in a highly competitive global environment. Put differently: sustainable management is an elementary skill and needed for survival. The final, somewhat condescending accusation of being a do-gooder can certainly be interpreted as a compliment. Innovative actions always target improvement and not maintenance of existing conventions. Especially sustainability in connection with innovation is the basis for mastering existing economic, societal and ecological challenges. Should the world indeed become a better place as a result of dealing with sustainability, integrating sustainability in the training of business managers to enable them to accept comprehensive responsibility, a major goal would have been accomplished. This continues to motivate us. This book is the result of a joint project by 14 professors at Nuertingen- Geislingen University. Most of them are active in the field of business management, but lawyers and environmental engineers are also involved. The subject of sustainable business management is wide open and first contours are only beginning to show. With the book we want to make a contribution towards discovering and developing the subject. To do so, we initially put sustainable business management in its scientific context and then illuminate the areas of direct relevance for management. This includes the positioning within strategic management, the demands of sustainability on personnel management, innovation management, international management as well as operative environmental management. With a focus on corporate leadership, sustainability is discussed in the context of financial management and controlling, including the already existing instruments for implementing sustainability used by practitioners as well as legal requirements. Next, the reader learns how the value chain and marketing activities can be structured in a sustainable fashion. Finally an outlook on the possible future development of sustainable management is provided. <?page no="8"?> Preface 7 We are grateful for the outstanding cooperation with our publisher UVK Verlag, and especially want to thank Dr. Schechler. The editors look forward to any type of feedback from the readers. Prof. Dr. Dr. Dietmar Ernst (dietmar.ernst@hfwu.de) Prof. Dr. Ulrich Sailer (ulrich.sailer@hfwu.de) <?page no="10"?> o see Glossary @ www.uvk.de OOvveerrv viie eww Preface.............................................................................................................................5 Figures .......................................................................................................................... 19 Tables ........................................................................................................................... 21 Prof. Dr. Ulrich Sailer 1 Sustainable Development - an Introduction ........................................... 23 Prof. Dr. Dr. Dietmar Ernst 2 Sustainable Business Management ............................................................ 31 Prof. Dr. Erskin Blunck 3 Strategic Sustainability Management ......................................................... 53 Prof. Dr. Horst Blumenstock 4 Sustainable Human Resource Management ............................................. 77 Prof. Dr. Carsten Herbes 5 International Management and Business Sustainability .......................... 95 Prof. Dr. Frank Andreas Schittenhelm 6 Innovation Management and Sustainability ........................................... 117 Prof. Dr. Hans-Jürgen Gnam und Prof. Dr. Lisa Schwalbe 7 Operational Environmental Management.............................................. 133 Prof. Dr. Frank Andreas Schittenhelm 8 Financial Management and Sustainability ............................................... 159 <?page no="11"?> 10 Overview Prof. Dr. Ulrich Sailer 9 Controlling .................................................................................................. 175 Prof. Dr. Thomas Barth und Prof. Dr. Steffen Scheurer 10 Instruments for Implementing Business Sustainability ........................ 193 Prof. Dr. Katja Gabius 11 Legal Implications of Business Sustainability......................................... 228 Prof. Dr. Monika Reintjes 12 Shaping the Value Chain........................................................................... 249 Prof. Dr. Iris Ramme 13 Marketing .................................................................................................... 275 Prof. Dr. Thomas Ginter 14 Integral Management - New Perspectives for Sustainable Development............................................................................................................. 301 About the Authors ................................................................................................... 319 Glossary ..................................................................................................................... 32F <?page no="12"?> o see Glossary @ www.uvk.de TTaabbllee ooff CCoonntteenntt Preface.............................................................................................................................5 Figures .......................................................................................................................... 19 Tables ........................................................................................................................... 21 1 Sustainable Development - an Introduction.................................... 23 2 Sustainable Business Management .....................................................31 2.1 Introduction ................................................................................................ 31 2.2 Scientific Programs in Business Management and their Links to Business Sustainability................................................................................ 33 2.2.1 Gutenberg’s Factor Theory ....................................................................... 33 2.2.2 Heinen’s Decision-oriented Business Management............................... 34 2.2.3 The Systems-oriented Approach .............................................................. 36 2.2.4 The Behavioral Approach ......................................................................... 38 2.2.5 The Environmental Approach.................................................................. 39 2.2.6 The Approach of Institutional Economics ............................................. 40 2.3 What Lies Ahead for Business Research? ............................................... 42 2.4 Sustainable Business Management ........................................................... 43 2.5 Principles of Sustainable Business Management .................................... 45 3 Strategic Sustainability Management................................................. 53 3.1 Introduction ................................................................................................ 53 3.2 Classification of Strategic Sustainability Management ........................... 54 3.3 Dimensions of Strategic Sustainability Management ............................. 56 3.4 Organizational Purpose and Sustainability .............................................. 57 3.5 Strategy Process .......................................................................................... 60 3.5.1 Strategic Thinking....................................................................................... 60 3.5.2 Strategy Formation ..................................................................................... 62 3.5.3 Strategy Implementation / Strategic Change .......................................... 65 3.6 Strategy Content ......................................................................................... 66 <?page no="13"?> 12 Table of Content @ www.uvk.de 3.6.1 Business Level Strategy .............................................................................. 66 3.6.2 Corporate Level Strategy ........................................................................... 67 3.6.3 Network Level Strategy ............................................................................. 68 3.7 Strategic Context......................................................................................... 69 3.7.1 Organizational Context.............................................................................. 70 3.7.2 Industry Context......................................................................................... 71 3.7.3 International Context ................................................................................. 72 3.7.4 Ecological Context ..................................................................................... 72 4 Sustainable Human Resource Management.................................... 77 4.1 Challenges Facing Human Resource Management ................................ 77 4.2 Development towards Sustainable Human Resource Management .... 79 4.2.1 Scope and Orientation ............................................................................... 79 4.2.2 Fundamental aims....................................................................................... 80 4.2.3 Culture of Trust as the Foundation for Sustainable Human Resource Management ............................................................................... 81 4.3 Central Tasks for Sustainable Human Resource Management............. 83 4.3.1 Leadership ................................................................................................... 83 4.3.2 Human Resource Management planning ................................................ 84 4.3.3 Human Resource Management development......................................... 86 4.3.4 Shaping the Corporate Culture ................................................................. 88 4.4 Organizational Structure of Sustainable Human Resource Management ................................................................................................ 89 4.4.1 Positioning and Classification of SusHRM ............................................. 89 4.4.2 Involvement in SusHRM........................................................................... 90 5 International Management and Business Sustainability.............95 5.1 Introduction ................................................................................................ 95 5.1.1 International Corporate Activities - an Overview ................................. 95 5.1.2 The International Dimension of Sustainability....................................... 96 5.1.3 Effects of International Transactions on Sustainability ........................ 97 5.2 International Particularities of Sustainability Aspects.......................... 100 5.2.1 Expanded Scope ....................................................................................... 100 <?page no="14"?> Table of Content 13 @ www.uvk.de 5.2.2 Supranational Regulations of Sustainability Aspects............................ 101 5.2.3 Other Supranational Business Sustainability Drivers........................... 104 5.3 Approaching and Understanding Sustainability in Different Countries.................................................................................................... 105 5.4 Problems and Approaches for Sustainable International Activities of Corporations......................................................................................... 108 5.4.1 Strategy....................................................................................................... 108 5.4.2 Procurement .............................................................................................. 108 5.4.3 Marketing & Distribution ........................................................................ 109 6 Innovation Management and Sustainability ................................... 117 6.1 Introductory Considerations ................................................................... 117 6.2 Prerequisites for Success at the Company Level .................................. 119 6.2.1 Innovation Processes ............................................................................... 121 6.2.2 Culture of Innovation .............................................................................. 121 6.2.3 Innovation Manager ................................................................................. 123 6.3 Specific Sustainability Aspects ................................................................ 128 6.3.1 Sustainable Innovation Process .............................................................. 128 6.3.2 Sustainable Culture of Innovation.......................................................... 129 6.3.3 Sustainable Innovation Managers........................................................... 129 7 Operational Environmental Management .......................................133 7.1 Development of Environmental Management..................................... 133 7.2 Uses of an Environmental Management System.................................. 136 7.3 Environmental Management based on DIN EN ISO 14001............. 137 7.3.1 Requirements of DIN EN ISO 14001 .................................................. 137 7.3.2 Introduction of an Environmental Management System based on ISO 14001.................................................................................................. 138 7.4 Environmental management following EMAS .................................... 143 7.4.1 Demands of EMAS .................................................................................. 144 7.4.2 Vorgehensweise für die Einführung von EMAS.................................. 145 7.5 Simplified Systems Approaches .............................................................. 150 7.6 Further Developments of Environmental Management Systems...... 152 <?page no="15"?> 14 Table of Content @ www.uvk.de 8 Financial Management and Sustainability ......................................159 8.1 Introduction .............................................................................................. 159 8.2 Investment Analysis ................................................................................. 160 8.2.1 Cash Flow Analysis................................................................................... 162 8.2.2 Modern Portfolio Theory ........................................................................ 164 8.2.3 Utility Analysis .......................................................................................... 166 8.3 Financing ................................................................................................... 166 8.4 Implications for Company Management and Controlling .................. 169 8.5 Sustainable Financial Management......................................................... 170 8.6 Risk Management ..................................................................................... 172 9 Controlling ................................................................................................175 9.1 What is Meant by the Term Controlling? .............................................. 175 9.2 Controlling Tasks...................................................................................... 178 9.3 From Traditional to Sustainable Controlling ........................................ 180 9.4 Holistic Solutions...................................................................................... 184 9.5 The Limits of Accounting in Sustainable Controlling ......................... 185 9.6 Controlling Based on Key Figures versus Sustainable Controlling ... 187 9.7 Applied Sustainability Controlling.......................................................... 189 10 Instruments for Implementing Business Sustainability ..............193 10.1 Introduction .............................................................................................. 193 10.2 Implementing Sustainable Management at the Company Level ........ 195 10.3 The Situational Approach to Sustainable Management....................... 196 10.4 Implementation in the Context of Integrated Management ............... 199 10.5 Controlling Tasks in the Context of Successfully Implemented Sustainable Management ......................................................................... 202 10.6 Assessment of the General Implementation of Sustainable Management .............................................................................................. 203 10.6.1 Features of a Sustainability Assessment ................................................ 203 10.6.2 Overview of the Assessment Process .................................................... 204 10.7 Examples of Concrete Instruments for Sustainable Management..... 210 <?page no="16"?> Table of Content 15 @ www.uvk.de 10.7.1 The Sustainable Balanced Scorecard as an Instrument for Sustainable Management at the Strategic Level ................................................ 210 10.7.2 Carbon Controlling as an Instrument for Sustainable Management at the Operative Level.............................................................................. 214 10.8 External Reporting on Sustainable Management ................................. 218 10.8.1 Approaches to Measure Sustainability ................................................... 218 10.8.2 Reporting on Business sustainability based on the Global Reporting Initiative (GRI).......................................................................................... 220 10.9 Summary .................................................................................................... 224 11 Legal Implications of Business Sustainability............................... 228 11.1 Principles of Business Sustainability ...................................................... 229 11.2 Corporate Social Responsibility .............................................................. 231 11.2.1 Terminology .............................................................................................. 231 11.2.2 Historical Roots ........................................................................................ 232 11.2.3 Legal Implications of CSR....................................................................... 232 11.2.4 Differentiation........................................................................................... 233 11.3 Corporate Governance ............................................................................ 233 11.3.1 Terminology .............................................................................................. 233 11.3.2 Historical Roots ........................................................................................ 234 11.3.3 Legal Foundations of Corporate Governance ...................................... 236 11.4 The German Corporate Governance Code .......................................... 238 11.4.1 Term and Essence .................................................................................... 238 11.4.2 Formal Structure of the German Corporate Governance Code ........ 239 11.4.3 Material Context: The Normative Structure of the German Corporate Governance Code .................................................................. 239 11.4.4 Current Developments Concerning the German Corporate Governance Code ..................................................................................... 241 11.5 Green Book of the European Commission of April 5, 2011: European Corporate Governance Framework (2011) ........................ 243 11.6 Action Plan Corporate Governance of the EU.................................... 244 11.7 Corporate Compliance ............................................................................. 244 11.7.1 Terminology .............................................................................................. 244 <?page no="17"?> 16 Table of Content @ www.uvk.de 11.7.2 Legal Implications .................................................................................... 245 11.7.3 Principles of a Corporate Compliance Organization at the Company.................................................................................................... 245 12 Shaping the Value Chain ..................................................................... 249 12.1 Fundamentals ............................................................................................ 249 12.1.1 Value Creation........................................................................................... 249 12.1.2 Pressure to Adapt ..................................................................................... 250 12.1.3 Ecological Sustainability and Value Creation........................................ 251 12.2 Procurement and Procurement Logistics .............................................. 253 12.2.1 Reassessment of Known Concepts ........................................................ 253 12.2.2 Extending Existing Processes ................................................................. 255 12.3 Production und Production Logistics .................................................... 257 12.3.1 Reassessment of Known Concepts ........................................................ 257 12.3.2 Extending Existing Processes ................................................................. 259 12.3.3 Use of Innovative Technologies............................................................. 262 12.4 Distribution and Distribution Logistics................................................. 263 12.4.1 Reassessment of Known Concepts ........................................................ 263 12.4.2 Extending Existing Processes ................................................................. 267 12.4.3 Use of Innovative Technologies............................................................. 268 13 Marketing................................................................................................. 275 13.1 Marketing and Sustainability ................................................................... 276 13.1.1 Marketing ................................................................................................... 276 13.1.2 Sustainability.............................................................................................. 276 13.1.3 Definition of Sustainable Marketing ...................................................... 276 13.1.4 Development of Sustainable Marketing ................................................ 279 13.2 Sustainability in the Marketing Process ................................................. 280 13.2.1 The Marketing Process ............................................................................ 280 13.2.2 Marketing Research .................................................................................. 281 13.2.3 Strategic Marketing ................................................................................... 282 13.2.4 Marketing Implementation and Marketing Controlling ...................... 282 <?page no="18"?> Table of Content 17 13.3 Sustainable Marketing Measures ............................................................. 283 13.3.1 Product Policy ........................................................................................... 283 13.3.2 Pricing Policy............................................................................................. 288 13.3.3 Distribution Policy ................................................................................... 291 13.3.4 Communication Policy............................................................................. 293 14 Integral Management - New Perspectives for Sustainable Development ............................................................................................301 14.1 Defining the Problem: Complexity and its Consequences ................ 301 14.2 The Integral Approach............................................................................. 303 14.3 Fields of Tension in Integral Management ........................................... 311 About the Authors ................................................................................................... 319 Glossary ..................................................................................................................... 32F <?page no="20"?> o see Glossary @ www.uvk.de FFiigguurreess Fig. 1-1 Three-Pillar-Model of Sustainability ..................................................... 25 Fig. 2-1 Scientific programs in business management ...................................... 32 Fig. 3-1 Overview of the Strategic Dimensions................................................. 56 Fig. 3-2 Spectrum of hybrid organizational targets following Kim Alter....... 59 Fig. 3-3 Four types of sustainability marketers following Belz and Peattie. .. 59 Fig. 3-4 Overview of the strategic dimensions as well as central aspects of sustainability ............................................................................................. 74 Fig. 4-1 Target system of SusHRM ..................................................................... 81 Fig. 4-2 Aspects of personnel planning in the context of SusHRM ............... 86 Fig. 4-3 Systematic overview of personnel development measures ................ 87 Fig. 4-4 Considering different dimensions of fairness ...................................... 88 Fig. 5-1 Culture and various sustainability activities........................................ 106 Fig. 6-1 The innovation triangle - Interrelations between innovation manager, innovation process and culture of innovation as components of innovation management............................................ 119 Fig. 6-2 An overview of the stage-gate model ................................................. 121 Fig. 6-3 Prerequisites for successful innovation management ....................... 122 Fig. 6-4 Tasks of the innovation manager ........................................................ 123 Fig. 6-5 Skills necessary for successful innovation management................... 125 Fig. 6-6 Required competencies of the innovation manager ......................... 127 Fig. 7-1 Possible process for updating legal demands .................................... 141 Fig. 7-2 Meaning of symbols .............................................................................. 142 Fig. 7-3 Steps in introducing EMAS ................................................................. 144 Fig. 7-4 EMAS logo............................................................................................. 150 Fig. 7-5 Main criteria of EFQM......................................................................... 156 Fig. 8-1 Cash flows in the company .................................................................. 160 Fig. 9-1 Components of controlling.................................................................. 176 Fig. 9-2 Controlling as product of manager and controller............................ 176 <?page no="21"?> 20 Figures @ www.uvk.de Fig. 9-3 Controlling tasks in practice................................................................. 180 Fig. 9-4 Types of systems and competencies ................................................... 182 Fig. 9-5 6 steps of holistic problem solving ..................................................... 185 Fig. 9-6 Controlling based on key figures versus sustainable controlling..... 188 Fig. 9-7 5 steps towards sustainable success..................................................... 190 Fig. 10-1 Explanatory model for the implementation of business sustainability. ...................................................................................................... 197 Fig. 10-2 Key questions and criteria concerning the importance of sustainability. ...................................................................................................... 197 Fig. 10-3 Matrix of opportunities and threats of business sustainability ........ 198 Fig. 10-4 Integrated management concept following Bleicher .......................... 201 Fig. 10-5 Steps in the assessment process........................................................... 205 Fig. 10-6 Providing weights to the ecological dimension ................................. 206 Fig. 10-7 Assessing the degree of implementation ............................................ 207 Fig. 10-8 Activity portfolio ................................................................................... 209 Fig. 10-9 Possible options for converting a BSC into a SBSC......................... 211 Fig. 10-10 Integrative Sustainability Balanced Scorecard.................................... 211 Fig. 10-11 Options for reporting ........................................................................... 221 Fig. 12-1 Fields of action for the sustainable value creation ............................ 252 Fig. 12-2 Lot size planning ................................................................................... 260 Fig. 13-1 Marketing process ................................................................................. 280 Fig. 14-1 The Four-Quadrant Model - Different perspectives on reality ...... 304 Fig. 14-2 Holarchy of development..................................................................... 305 Fig. 14-3 The four quadrants related to humans ............................................... 310 Fig. 14-4 States as instruments for the determination of the status quo ........ 312 Fig. 14-5 Development stages of a company ..................................................... 313 Fig. 14-6 Possible development lines for a company ........................................ 314 Fig. 14-7 Company typologies.............................................................................. 315 Fig. 14-8 Fields of tension in integral management .......................................... 315 <?page no="22"?> TTa abbllees s Tab. 1-1 Societal and business dimensions of sustainability .......................... 26 Tab. 4-1 Examples from the target system of SusHRM................................. 81 Tab. 4-2 Examples of design tasks of SusHRM in the context of human resource management .......................................................................... 83 Tab. 7-1 Development stages of environmental management .................... 135 Tab. 7-2 Example of a legal register ................................................................ 140 Tab. 7-3 Examples of environmental aspects and environmental effects.. 145 Tab. 7-4 Examples for direct and indirect environmental aspects .............. 146 Tab. 7-5 Environmental management approaches........................................ 151 Tab. 9-1 Controlling tasks................................................................................. 179 Tab. 12-1 Building blocks for resource efficient technologies to run logistics centers ................................................................................... 271 Tab. 13-1 Philosophies of market development .............................................. 277 Tab. 13-2 Development of sustainable marketing........................................... 279 Tab. 13-3 Potential for a sustainable product policy ....................................... 287 Tab. 13-4 Potential for a sustainable pricing policy......................................... 291 Tab. 13-5 Potential for a sustainable distribution policy ................................ 293 Tab. 13-6 Potential for a sustainable communication policy ......................... 296 <?page no="24"?> o see Glossary @ www.uvk.de 11 SSuussttaai inna ab blle e DDe evveello oppmme ennt t -- aan n IIn nt trro oddu uc cttiioon n by Ulrich Sailer Learning Objectives The readers ) are familiar with the term sustainable development and its origins, ) know how the term sustainable development evolved from the Brundtland Report to the Three-Pillar-Model, ) recognize the inherent tensions between traditional models of business management and sustainable business. List of Key Terms ) Greenwashing ) Brundtland Report ) Three-Pillar-Model ) Corporate Social Responsibility (CSR) ) Corporate Citizenship ) Compliance Should we even bother with the term sustainability these days? It is used in an inflationary fashion and for many different purposes. It is mocked as a buzzword and often abused rather than used. We frequently do not know what an author means concretely when he uses the term. One author may use sustainability simply as a synonym for something that has a long-term or lasting effect. Another one may imply the full weight of the d Brundtland Report, the d Three-Pillar-Model and the recommendations of the study commissions from various parliaments. And a third author talks about sustainability because today products and services are absolutely expected to have that feature. Who would want to buy anything else? Especially this frequent and undifferentiated use, the misuse of the term and also the abusive d greenwashing result in the fact a number of observers think of sustainability as a worn out and trendy term which should consciously be avoided. Those who continue to work on business sustainability issues in academia are frequently forced to justify, in a slightly apologetic manner, why they still use the term. And this is exactly what the authors of “Sustainable Business Management” discussed. Now that business management has been “turned sus- <?page no="25"?> 24 1 Sustainable Development - an Introduction @ www.uvk.de tainable,” many a cynic might consider such a volume to be unavoidable. As we can already choose sustainable vacation travel, biological and sustainable wine and sustainable electrical power, it is inevitable that somebody also wants to sell the idea of sustainable business management. But isn’t good business management already sustainable? Hasn’t the goal of our management science always been to develop healthy companies which can grow sustainably? In that case, there is no reason for the discipline of business management to listen to the lectures of the supporters of sustainability who stress its narrow-mindedness. Not far away is an ideological debate about social romantics and do-gooders, who want to seize the opportunity offered by the spirit of the times to take revenge on business management. Given these challenges, it is unsurprising that a number of people try to distance themselves from the term of sustainability. There is a real danger that the message is misunderstood or that the author is associated with the wrong crowd. It is clear that the term sustainability cannot be used lightly. But we feel it is our responsibility to seize the opportunities for advancing the field of business management which arise from a critical discussion of sustainability. Sustainable business management is neither a complete concept nor an ideology. And it is absolutely not the case that traditional business management is abandoned completely or discredited as hopelessly one-sided and incomplete. Instead we are looking at an evolutionary development, which confirms many insights from classical business management, makes numerous additions and also refutes several ideas. How can we define “sustainable” so that it is useful and enriching for business management? If we google the term, we get more than 100 million hits in less than half a second. But where does the term originate? Sustain has its roots in the Latin word sustinere, which can be translated as maintain, carry, preserve or keep. Sustainability thus implies stable structures which at the same time provide sufficient reserves for the future. 1 The origin of sustainability is regularly traced back to forestry, where the limits of short-term overexploitation were already decried centuries ago. Due to lengthy regeneration times and the slow growth of forests, the necessity for a caring treatment of the natural resource wood is obvious if the supply is to be assured over the long term. Only that amount of wood can be harvested which is replaced in type and quantity. Today sustainable development still reflects the self-image in forestry. Discussions about sustainability frequently make reference to the so-called d Brundtland Report from the year 1987. Gro Harlem Brundtland, born in 1939, is a Norwegian politician and member of the Social Democratic Party. She was minister of the environment in the seventies and later until 1996 re- 1 Grober, U. (2010), pp. 19o20 <?page no="26"?> 1 Sustainable Development - an Introduction 25 @ www.uvk.de peatedly prime minister of Norway. She narrowly escaped the terrorist attack on the Norwegian island Utoya, since she only left the island shortly before. Beginning in 1983, Brundtland headed the “World Commission on Environment and Development” which was assembled by the United Nations. The final report of the commission is entitled “Our Common Future” and is frequently called d Brundtland Report. The report is credited with mapping out the principles of sustainable development and coining the term sustainability. It is stated: “Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs.” 2 Sustainable development thus expresses awareness for the responsibility for future generations and the environment. Restraint is exercised and options are foregone in order to enable future generations to have their own options. A few years later, in June 1992, the first United Nations Conference on Environment and Development took place in Rio de Janeiro. Approximately 10,000 participants from 178 countries compiled lines of action for a sustainable global development. Sustainable development was designated as a guiding political principle. This was based on the insight that global environmental protection is possible only if social and economic aspects are also taken into consideration. This developed into the d Three-Pillar-Model of Sustainability, which consists of an economic, an ecological and a social pillar. If one of the aspects is ignored, sustainability collapses. Unsurprisingly, this initiated a discussion about the most important pillar and the appropriate handling of conflicts among the aims. Should environmental pollution be tolerated if it creates employment? Or should democratic processes be avoided, since a majority is possibly opposed to a project which protects the environment? Figure 1-1: Three-Pillar-Model of Sustainability 2 The Brundtland Report can be found at www.un-documents.net/ ocf-02.htm <?page no="27"?> 26 1 Sustainable Development - an Introduction @ www.uvk.de Example: Beiersdorf AG “We manage our business sustainably and are committed to our ecological and social responsibility. Our actions are determined not only by our company’s economic success, but also by our active approach to environmental protection and occupational safety, and by our commitment to society. Our actions are based on a culture of trust, fairness and equality of opportunity.” 3 The following Table lists for each of the three pillars the societal dimension alongside the practical implementation at the company level. Pillar Societal Dimension Business Dimension Ecological sustainability Nature and environment need to be preserved for future generations. This includes climate protection, protection of the natural landscape, preservation of biodiversity, and the conservation of natural resources. low emissions of pollutants low life cycle costs careful resource utilization recycling longevity ... Economic sustainability Creation of lasting prosperity. Careful treatment of the resources required for economic success. Promotion of education and establishment of favorable framework conditions to support economic success. shareholder value profit maximization return market share growth ... Social sustainability Creation of a livable and futureoriented society that provides freedom for the development of individuals and their participation in the community. employee satisfaction secure workplace tax payments social outreach ethical responsibility occupational safety ... Table 1-1: Societal and business dimensions of sustainability 3 Homepage of Beiersdorf: http: / / www.sustainability.beiersdorf.com/ Our-Way/ Guide lines/ Sustainability-Guidelines.aspx? l=1, translated <?page no="28"?> 1 Sustainable Development - an Introduction 27 @ www.uvk.de Especially the field of business management frequently stresses the importance of reaching clear decisions on the basis of unambiguous relationships among variables. Introductory business courses already teach the importance of studying linkages between variables, clarifying conflicts among competing aims and defining a clear hierarchy of targets. Admittedly, this is grounded in a rather mechanical model of a company. On the basis of clearly defined target systems, exactly defined binding constraints and complete information, it is possible to develop solutions that are theoretically clean, but usually have little in common with business reality. In our daily lives, however, we are quite capable of dealing with imprecision, missing information and contradictions. And numerous companies manage to strike an appropriate balance between economic, ecological and social considerations in the face of possible contradictions. Instead of weighing the targets against each other, a commensurate and lasting balance of targets is important. The transfer of the d three-pillar-model to the business world makes it clear that defining the success of a company by maximizing a single key performance indicator it is no longer possible. This leads us to an important insight for sustainable business management. Ecological and social targets are not merely additional guidelines for the company, further guard rails, which reduce the scope of management even further. Thus it is not just business as usual with less freedom. We should not discuss sustainable business management in such a traditional mode of thinking. Instead we are abandoning strictly linear thinking and company management as managing a machine. Not individual targets are maximized, but instead a balance of targets is sought. Contradictions, incomplete or even incorrect information are a part of daily operations. Not “either - or,” but instead “as well as” shapes our understanding of reality. 4 Example: Siemens AG “Although decisions in these areas are not always free of conflicting interests, we aim to make them transparent and to find the best solutions possible. The responsible use of natural resources, targeted investments in viable technologies that promise profitable growth and offer our customers a competitive edge, and corporate ethics that extend beyond compliance with the law and focus on integrity. These are the factors that enable us to drive sustainable development and to lay the foundations for a successful future of our company.” 5 4 Sailer, U. (2012), pp. 90o98 5 Siemens AG, in: http: / / www.siemens.com/ sustainability/ de/ nachhaltigkeits-verstän dnis/ grundsaetze.htm, translated <?page no="29"?> 28 1 Sustainable Development - an Introduction @ www.uvk.de Challenging the simplifying, classical world of business modeling also means abandoning familiar structures that work well in the models and taking completely new perspectives that will likely yield new insights. In complex systems, we need to move away from the erroneous belief that given adequate information, everything can be controlled. 6 By now we have familiarized ourselves with two aspects of sustainable development. Sustainability in an ethical sense comprises the three-pillar-model and generational equity, while sustainability in a functional sense deals with the limits to control of complex social systems. Both aspects of sustainability are interrelated and hence must both be included in sustainable business management. In applied work as well as in the literature, sustainability in an ethical sense tends to dominate. Business sustainability is already well established in many companies. Sustainability targets are defined, measures derived and results presented in sustainability reports. Established terms include d corporate social responsibility (voluntary support for social sustainability), d compliance (adherence to legal and societal as well as self-imposed ethical standards) or d corporate citizenship (local social engagement). Meanwhile, all larger companies are forced to actively position themselves with regard to sustainability. This commitment can be traced to the true support of decision makers or the pressure from customers, employees, business partners, investors, the public, the internet community or regional and supra-regional politicians. And finally it is also the case that invitations to tender or strategic partnerships frequently require certifications to evidence the fulfillment of social or ethical demands (for example ISO 14001, EFQM, SA8000). Thus sustainability has arrived at the company level. It is therefore imperative that the science of business management also actively deals with the many aspects of business sustainability. At a glance The term sustainable development may indeed have numerous meanings, but we define it against the backdrop of the Brundtland Report and the Three-Pillar-Model. For business management, sustainability is more than just another binding constraint; it leads to a redefinition of the target system. This means that economic, ecological and social aspects need to be integrated into business management and a balance of targets must be 6 Sailer, U. (2012), p. 110 <?page no="30"?> OxZ|]šZX]| 29 achieved. The frequently dominating mechanical model of the company needs to be extended. Companies are social systems, multi-faceted and dynamic. Sustainable business management must find ways of dealing with such complexity. Suggestions for further reading A clearly structured historical classification of sustainability: Caradonna, J. (2014): Sustainability: A History, Oxford/ New York. An accessible and comprehensive overview of the field of sustainability: Robertson, M. (2014): Sustainability: Principles an Practice, New York. <?page no="32"?> o see Glossary @ www.uvk.de 22 SSuussttaaiinnaabbllee BBuussiinneessss MMaannaaggeemmeenntt by Dietmar Ernst Learning Objectives The readers ) are able to list the various scientific programs in business management and can name important representatives of these fields, ) are able to express the most important basic tenets of the different scientific programs in business management, ) are able to compare the individual scientific programs in business management, ) are able to explain the contributions of the individual scientific programs in business management with regard to business sustainability and support them with examples, ) are able to express the main ideas of sustainable business management and explain its contribution to the development of research in business management, ) are familiar with the principles of sustainable business management, are able to critically discuss them and provide supporting examples. List of Key Terms ) Decision-oriented business management ) Gutenberg’s factor theory ) Principles of sustainable business management ) Institutional economics ) Sustainable business management ) Shareholder value ) Stakeholder value ) Environmental approach 22..11 IInnttrroodduucctti ioonn On the following pages we want to introduce sustainable business management as a new scientific program in business studies. Business sustainability is a term that is used at every level of human activity. Does the introduction of sustainable business management merely react to the spirit of the times? Should it be considered as an opportunistic attempt to force business management into a straightjacket which may be applauded by practitioners, but does not contribute <?page no="33"?> 32 2 Sustainable Business Management @ www.uvk.de to any substantial development of the discipline? Or is sustainable business management an innovative approach based on earlier scientific programs in business management and likely to yield value added concerning the “improvement of decisions in business management.” 7 The second aspect will dominate the following elaborations. It will be shown that the scientific programs in Germany have made an important contribution to the development of sustainable business management. To that aim, the most important insights will be summarized briefly. In the next step, it will be discussed how both research and applied work in business management have increasingly been dominated by capital market considerations. This has changed the discipline. In the following, the scientific program of sustainable business management will be presented, which can be seen as a counterpoint to the shareholder value approach. First tendencies towards sustainable business management are already present in the literature. 8 Figure 2-1: Scientific programs in business management Before we begin with the analyses of the scientific programs in business management, it should be pointed out briefly that the definition of business sustainability in the context of a Three-Pillar-Model as presented in the introductory 7 Heinen, E. (1969), pp. 209o210 8 Hülsmann, M./ Müller-Christ, G.; Haasis, H.-D. (Hrsg., 2004); Göllinger, Th. (eds., 2006); Burschel, J./ Losen, D./ Wiendl, A. (2004) <?page no="34"?> @ ww w.uvk.de chapter should definitely be checked for completeness. A look at business management research reveals that the concepts used are not only influenced by social and environmental aspects, but are also strongly driven by technological factors and the legal sciences. Technology and legislation act as both framework conditions and additional driving forces for sustainable economic management. The five pillars of business sustainability (economy, social sphere, environment, technology and legislation) are reflected in various scientific programs in business management and constitute important components of sustainable business management. Figure 2-1 clarifies these linkages. 22..22 SSc ciieen ntti iffi ic c P Prroog grraamms s i inn B Bu ussi in neesss s M Maannaag ge emme en nt t aanndd t th he ei ir r LLiin nkks s tto o BBu us siin neessss SSuusst ta aiin naabbi il liit ty y 22..2 2. .11 GGu ut te en nbbe er rg g’ ’ss FFa acct to or r TTh he eoorry y d Gutenberg’s factor theory is considered to be the first closed system in the field of business management. According to Gutenberg’s factor theory, the field of business management has the task to “detect the inner logic of things and to intellectually penetrate the circumstances of a company … The scientific path does not depend on the practical relevance of the subject matter.” 9 With his three volumes “Production,” “Distribution” and “Finance” he implemented the integrative idea of business management as the science of linkages in production. At its core is the functional production relationship between factor input and factor return. Profit maximization is the chief target criterion and takes center stage. Insight The instruments used by Gutenberg are closely related to economics, more precisely to neoclassical microeconomics. Complete rationality is assumed as represented by homo oeconomicus, an ideal-typical economic subject. These premises, which up to this date are found in most financial models, have the advantage that the complex world can be reduced to a closed system of mathematical equations, which allows the derivation of unambiguous decisions and action plans. The contribution of Gutenberg is the introduction of formal and mathematical methods to business management and the development of the 9 Gutenberg, E. (1953), pp. 340o341 2.2 4~x|`Zx{x~ 5]_z]ša\ x` mX\x`|\\ Nš`šz|a|`Z 33 <?page no="35"?> 34 2 Sustainable Business Management @ www.uvk.de discipline towards a normative approach. At the same time, this entails the danger that business management is closed off from other disciplines. Especially the lack of practical relevance of its model premises (profits as the sole target criterion, rational decision making, harmony of the profit goal with social welfare maximization) are considered to be the major points of criticism, which were taken up by the scientific programs discussed in the following. Contribution of the factor theory to sustainable business management What can sustainable business management learn from the factor theory? Initially, it must be accepted that almost all financial models which are helping to shape the development of business management are based on the neoclassical paradigm. This includes among others the d shareholder value approach, the portfolio theory, the theory of company valuation, the capital market theory or the option price theory. Despite continued criticism, research in business management has so far not been able to replace the financial models which were developed primarily in the sixties and seventies with more realistic and at the same time normative models. It must also be stated that these models are very well suited for solving specific questions. But a mistake which was made in the past years and which must be avoided is the assumption that the complex reality can be governed with these models. In this regard, the growing importance of the financial markets has also led to an increasing focus on financial issues in business practice. In fact, business management is dominated by financial management. This certainly offers perspectives for sustainable business management. 22..22..22 HHeeiinneenn’’ss DDeecciissiioonn--oorriieenntteedd BBuussiinneessss MMaannaaggeemmeenntt In contrast to the approach chosen by Gutenberg, the d decision-oriented approach of Heinen gives greater importance to the practical tasks of business management. It is the scientific starting point for business management. “The fundamental importance of the decisions concerning the objectives becomes evident in the structure of the theory of the corporation, which makes up the core of the quest for knowledge in business. At the beginning of every effort to develop such a theory is the search for the target function of the firm. Depending on the choice of the target function, the theory of the firm will have a different structure.” 10 10 Heinen, E. (1976a), p. 15 <?page no="36"?> @ ww w.uvk.de The decision-oriented approach introduced two innovations to business management: ) The realistic incorporation of concrete decision situations, ) The opening towards questions from the social sciences. “Decision-oriented business management sends ... the <homo oeconomicus> from classical microeconomics into fairyland. Its analysis of decision making is based on basic models of humankind, organization and society.” 11 It moves away from the idea of the firm as “<perfectly functioning> humans and organizations.” 12 Heinen considers his approach to be a synthesis of the ethical-normative program of Heinrich Nicklisch on the one hand (the firm cannot be considered only with regard to the productiveness of the factor input, but must be viewed as a sub-unit of societal order) and the program of production relationships of Gutenberg on the other hand. The orientation towards decisions should be seen as the “unification of both approaches.” 13 The decisions of individuals who face economic choices are at the heart of d decision-oriented business management. Heinen merges approaches to logical decision making of prescriptive decision theory (which rests on the neoclassical paradigm) with questions concerning the decision making process in reality. These are at the center of descriptive decision theory, which is closer to the social sciences. Further gains in knowledge of the decision-oriented approach relate to the incorporation of the time factor, since decisions that span several periods or sequences of decisions over time are made predictable. Furthermore, Heinen succeeded in quantifying risk and uncertainty and incorporating it into decision theory. Better than any other approach, decision-oriented business management allows the conceptual integration of tasks related to decisions and design. Contribution of the decision-oriented approach to sustainable business management From the current perspective, the decision-oriented approach of Heinen constitutes an important step in the direction of sustainable business management. It opens up the field of business administration towards a unified treatment of management and personnel issues. The relevance of employees for companies 11 Heinen, E. (1976b), pp. 395o396 12 Albach, H. (1986), p. 589 13 Schanz, G. (2009), p. 112 35 2.2 4~x|`Zx{x~ 5]_z]ša\ x` mX\x`|\\ Nš`šz|a|`Z <?page no="37"?> 36 2 Sustainable Business Management @ www.uvk.de in particular is a central component. Due to increased demands on job profiles of employees and the demographic change in Germany, personnel issues will be of increasing relevance in business management. Furthermore, the decisionoriented approach of Heinen takes on the creative challenge without reducing the complex environment to purely functional premises. 22..22..33 TThhee oo SSyysstteemmss--oorriieenntteedd AApppprrooaacchh While Gutenberg introduced the development of descriptive and explanatory models into business management, Heinen extended this system by including decision models. The systems-oriented approach goes one step further and sets itself the task of devising models for shaping future developments. As the systems-oriented approach belongs to the field of cybernetic science, it is not interested “in what is, but rather what will be, not in the existence, but rather in the functioning of systems.” 14 Insight Cybernetics is the science of structuring, directing and regulating complex systems via information and communication. Ulrich writes on this issue: “The essence of the cybernetic systems is their ability as open systems to compensate for interruptions in the context of control and regulation processes, so that the system will independently return into the range of permissible deviations.” 15 Systems-oriented business management considers itself to be a design theory related to engineering. The difference is that it deals with social and not with technical systems. The approach is purposefully interdisciplinary and is designed to assure the inclusion of insights from neighboring disciplines (for example behavioral sciences). This gives up the mathematical consistency and formality of Gutenberg’s theory in favor of practical relevance and a stronger focus on dynamic aspects. The notion of the actual operating process as a black box for management purposes is expressed by Ulrich as follows: “We do not even try to capture in detail all the activity inside the system and to determine a corresponding causal relationship. We are content with those fea- 14 Ulrich, H. (1971), p. 44 15 Ulrich (1971), p. 44 <?page no="38"?> @ ww w.uvk.de tures that we can observe from the outside: inputs and outputs. We consider the system itself as something inaccessible, as a black box.” 16 Is it even possible on this basis to reach the aim of shaping developments, which was given such prominence by Ulrich? If the system “company” is considered to be “inaccessible,” the difficulty of providing direction in business management becomes clear. The systems-oriented approach is honest in accepting that questions in business management are not easily solved with the help of mathematical formulas, but are instead characterized by complexity. The systems-oriented cybernetic approach entered management education as the so-called St. Gallen-School. The task of management is to position a company in such a way that the system can evolve evolutionary and develop superior solutions. 17 This requires the self-organization of the company which is preferred over a rational structure established to reduce complexity. Insight Crucial elements of the systems-oriented and cybernetic approach are decentralization, lack of detailed regulation as well as the establishment of a company culture which fosters an evolutionary development of the organization. Contribution of the systems-oriented approach to sustainable business management The d systems-oriented approach exhibits numerous features that are relevant for the design of sustainable business management. This includes the opening up of business management towards neighboring sciences and the understanding that business management is an interdisciplinary subject as well as the insight that a company is part of an interrelated system. This insight is explicitly taken up in business sustainability, where the interrelations of economic actions are studied in an economic, ecological and social context. A further central element is the extension of the approaches of Gutenberg and Heinen to include the task of shaping the organization. This responsibility is seen as an evolutionary process. The self-organizing corporation is able to reach innovative solutions in an environment that is subject to constant change. Such innovative power enhances the competitive strength in a global marketplace. 16 Ulrich (1970), p. 132 17 Sailer, U. (2012), p. 119 37 2.2 4~x|`Zx{x~ 5]_z]ša\ x` mX\x`|\\ Nš`šz|a|`Z <?page no="39"?> 38 2 Sustainable Business Management @ www.uvk.de 22..22..44 TThhee oo BBeehhaavviioorraall AApppprrooaacchh Gutenberg’s factor theory as well as most decision theories and capital market theories are rooted in the rationality principle. The advantage of this principle is the ability to mathematically model the question at hand and to provide clear decision support on that basis. The price that has to be paid for this is the use of very restrictive premises, which lead to models that cannot adequately capture reality. One example of these premises is homo oeconomicus, which is rejected by Heinen, who moves away from the principle of rationality in his decisionoriented approach. This idea is also taken up by the d behavioral approach to business management. Insight The behavioral approach to business management sets itself the goal of explaining the actual decision making behavior of individuals and companies with the help of findings from behavioral science. Concretely, business management is opening up towards disciplines such as psychology, social psychology and sociology by including insights from these fields. This is supposed to lead to better explanations for the behavior in companies and on markets, which in turn will yield improved forecasts and superior decision support. The decision-oriented approach of Heinen and behavioral business management have resulted in a shift away from the primarily theoretical orientation of Gutenberg and towards the Anglo-American school of management with its focus on concrete management problems. 18 The decision-oriented approach has an influence for example also in behavioral finance, which explains irrationality in financial markets and has gained major influence in the wake of the financial market crisis. The behavioral approach and the factor approach equip business management with two extremely useful theories. With the behavioral approach it is possible to explain actual behavior in a company rather well, while the normative approach offers mathematical models to calculate optimal solutions. Current research in business management has so far not been successful, however, in merging the two approaches into a comprehensive framework. This may not even be possible, since the two methodologies define different tasks for themselves. For these, they may already offer optimal solution techniques. 18 Kirsch, W. (1979), pp. 105o120 <?page no="40"?> @ ww w.uvk.de Contribution of the behavioral approach to sustainable business management Which of these two approaches is better suited for the concept of sustainable business management? Since one of the pillars of business sustainability aims at social targets, the behavioral approach provides an important counterpoint to the shareholder value orientation. The behavioral approach accepts humans with their differences and their individuality. By turning away from homo oeconomicus, it is made possible to individualize the production factor “labor” and to include its potential for company success. In contrast, the normative approach is suitable for solving a large number of decision problems, which are not addressed by the behavioral approach. One example is investment planning. 22..22..55 TThhee oo EEnnvviirroonnmmeennttaall AApppprrooaacchh The environmental approach constitutes a reaction to the increasing environmental problems of our industrialized society, which has led to a reassessment in politics, business and academia. Concerning research in the field of business, two main streams can be discerned at the moment: ) The ethical and normative ecological business management, ) the ecological approach. Insight Ethical and normative business management is demanding a fundamental reorientation of economic thought and action by giving greatest prominence to the consistency between ecological and business perspective. This approach is not so much concerned with the things that “can be done immediately, but rather about a fundamental debate about the relationship between economy and ecology.” 19 Global warming is one example for such a debate about basic principles. The results of this debate will have an effect on the economy via policy measures. Insight The environmental approach is not so much about a complete reorientation of business thinking, but rather about the inclusion of ecological topics into the traditional core of business management. 19 Freimann, J. (1987), p. 381 39 2.2 4~x|`Zx{x~ 5]_z]ša\ x` mX\x`|\\ Nš`šz|a|`Z <?page no="41"?> 40 2 Sustainable Business Management @ www.uvk.de Environmental protection and environmental technologies are seen as new elements in the catalogue of business targets. They should not be seen in competition with the profit motive, but rather as constraints or as opportunities to optimize economic goals. Contribution of the environmental approach to sustainable business management Sustainable business management is tightly linked to the environmental approach. As part of an ethical and normative ecological business science, sustainable business management should be an active participant in the debate about the economic framework conditions necessary to ensure a functioning ecosystem for the coming generations. With regard to the ecological approach, the main potential of sustainable business management lies in the development of innovative environmental technologies and products, which can make a contribution towards the attainment of environmental targets at the level of the company and the economy. A related goal is technological and market leadership in order to assure continued business success. 22..22..66 TThhee AApppprrooaacchh ooff IInnssttiittuuttiioonnaall EEccoonnoommiiccss In the sixties, microeconomics turned away from stringent neoclassical equilibrium theory and institutional economics was developed. New institutional economics analyzes the production of goods not from a technical and economic perspective, but rather against a legal and economic background. Insight The focus of new institutional economics is not on the possession of factors of production, but rather on the right of disposition, which can be passed on to another economic agent by means of a contract. Within the school of new institutional economics, four directions can be distinguished: 20 ) Economics of information: analyzes the uncertainty which exists among contract parties. ) Property rights approach: analyses how the distribution of property rights influences the behavior of economic agents. 20 Schanz, G. (2009), pp. 133o155 <?page no="42"?> @ www.uvk.de ) Transaction cost approach: studies the magnitude of the costs associated with the transfer of property rights. ) Principal-agent approach: analyzes the optimal design of a contract as part of business relations and looks at differences in aims and information levels between principal (shareholder) and agent (management). The approach of institutional economics will be explained in more detail with reference to the principal-agent problem, which exists for example in the case of listed companies (principal: owners; agent: board of management). The model deals with problems of cooperation and dependency between two individuals, who both contribute to the success of an activity. At a publicly listed company, the shareholders give a mandate to the board of management to maximize shareholder value, in other words the value of the company. But as an opportunistically rational being, the manager may pursue interests that are in conflict with the aims of the shareholders. Problems for the shareholders arise primarily from a lack of information, the costs of contract design and differences in utility maximization of the various individuals involved. The control mechanisms of the shareholders are limited due to the above mentioned problems. For that reason, the principal must try to defuse the agency problem be creating incentives. Call options on shares for example are an instrument to align the goals of management board and shareholders, because both principal and agent are interested in shareholder value maximization. Can new institutional economics make a meaningful contribution to sustainable business management? At first glance it may appear that new institutional economics supports the implementation of the shareholder value approach by providing academic legitimacy. But at the same time it makes a contribution towards bridging the gap between normative and behavioral business studies. As an example, new institutional economics provides strong foundations for the use of profit sharing programs in companies. It is not so much the approach but rather the fields of application of new institutional economics to business management that must be subjected to a critical discussion. Contribution of institutional economics to sustainable business management Independent of the specific applications, new institutional economics has been influential in moving research in business management further away from classical questions about the real economy. Prior to the outbreak of the financial crisis, this was not well understood. But in the current globally competitive environment with its uncertainties and fragile financial markets, the importance 41 2.2 4~x|`Zx{x~ 5]_z]ša\ x` mX\x`|\\ Nš`šz|a|`Z <?page no="43"?> 42 2 Sustainable Business Management @ www.uvk.de of a strong real economic base both for the economy and for individual firms is becoming apparent. It is possible that a reorientation towards questions related to the real economy will open up new avenues of research in business management. Sustainable business management would be very suitable in this regard. 22..33 WWhhaatt LLiiees s AAhhe eaadd ffoorr BBuussiinnees sss RRees seea arrcchh? ? A closer look at popular textbooks reveals that the chapters on research in business management end with new institutional economics. What happened to research in Germany, which used to be influential in the field of business management? Where are the new approaches? With the new institutional economics and the global introduction of the shareholder value approach, the critical debate in the field of business management apparently came to a close both among academics and practitioners. It appears that the paradigm of shareholder value maximization is generally accepted as the overarching target for every corporation and any discourse about the “appropriate” direction of research has died out. Research only takes place in the sub-fields of business management. The d stakeholder approach does not offer an alternative to the shareholder value approach. While it puts the firm into a broader context, it does not provide any tools for company management. In the classical introductory textbook by Wöhe, which covers all aspects of business management, the following is written under the heading “Dominance of the shareholder approach in business practice: ” “This textbook follows the traditional concept of business management which states that activities inside a company are motivated primarily by the interests of the providers of equity capital. Models in business management follow the shareholder approach, since this conception has been largely successful in the reality of companies active in competitive markets.” 21 Has the shareholder value approach really yielded the outstanding practical results which warrant its uncritical acceptance and the end of further debate? A closer look at the price development of publicly listed companies and the causes of the financial crisis does not appear to support this view. A look at the management systems of major corporations also reveals that they do not target the net present value, but continue to be based on numbers related to an accounting period (EVA, ROCE, …). The case gets even weaker when considering that a large share of the value added and of innovations in Germany is produced by medium-sized companies. Due to the cost pressures at their publicly listed clients, these firms are also subjected to the shareholder value principle, but are characterized by a carefully differentiated target system. It should also be asked 21 Wöhe, G./ Döring, U. (2010), p. 57 <?page no="44"?> 2.4 Sustainable Business Management 43 @ www.uvk.de whether the tasks of corporate management can really be reduced to the idea of shareholder value in the current environment which is subject to a scarcity of qualified experts, the broad availability of capital, the increased importance of knowledge relative to capital, intensifying competitive pressures at the global level and shrinking and increasingly expensive resources. 22..44 SSuussttaaiinnaabbllee BBuussiinnees sss MMaannaaggeemme enntt Insight The goal of sustainable business management is to move research in business management beyond the excessively narrow focus on financial considerations. Is this in contrast to the insight that the sole purpose of a company is to improve the wealth of its owners? This statement is rooted in the microeconomic thinking of homo oeconomicus and merely sheds light on one aspect and one perspective of business management. It should be noted that meanwhile a large number of owners pursue the goal of long-term company success. They are not so much interested in short-term price advances that are mostly volatile. Furthermore, the shareholder value school ignores to think about the success factors of entrepreneurial activities. The groupings “owners,” “management” and “employees” are jointly responsible for the success of a company. Other groups such as customers, suppliers and the government also make their contributions. If thinking in line with the shareholder value approach and new institutional economics is accepted, it is crucial to not only address the principal-agent problem that arises between owners and management, but to also consider in the same light the relationship between owners and employees and between management and employees. All this is needed to assure sustainable economic success. This brings us back to the new research approach of sustainable business management. Insight Sustainable business management is based on the various strands of research that have previously been developed in the field of business. It aims at a consistent development of the existing research approaches. <?page no="45"?> 44 2 Sustainable Business Management @ www.uvk.de Sustainable business management is also based on the insight that a corporation must be positioned in a way that assures its long-term success. This requires innovation and market leadership. Business sustainability is not ubiquitous, but a feature that requires hard work and investments. In that sense, sustainable business management can also partly draw on the shareholder value approach, but only if profit-sharing between the parties “capital,” “management” and “employees” is agreed. New institutional economics can make a valuable contribution by solving the associated problems. This in turn requires the incorporation of the behavioral approach, since homo oeconomicus is not sufficient to model the various parties that contribute to company success. Everybody contributes their individual abilities, which must be utilized in a way that allows the optimal use of the available potential. Company leadership is the subfield of business management which can benefit most from the behavioral approach. Sustainable business management looks at the company as part of a system. Its interrelations constitute a decisive success factor for a sustainable economy. Insight Success in sustainable management requires the ability to adapt to changing environmental framework conditions. A closed approach to business, which reduces economic activity to processes inside the corporation, fails to address the management challenges posed by a global and volatile world. Instead, business management must react to changes in economic and societal framework conditions. In the period after the war, when a huge demand was met by relatively limited supply, the approach of Gutenberg was still very suitable. Today we are facing different challenges. In a world characterized by increasingly scarce and expensive resources as well as global and competitive markets, the task is to deploy all factors of production (labor, capital and technical progress) in such a way that highly innovative companies can maintain and deepen their technological and market leadership. This includes ecological aspects such as resource-efficient production and behavioral approaches which target an optimally trained and utilized workforce as prerequisites for sustainable and successful economic activities. Insight Sustainable business management deals with economic activities of companies that are successful in the long run. It takes into consideration the <?page no="46"?> 2.5 Principles of Sustainable Business Management 45 @ www.uvk.de linkages with other companies and the surrounding economic environment. Long-term success is accomplished via the optimal use of all factors of production. The interests of all involved parties are aligned in negotiations which assure adequate participation in the activities and the success of the company. 22..55 PPrriin ncciippl leess oof f SSu us stta ai innaabbl lee BBu ussi inneessss MMaannaag geemme enntt The following principles define sustainable business management: 1. In line with traditional approaches, sustainable business management bases its actions on flow variables such as profit, cash flow or sales and incorporates technological, social and ecological aims to reach its economic targets. The economic orientation of the company is not driven by short-term targets, but rather by the preservation of assets and the application of this mercantilist principle to all factors of production. 22 Example An analysis of globally leading mid-sized companies (hidden champions) reveals that similar to high net worth individuals, these companies base their growth on the available substance, which they gradually expand. Risks that materialize when this basic principle is violated can be observed for example in company takeovers that are largely financed with debt (Porsche o Volkswagen, Schaeffler - Continental or LBO transactions of private equity companies). 2. Sustainable business management incorporates the relevance and limited substitutability of natural resources, human capital and technological progress for achieving business targets. Example Sustainable growth of a company cannot be accomplished by the unbalanced substitution of one or several factors of production. Growth at the expense of natural resources, which is partially observable in emerging markets, excessive cost-cutting measures via layoffs, strong substitution of 22 Müller-Christ, G./ Hülsmann, M. (2003), pp. 269o277 <?page no="47"?> 46 2 Sustainable Business Management @ www.uvk.de equity capital by debt capital in the financial structure or budget cuts in research and development may trigger short-term economic success, but jeopardize the existence of the company in the long run. 3. Sustainable business management has its main focus on securing the longterm success and development potential of the company. Its normative founda tions and strategic orientation are implemented by aligning the operative activities of the company with the defined normative visions and strategic guidelines. 23 Example This principle finds its expression in company management with a longterm orientation as exemplified by the management model developed by the St. Gallen-School. Business sustainability is always part of the philosophy and culture of the company. It does not matter whether this is stated explicitly in the company principles or only revealed indirectly via the actions of management. 4. Sustainable business management has an orientation on innovation. It pursues a strategy of continuous improvement of the resource productivity by exploiting process optimization and innovativ e process and product design. 24 Example Companies that embrace business sustainability are characterized by a large innovative potential, which gives them a competitive advantage at the global level. Business sustainability is not the result of the innovation policies of companies, but rather a prerequisite for successful activity. 5. Sustainable business management aims at a reduction of resource use and emissions, given that the economic condition of the company allows this and the global and national priorities concerning business sustainability demand this. 25 23 Freimann, J. (2006), p. 49 24 Wagner, B./ Strobel, M. (1999), pp. 67o68 25 Stahlmann, V./ Clausen J. (2000), pp. 103o104 <?page no="48"?> 2.5 Principles of Sustainable Business Management 47 @ www.uvk.de Example It is in the self-interest of companies with a business sustainability focus to act in a resource efficient manner, since resource costs and costs of hedging volatile resource prices can strongly influence profitability. 6. Sustainable business management aims at the capabilities of its employees to support business activities. The goal is to optimally utilize and develop the available social capital and human capital. This facilitates learning in the entire organization, which in turn enhances the future outlook. 26 Example As a consequence of the expected shortage of qualified specialists and academics, the factor “labor” will gain significantly in importance in the years to come. The practice of hire and fire, which is prevalent at consultancies or investment banks, is in conflict with the principles of sustainable management. 7. Sustainable business management is highly flexible. It is not set on available products and programs, but interprets its societal task as the provision of solutions for client-specific problems. These solutions draw on intelligent service bundles with a functional and forward looking orientation. 27 Example Importantly, sustainable economic behavior should not be seen as “static,” but rather as an evolutionary and innovative process of adaptation to a changing environment. Business sustainability is thus not “purely preserving” in character, but instead entails the responsibility to shape in a sustainable fashion. 8. Sustainable business management creates companies that are successful in the marketplace. Nonetheless, these companies are looking for cooperative 26 Achouri, C. (2011), pp. 253o254 27 Freimann, J. (2006), p. 51 <?page no="49"?> 48 2 Sustainable Business Management @ www.uvk.de solutions in the form of alliances or networks with a focus on the value chain or regional aspects. Such co-operations aim to strengthen business sustainability by exerting influence on suppliers, customers and partners. 28 Example As a consequence of shortened innovative cycles, increasing R&D expenses, stronger market segmentation and intensifying competition, more and more alliances are formed. One example in the automotive industry is the co-operation with regard to “alternative drives.” But the same industry has also witnessed negative examples. The relationship between automotive producer and suppliers is still characterized by the Lopez-effect and intense price pressures. Such uncooperative working relationships are only successful in the short run. Over the long term, they lead to a decline in innovative strength and problem solving ability. 9. Sustainable business management views the company as a coalition of different stakeholders and leadership as the process of balancing these stakeholder interests. Since these groups differ in their ability and interest to exert influence, the goal is to achieve an acceptable reconciliati on of interests which ultimately secures the long-term business sustainability and viability of the company, without treating any of the groups as having a superior or privileged position. Communication is open and focuses on the dialogue with all stakeho lders. 29 Example Sustainable business management sees itself as contrary to a management science that looks at the short term and has a pure focus on capital markets. In contrast to the shareholder value approach, all stakeholders are included. This assures an increase in the company value over the long term, which is in the interest of all stakeholders, including shareholders. 10. Sustainable business management does not accept the current economic, political and ecological framework conditions as facts that cannot be influenced. Instead, it views companies as economic agents that are actively en- 28 Kirschten, U. (2003), pp. 171o172 29 Freimann, J. (2006), p. 52 <?page no="50"?> 2.5 Principles of Sustainable Business Management 49 gaged in the political debate in order to establish a sustainable environment. This also facilitates the strategic orientation concerning the future development of the company. 30 Example Sustainable business management views companies as economic agents that shape their environment and pursue innovation. For that reason, companies should be interested to obtain a competitive advantage by exceeding the legally mandated minimum requirements for business sustainability. The automotive industry and their lobbyists fight the reduction of CO 2 threshold values instead of accepting the challenge of reducing emissions. Such innovative strength would likely secure market shares. At a glance Sustainable business management is rooted in the various directions of research that have previously been developed in the field of business and pursues the consistent development of these approaches. Sustainable business management is concerned with economic activities of a company that are successful over the long term and takes into consideration the interactions with other companies and the economic environment. Long term success is achieved by optimally utilizing all factors of production. The interests of all stakeholders are balanced during negotiations. All stakeholders participate adequately in the success of the company. 30 Schneidewind, U. (1998) <?page no="51"?> 50 2 Sustainable Business Management @ www.uvk.de Suggestions for further reading A comprehensive treatment is provided here: Göllinger, Th. (ed.): Bausteine einer nachhaltigkeitsorientierten Betriebswirtschaftslehre, Festschrift zum 70. Geburtstag von Eberhard Seidel, Marburg. Business sustainability in various business functions: Hülsmann, M., Müller-Christ, G., Haasis, H.-D. (Hrsg., 2004): Betriebswirtschaftslehre und Nachhaltigkeit: Bestandsaufnahme und Forschungsprogrammatik, Wiesbaden. Literature Achouri, C. (2011): Wenn Sie wollen, nennen Sie es Führung: Systemisches Management im 21. Jahrhundert, München. Albach, H. (1986): Allgemeine Betriebswirtschaftslehre. Zum Gedenken an Erich Gutenberg, in: Zeitschrift für Betriebswirtschaft, 578-613. Burschel, C. J., Losen, D., Wiendl, A. (2004): Betriebswirtschaftslehre der Nachhaltigen Unternehmung, München. Freimann, J. (1987): Ökologie und Betriebswirtschaft, in: Schmalenbachs Zeitschrift für betriebswirtschaftliche Forschung, vol. 39, 380-390. Freimann, J. (2006): Nachhaltig wirtschaften! Wider die Orientierung des praktischen wirtschaftlichen Handelns am Vorbild der Homunkuli, in: Göllinger (ed.): Bausteine einer nachhaltigkeitsorientierten Betriebswirtschaftslehre, Festschrift zum 70. Geburtstag von Eberhard Seidel, Marburg. Göllinger, Th. (Hrsg.): Bausteine einer nachhaltigkeitsorientierten Betriebswirtschaftslehre, Festschrift zum 70. Geburtstag von Eberhard Seidel, Marburg. Gutenberg, E. (1953): Zum Methodenstreit, in: Zeitschrift für handelswissenschaftliche Forschung (5), 327-355. Heinen, E.(1969): Zum Wissenschaftsprogramm der entscheidungsorientierten Betriebswirtschaftslehre, in: Zeitschrift für Betriebswirtschaftslehre (39), 207-220. Heinen, E. (1976a): Die Zielfunktion der Unternehmung, Festschrift zum 65. Geburtstag von Erich Gutenberg, hrsg. von Helmut Koch, Wiesbaden 1962, 9-72; reprinted in: Grundfragen der entscheidungsorientierten Betriebswirtschaftslehre, München, 13-93. <?page no="52"?> OxZ|]šZX]| 51 Heinen, E. (1976b): Grundfragen der entscheidungsorientierten Betriebswirtschaftslehre, München. Hülsmann, M., Müller-Christ, G., Haasis, H.-D. (eds., 2004): Betriebswirtschaftslehre und Nachhaltigkeit: Bestandsaufnahme und Forschungsprogrammatik, Wiesbaden. Kirsch, W. (1979): Die verhaltenswissenschaftliche Fundierung der Betriebswirtschaftslehre, in: Raffée, H., Abel, B. (eds.): Wissenschaftstheoretische Grundfragen der Wirtschaftswissenschaften, München. Kirschten, U. (2003): Unternehmensnetzwerke für nachhaltiges Wirtschaften, in: Linne, G., Schwarz, M. (eds.): Handbuch Nachhaltige Entwicklung - Wie ist nachhaltiges Wirtschaften machbar? Opladen, 171-182. Müller-Christ, G., Hülsmann, M. (2003): Quo vadis Umweltmanagement? Entwicklungsperspektiven einer nachhaltigen Managementlehre, in: Die Betriebswirtschaft, 63, 257-277. Sailer, U. (2012): Management: Komplexität verstehen: Systemisches Denken, Business Modeling, Handlungsfelder nachhaltigen Erfolgs, Stuttgart. Schanz, G. (2009): Wissenschaftsprogramme der Betriebswirtschaftslehre, in: Bea, F. X., Schweizer, M.: Allgemeine Betriebswirtschaftslehre, vol. 1: Grundfragen, Stuttgart, 81-159. Schneidewind, U. (1998): Die Unternehmung als strukturpolitischer Akteur, Marburg. Stahlmann, V./ Clausen, J. (2000): Umweltleistung von Unternehmen - Von der Öko-Effizienz zur Öko-Effektivität, Wiesbaden. Ulrich, H.: (1970): Die Unternehmung als produktives soziales System, 2 nd edition, Bern, Stuttgart. Ulrich, H.: (1971): Der systemorientierte Ansatz in der Betriebswirtschaftslehre, in: Wissenschaftsprogramm und Ausbildungsziele der Betriebswirtschaftslehre, Bericht von der wissenschaftlichen Tagung in St. Gallen, hrsg. vom Verbandsvorstand durch den Tagungsleiter, Berlin. Wagner, B., Strobel, M. (1999): Kostenmanagement mit der Flusskostenrechnung, in: Freimann, J. (ed.): Werkzeuge erfolgreichen Umweltmanagements. Wiesbaden. Wöhe, G.; Döring U. (2010): Einführung in die Allgemeine Betriebswirtschaftslehre, 23 rd edition, München. <?page no="54"?> o see Glossary @ www.uvk.de 33 SSttrraatteeggiicc SSuussttaaiinnaabbiilliittyy MMaannaaggeemmeenntt by Erskin Blunck Learning Objectives The readers ) understand that a differentiated treatment of the term sustainability is needed in the context of sustainable management, ) realize the importance of the definition of the organizational purpose as a precondition for strategic sustainability management, ) become familiar with the strategic tasks in the context of sustainable management, ) recognize the relevance of the perspectives strategy process, strategy contents and strategy context for strategic sustainability management, ) deepen their knowledge of selected innovative approaches to substantiate sustainability at a strategic level. List of Key Terms ) Strategic sustainability management ) Strategy process ) Resilience ) Cradle-to-cradle ) Shared value 33..11 IInnttrroodduuccttiioonn This contribution presents the major organizational aspects of strategic sustainability management. Taking the business purpose as the starting point, a particular focus will be on strategy development, strategic content and strategic context, even though strategic management encompasses additional topics such as organization, company culture, information and strategic performance potential. 31 Our considerations are related to lines of thought that have already been discussed elsewhere in this volume, especially the definition of sustainability as presented by Sailer. In his definition of sustainability, Sailer draws on the broadly accepted terminol- 31 for example Bea, F., Haas, J. (2013), p. 22 <?page no="55"?> 54 3 Strategic Sustainability Management @ www.uvk.de ogy of the Brundtland commission from 1987 and on the Triple Bottom Line approach of sustainability which was developed in 1992 at the Rio Conference. According to this definition, sustainable development is characterized by an economic, a social (on occasion, this is also called the socio-cultural dimension) and an ecological dimension. According to the Triple Bottom Line approach, all three dimensions should be given equal weight when implementing sustainable development. The increased interest in sustainability at a strategic level was shown for example by a global survey conducted by McKinsey in 2011 and 2012 among more than 4000 managers. 32 Among others, the managers were asked to explain their increasing interest in the topic of sustainability. The most frequent responses related to ) reduction of energy consumption, ) wast e reduct ion and ) repu tation management. The most severe obstacles for the successful implementation of sustainability were identified as short-term performance goals, a lack of performance goals for sustainability, lacking or insufficient parameters (key performance indicators) for sustainability as well as unclear responsibilities for sustainability. 33 A further indicator for the growing importance of sustainability strategies is the intensive interest in the topic under the heading of “shared value” by Michael Porter from Harvard, who has been an influential and leading thinker on strategy for decades. Jointly with Mark Kramer, Porter points out the limitations of the corporate social responsibility perspective and defines his own approach, which is tied in closely with the core strategy of a company and looks at product offering, value chain and clusters. 34 The following sections deal with the relevance of “sustainable business management” for the topic of strategic management. 33..22 CCllaassssiiffiiccaattiioonn ooff SSttrraatteeggiicc SSuussttaaiinnaabbiilliittyy MMaannaaggeemmeenntt The origins of the term „strategic management“ go back to the year 1976 when Ansoff, Declerck and Hayes published their book “From Strategic Planning to Strategic Management.” 35 The broadening of the concept of planning over the 32 Bonini, S. (2012) 33 Bonini, S. (2012), pp. 2o6 34 Porter, M./ Kramer, M. (2011), pp. 7o12 35 Bea, F./ Haas, J. (2013), p. 6 <?page no="56"?> 3.2 Classification of Strategic Sustainability Management 55 @ www.uvk.de past decades included long-term planning and strategic planning and eventually led to strategic management. In the recent past, theory and applied work in strategic management have increasingly addressed societal challenges, which Bea and Haas 36 captured aptly with the keywords “knowledge society,” “virtual organization,” “self-organization,” “the company as a learning organization,” and also “sustainability.” The latter issue of sustainability, which is also frequently discussed under the heading of social responsibility, appears to receive special attention against the backdrop of climate change. At this point, the question arises, whether the focus should be on the analysis of “sustainable strategies” in the context of “strategic management” or whether the term d “strategic sustainability management” is more suitable. In order to clarify what this terminology does mean and what not, a broader perspective should be taken. The point is not to establish a new (management) fad for the company, but instead to (further) extend the basic intellectual approach of company leadership by including the aspect of sustainability. The distinction between the criteria normative, strategic and operative is frequently made in management science. ) Normative management deals with the general goals of the company. The fund amental principles, norms and values of the companies need to be set. The values of a company are reflected in the company culture; principles and norms are set in the corporate statutes . ) Strategic management deals with establishing, maintaining and using the potentials for success of the company. At issue is the systematic alignment of the company to promising combinations of products and markets and the provision of th e required resources. The normative and strategic levels of the company assure an effective positioning . ) O perative management derives the implementation of the ideas from normative and strategic management in the form of real and financial co mpany proc esses. A specific discussion of the interaction of these three levels ca n be foun d in Chapter 10 (Instruments for the Implementation of Sustainability). While the following contributions also consider operative questions, this Chapter deals primarily with strategic management and the link with the normative level. The following elaborations give concrete meaning to strategic sustainability management, which can be characterized as strategic management with the specific aim of reaching all three target dimensions of sustainability. 36 Bea, F./ Haas, J. (2013), p. 13 <?page no="57"?> 56 3 Strategic Sustainability Management @ www.uvk.de 33..33 DDiimmeennssiioonnss ooff SSttrraatteeggiicc SSuussttaaiinnaabbiilliittyy MMaannaaggeemmeenntt In order to do justice to the complexity of the topic of company strategy, the structure proposed by de Wit and Meyer is used in this context. 37 It distinguishes the dimensions of strategic process, content and context as well as company purpose. Even if not all dimensions can be discussed in detail and therefore no claim of completeness should be made, this structure is used to show where sustainability considerations are of particular importance. For this purpose, the strategic context is expanded to include the dimension of ecological context. Figure 3-1: Overview of the Strategic Dimensions 38 37 De Wit, B. / Meyer, R. (2010), p.12 and p.14 incorporating the ecological context 38 Own representation following De Wit, B. / Meyer, R. (2010), p.12 and p.14 incorporating the ecological context <?page no="58"?> 3.4 Organizational Purpose and Sustainability 57 @ www.uvk.de While the topics are discussed sequentially in the following, it should be taken into consideration that they are not separate parts of a strategy, but merely distinct dimensions. This means that every strategic challenge comprises all three strategic dimensions. 33..44 OOrrggaanniizzaattiioonnaall PPuurrppoossee aanndd SSu ussttaaiinnaabbiilliittyy Before planning a journey, it is necessary to determine the destination. This is even more relevant if several persons embark on the trip. The same is true for an organization. Before an organization is established, all parties involved should reach an understanding about the goals to be reached and the purpose of the organization. For existing companies, it should be checked from time to time whether the initial organizational purpose is still valid and supported by all important agents (employees, company management, customers, owners, …). On occasion, this is also called the normative level of company management. Depending on the degree of formalization of the company, a vision or mission statement will be developed or communicated verbally by the company leadership to all involved partiers inside and outside the organization. After a few years, such a statement needs to be reassessed and updated if necessary. Typical books on strategy contrast the shareholder value approach (value creation for the owner) and the stakeholder approach (alignment of the goals of different interest groups) as extreme positions. 39 From the perspective of sustainability, however, the balancing of the Triple Bottom Line, which was discussed by Sailer in the introduction, needs to be addressed. With regard to methodology, the stakeholder approach of Freeman and Reed 40 can be used for the determination of the environmental situation. However, a frequent criticism of this approach relates to the fact that it leads to suboptimal compromise. But truly sustainable company targets must go beyond a compromise which was found in the context of the stakeholder approach. An attempt is made to position the company in such a way that it acts successfully over the long term for its central interest groups such as employees, customers, shareholders and suppliers. At the same time, it influences the ecological environment in a way that makes the approach viable over the long term. 39 On this issue see for example Bea, F./ Haas, J. (2013) pages 82o83 as well as pages 112o113 40 Freeman, E. / Reed, D. (1982) <?page no="59"?> 58 3 Strategic Sustainability Management @ www.uvk.de At a company with a sustainability focus, the three target dimensions in the sense of the Triple Bottom Line take center stage. The harmonious alignment of economic, ecological and social (occasionally also called socio-cultural) aims is seen as a target system at the highest level. There is disagreement, however, about the best way to reach these targets and the relation among them. For example, how important should the economic goals be and to what extend should the possible ecological impact be minimized. 41 William McDonough and Michael Braungart take these considerations one step further with their idea of the Triple Top Line. Instead of balancing the three dimensions, the “design” stage of the product and the process is already used to think about creating value and business opportunities with intelligent design. This is called Triple Top Line growth. The practical implementation draws on the so-called “fractal triangle” with the dimensions economy, ecology and social (called equity in this approach). 42 It is already contemplated during the design process how prosperity can be grown, the community celebrated and the health of all species enhanced. The triangles with all their interconnections are considered in an iterative fashion in order to identify appropriate goals and approaches. 43 The organizational purpose can differ widely depending on the type of organization. In a continuum from conventional company management with first rudiments of sustainability (for example family business with sustainability in the fields of economy and social responsibility in the sense of strong employee loyalty) via a corporation with a strong commitment to sustainability to a company that was founded with the primary purpose of solving a socio-cultural and/ or ecological problem in the area of sustainability. The traditional nonprofit company can be seen as the opposite pole to the traditional for-profit corporation. 41 Belz, M./ Peattie, K. (2012), pp. 129o132 42 McDonough, W./ Braungart, M. (2013) http: / / www.McDonough.com/ speaking-writing/ design-for-the-triple-top-line/ 43 McDonough, W./ Braungart, M. (2013) http: / / www.McDonough.com/ speakingwriting/ design-for-the-triple-top-line/ <?page no="60"?> 3.4 Organizational Purpose and Sustainability 59 @ www.uvk.de Figure 3-2: Spectrum of hybrid organizational targets following Kim Alter 44 Patagonia can serve as an example for a sustainable (or socially responsible) company. Several social enterprises were founded for example by Nobel laureate Muhammad Yunus. 45 All things considered, the question arises in which way an organization is confronted with topics of sustainability and which dimension is given the greatest weight. Figure 3-3 clarifies the two dimensions of ethical-moral and economicstrategic motives. While the two groups labeled “self-employers” and “opportunists” have little ethical-moral motivation and are therefore of little importance for sustainability strategies, the two upper boxes of the figure deserve a closer look. The driver of proactive and sustainable company leadership can be a manager with strong values. He is frequently an entrepreneur who establishes a different kind of company. Figure 3-3: Four types of sustainability marketers following Belz and Peattie. 46 44 Own representation following Alter, K. http: / / www.4lenses.org/ setypology/ print 45 Yunus, M. (2011), pp. 95o97 <?page no="61"?> 60 3 Strategic Sustainability Management @ www.uvk.de For example, the company Body Shop was founded by Annita Roddick, who actively supported environmental topics. She can thus be put into the category of “Do-gooders.” Claus Hipp, the owner of the company Hipp, a producer of baby food, can be best characterized as an “ethical strategist,” who wants to meet the Triple Bottom Line, thus fulfilling his Christian and ethical principles and securing the long-term success of his family-run business. 47 Starting from the respective target of the organization, a specific type of strategic thinking is established. This is explained in more detail in the following sections. 33..55 SSttrraatteeg gyy PPrroocceessss The way in which a strategy is developed can be called strategy process. Typical questions in this context are “how,” “who” and “when.” 48 The strategy process can be broken down into the three fields of strategic thinking, strategy development and change management. 33..55..11 SSttrraatteeggiicc TThhiinnkki inngg Of particular relevance in strategic thinking is the idea that the persons who develop the strategy are aware of their limitations and possible errors in perception. This also plays an important role for sustainability. Interesting in this regard is the mode of thinking of the strategist, in other words the assumptions about the way the world works and the existence of causal relations. This attribute, which is also called “mental model” is useful in principle to help humans find orientation during their daily routine without having to question everything in every situation. But it entails the danger that the strategist is led astray. This becomes even more relevant, as such “cognitive maps” are frequently based on knowledge obtained from experience, which for the most part is used intuitively and unknowingly as a mental model. Any assessment of a situation is not generated independently, but interacts with others. Humans develop a joint understanding of the world by interacting with a group for a long time. Such a world 46 Belz, M./ Peattie, K. (2012), p. 127 47 Belz, M./ Peattie, K. (2012), p. 128 48 De Wit, B. / Meyer, R. (2010a), p. 5 <?page no="62"?> 3.5 Strategy Process 61 @ www.uvk.de view can come into existence among small groups, but also at the level of an entire industry or nation. 49 Case examples Differences in the understanding of the way the world functions become particularly apparent when a foreign country with a different culture is visited and the dialogue with the people is sought. The world view of the citizens of the United States for example differs significantly in some aspects from that of Iranian citizens. But even countries within one cultural area display strong differences as exemplified by the example of the attitudes concerning the use of nuclear power, which differ widely within the European Union. Similar differences are also observable between industries, for example between conventional utilities and producers of renewable energy, or between organic and conventional agriculture. Concerning the topic of sustainability, it is of importance how the relationship between the three areas of economy, ecology and socio-culture is understood and which motivation and fundamental attitude shapes the company engagement with sustainability. Strategy starts with a definition of the goals at the various levels. In addition to the need for a vision, which is debated controversially in the literature, 50 there is agreement about the advantages of a strong corporate mission, which defines the purpose of the organization within society. At this point it is assumed that a sustainability strategy follows the target dimensions of the Triple Bottom Line without pursuing more fundamental considerations. 51 This can be put in more concrete terms with reference to the principles of efficiency (increased productivity to reduce resource input), sufficiency (frugal consumption patterns) and consistency (adaptation of principles from nature and processes from the biosphere, circular economy). 52 49 De Wit, B. / Meyer, R. (2010a), pp. 57o59 50 On this topic see in particular Malik, F. (2008) 51 A comprehensive treatment of sustainability targets is found in the ordonomic concept for strategic management developed by Pies, Beckmann and Hielscher, see Pies, I./ Beckmann, M./ Hielscher, S. (2012), pp. 325o341 52 Pufé, I. (2012), pp. 123o126 <?page no="63"?> 62 3 Strategic Sustainability Management @ www.uvk.de 33..55..22 SSttrraatteeggyy FFoorrm maattiioonn Typical steps in strategy formation are the initial determination of the target hierarchy followed by an environmental analysis (opportunities and threats) as well as the assessment of the company positioning (strength and weaknesses). Based on this analysis, strategic options can be developed, assessed and chosen with regard to the desired objective. The following implementation and evaluation of success (strategy controlling) is frequently considered to be a separate topic, which belongs to the fields of change management or controlling. 53 Strategic sustainability management defines the goals of the company while taking into special consideration all dimensions of sustainability. The analysis of the company environment is holistic and focuses on the long term. It takes account of the specific situation of the company. An example of such an approach is the study on the ten “Global Sustainability Megaforces” published by KPMG. It points out in compact form global developments which will influence companies and industries to different degrees. 54 In a next step, these environmental developments can be matched with the strengths and weaknesses of a company in order to recognize how it will be able to maintain its position in this specific competitive environment. Of major importance for the determination of the corporate environment is the issue of awareness for sustainability among the various stakeholders. This is particularly true for the stakeholder groups of customers, providers of capital, employees and management. A thorough and comprehensive assessment of the company’s current situation as well as its expected development over the coming years form the basis for the evaluation of the likely success of the various strategic options. If, for example, the customers of the company only have a weak awareness for the various aspects of sustainability, it needs to be assessed whether this will lead to a competitive disadvantage and how this awareness is likely to develop in the future. A further important aspect is the expected behavior of all relevant competitors. To what extend a company adopts the rules of its industry as opposed to taking the role of industry leader that pursues its own path is discussed controversially in the management literature and in practical terms depends strongly on the 53 On this issue see for example Bea, F./ Haas, J. (2013), p. 57 54 KPMG, De Boer,Y. et. al. (2012) <?page no="64"?> 3.5 Strategy Process 63 @ www.uvk.de specific situation of the company. Influential factors that help to capture the situation are for example proximity of the company to the customer in the value chain, size of the company and relative market share in the relevant market as well as consumer awareness (low interest vs. high interest products). Within each industry, the question arises whether the company wants to be in the lead concerning the topic of sustainability, whether it is a joint industry initiative or whether the company merely reacts to the competition. In the process of strategy development, sustainability management allows the usage of innovative approaches which differ from the classical methods. In the following, three approaches are given as examples. 1. Cradle-to-Cradle Redesign of the Product Offering Following d cradle-to-cradle approach published initially by William Mc Donough and Michael Braungart in the year 2002, product offerings are designed to come as close as possible to the requirement of eco-effectiveness. The classical life cycle analysis cradle-to-grave is replaced by a strategic orientation on an offering that satisfies the principles of a circular economy. Based on a thorough analysis of the materials used and their attributes, the authors reach the conclusion that materials fall into three categories and have to be utilized accordingly: biological metabolisms (“biosphere”) are suitable t o pass t hrough t he biologi cal mate rial s cycl e and de c om pos e follow ing the ir use. The second category is called technical metabolism (“technical sphere”). Its quantities are finite and thus too valuable to be discarded. These materials should be used and recycled as scarce raw materials available for further long-term industrial use. If these aspects are ignored or implemented halfheartedly, the organization will reach its limits. A third category of materials, the “toxic products” should be avoided if possible, since they are harmful to the organism and any contact with the two other types of materials prevents further use in the materials cycle. The materials no longer have a market value and are unsuitable for most uses. 55 2. Consideration of the Principle of Resilience The term resilience (“resilire” means to “bounce back” or “rebound”) originates from physics and means “to return to the original state.” It describes the reaction of materials to outside influences in an elastic and flexible manner while maintaining their original form. In biology this term is used similarly. It describes the ability of a system to survive when exposed to external disturbances. When transferring attributes of biological systems to company 55 Braungart, M. / McDonough, W. (2009), pp. 102o117 <?page no="65"?> 64 3 Strategic Sustainability Management @ www.uvk.de strategy, it is interesting to note that these are based on the principles of diversity, modularity, direct feedback, close social networks, redundancies and flexibility. 56 Applied to strategy, such characteristics are more likely to be found in organizations that are managed according to the portfolio theory than in organizations that subscribe to the principle of concentration on the core business. 3. Shared Value Approach The d shared value approach (“value added for both corporations and society”) of Michael Porter and Mark Kramer is looking for ways to avoid the use of trade-offs. The method offers three different avenues to reach that goal and each one leads to new opportunities in the other two areas: 57 a) A fresh look at products and markets with the aim of jointly generating value added and the discovery of new market opportunities. Examples cited include health, support for the elderly as well as reduction of damages in the ecological envi ronment. b) A reassessment of productivity along the value chain. Topics such as energy use and logistics, resource utilization, procurement, distribution, employee productivity as well as locational choice are reconsidered in light of the idea of shared value. c) Establishment of local clusters to improve competitiveness, innovation and productivity. Even though the authors move away from the term sustainability and develop their own concept called shared value, 58 it can nonetheless be used as a method to implement sustainability strategies, since the main ideas of the concepts are closely related. Much more straightforward is the differentiation of Porter and Kramer concerning the idea of corporate social responsibility. The concept of shared value continues to be critically discussed in academic work. On its way towards possible general applicability in the future, it still needs to be put in more concrete terms. Successful examples from different companies meanwhile give the inspiration to assess the possible applicability in the company-specific context. 59 56 Edwards, A. (2010), pp. 157o158 57 Porter, M./ Kramer, M. (2011), pp. 7o12 58 Porter, M./ Kramer, M. (2011), p. 4 59 On critical reflection see for example Reisach, U. (2012) http: / / blog.insm.de/ 2193shared-value-die-neuerfindung-des-kapitalismus/ <?page no="66"?> 3.5 Strategy Process 65 @ www.uvk.de Case example The way to win over consumers as active cradle-to-cradle partners for the company in the context of a network strategy is described by Peter Lacy, head of sustainability at the consultancy Accenture: Starting from the insight that 80 percent of a shoe can be reused on average, it becomes clear that it should not end up in the trash, but instead be exchanged for a new pair with the producer. Similar to a subscription, customers should pay an annual service fee which is above the cost of one pair of shoes, but below the cost of two. Both sides benefit: The customer does not keep unneeded shoes in his wardrobe and the manufacturer achieves customer retention and saves on raw materials. “We should not look at shoes as a product, but as a service instead.” 60 33..55..33 SSttrraatteeggyy IImmpplleemmeennttaattiioonn / / SSttrraatteeggiicc CChhaannggee In the context of strategy implementation the question arises whether the change process is evolutionary and continuous or revolutionary and discontinuous. Especially when introducing a sustainability strategy, a radical reorientation can become necessary in order to meet the requirements of the Triple Bottom Line. All participants along the value chain are challenged to change their usual behavior. Once these fundamental changes have been initiated, the sustainability principles are closer to the idea of evolutionary, continuous and permanent change than to the revolutionary approach. Efficiency gains, for example, can be obtained via continuous optimization of solutions in the sense of Kaizen targeted at continuous improvement. 61 Topics of sustainability go through an awareness life cycle which consists of the pre-problem stage, the discovery and enthusiasm stage, the solution stage, where attention is greatest, the stage of declining awareness and finally the stable postproblem stage, where the topic only receives reduced attention. 62 This observation is of major importance for the timing of the implementation of a sustainability strategy. Any forward looking company management will already deal with issues of sustainability during the pre-problem stage, in order to be adequately prepared when the topic comes into the focus of the public and of politicians and the company is asked to take a stand. 60 Peter Lacy (2013), p. 21 61 De Wit, B. / Meyer, R. (2010a), p. 195 62 Belz, M./ Peattie, K. (2012), pp. 148o149 <?page no="67"?> 66 3 Strategic Sustainability Management @ www.uvk.de 33..66 SSttrraatteeggyy CCoonntteenntt A further important strategy dimension is content, which can be described as the result of the strategy process. In this context, questions about “what” are being asked: What is and what should be the strategy of the company and its divisions? 63 The dimension of content can be structured along the three main levels business, corporate and network. At each level, specific questions need to be answered. 33..66..11 BBuussiinneesss s LLeev ve el l SSttr ra atte eg gyy At the business level the question of appropriate competitive strategy for longterm success unfolds with regard to (competitive) positioning. In addition to the classical strategic approaches by Michael Porter 64 which have a strong focus on competitive forces, namely differentiation, cost leadership and niche strategy, newer theories pursue the goal of generating a new and unique utility curve. 65 Are any of the three approaches particularly suitable or unsuitable for sustainability strategies? Especially the ideas of differentiation or niche offer a very interesting basis for a sustainability strategy that is successful in the long term. Many companies initially focus on the niche of consumers with a strong awareness for ecological and social topics (for example the group of the LOHAS, Lifestyle of Health and Sustainability). For a sustainability strategy to be successful, it is important to win over the responsible leaders at the business level. With their commitment, a sustainable business model for the core activities and value drivers of the division can be developed. If this is not successful, there is a real danger that the topic of sustainability is only seen as an additional constraint which must be met (“compliance”) but generates only very limited value for customers, company and society. In this context a distinction is frequently made in the literature between e corporate social responsibility and sustainability. The point is made that the sustainability approach has more direct implications for change in the core business. 66 At the business level, decisions are made concerning the direction of the core business, the core processes and the business model of the company. By giving these aspects a sustainable direction, it can be avoided that any reporting on the 63 De Wit, B. / Meyer, R. (2010a), p. 5 64 Porter, M. (1985) 65 Kim, C./ Maubourgne, R. (2005): Blue Ocean Strategy 66 Cohen, E. / Taylor, S./ Muller-Camen, M. (2012), p. 3 <?page no="68"?> 3.6 Strategy Content 67 @ www.uvk.de subject merely amounts to superficial “green washing.” Instead the value chain of the company becomes sustainable. In the following, a strategy is defined at this level for the various functional areas such as marketing, finance, personnel and procurement. Since customer orientation continues to play a major role for the success of companies with a sustainability focus, the course of action for a sustainability marketing strategy is demonstrated as an example. Following the methodology of Belz and Peattie, 67 such a strategy is developed in five major steps: 1. Screening of sustainability issues and actors 2. Segmentation of sustainability markets 3. Introduction of sustainability innovations 4. Positioning of sustainable products 5. Partnering with sustainability stakeholders Even if the focus is on questions that are relevant for marketing and additional aspects need to be considered for a business strategy, the positioning of the entire company or the division plays a central role when implementing a sustainability strategy. 33..66..22 CCoor rppoor raatte e LLeev veel l SSttr raatteeg gyy Initially the question arises whether a company can have different levels of sustainability in different divisions or whether this will lead to reputational conflicts. In order to avoid internal cultural conflicts, top management for the entire company should provide guidance with regard to ethical and cultural values. This challenge is managed more easily by a newly founded company with sustainable business targets and a company strategy focused on sustainability than an organization that has been focused on pure profit maximization for many years and generates a large share of its sales in departments with a traditional orientation. An example would be a producer of chocolate that obtains a growing, but still relatively small share of sales from the division of organic chocolate, which has a focus on sustainability. 67 Belz, M./ Peattie, K. (2012), pp. 147o149 <?page no="69"?> 68 3 Strategic Sustainability Management @ www.uvk.de The search for synergies among various business divisions is also an important task at the corporate level. In addition to cost savings, synergies can also lead to enhanced effectiveness and efficiency, which can contribute to the achievement of sustainability targets at all three levels. The synergies gained can potentially have a negative effect on the social dimension of sustainability. One implication may be that an equivalent or even better result can be achieved with a reduced staff. However, simply foregoing these efficiency advantages could jeopardize the existence of the company in the medium term and is thus in conflict with economic sustainability. Resources that are freed up via synergies should instead be moved towards new tasks inside and outside the organization. In the implementation of sustainability, certain support activities needed by several divisions can be provided centrally. This leads to synergies via leverage and economies of scale. An important aspect of the strategy at the corporate level is the question of risk management and risk sharing among the various divisions. The approaches known from portfolio theory take on new meaning in the context of the resilience concept. The approach of focusing on the core business, 68 which was advocated by strategy researchers in the past decades, can be criticized as a monoculture in the biological context of sustainability. As already discussed in the section on strategy development, resilient systems have attributes such as diversity and redundancy, modular components and flexibility. 69 These characteristics rather support a broad-based organization in line with portfolio theory instead of a narrow focus on core activities. 33..66..33 NNeet tw woorrkk LLeevve el l SSttr raatteeg gyy At the level of the network, the basic question arises whether and in what intensity a company is willing to cooperate with other organizations. If there is a willingness to cooperate, the parameters used to select potential partners as well as the resulting expectations for the future behavior of the partner need to be defined. The aim of a network strategy with a focus on sustainability is the cooperation with organizations that pursue similar sustainability targets and use a corresponding strategy. This is of particular importance especially with regard to the downstream and upstream stages of value creation, because it assures a sustainable product offering for the end user even in the case of strongly segmented work processes. If a company pursues the cradle-to-cradle principle, the users 68 On core competencies see Prahalad, C./ Hamel, G. (1990) 69 Edwards, A. (2010), p. 158 <?page no="70"?> 3.7 Strategic Context 69 @ www.uvk.de should also be part of this strategy with regard to use, care, maintenance, repair and recycling of the product. Case example In order to create a full awareness for the particularities of a sustainable offering, the interest and understanding of all partners along the value chain is needed. As an example, a committed and motivated employee of a bio supermarket or of a restaurant that exclusively serves bio products is well suited to talk about the advantages of a bio product that is based on sustainability. An amusing exaggeration of this principle is provided by the US web comedy series “Portlandia” in the sequel “In the Restaurant.” The restaurant guests ask very detailed questions about the origin of the chicken served and in the end decide to visit the farmer. 70 33..7 7 SSt trraat teeggi ic c CCo on nt teexxtt The set of prevailing conditions in which strategic process and content must be defined is called strategic context. The question that needs to be answered is where, in which environment, strategic process and content must be seen. 71 Sustainability topics can either directly or indirectly confront a company. In the direct case, the public addresses the company, while the indirect case involves the process of political decision making. An example for the indirect route is the European regulation aimed at reducing average CO 2 emissions of the automotive manufacturers. 72 Direct influence by the public can be seen in the protests against the American supplier of sports equipment Nike in reaction to the undignified working conditions at its suppliers. 73 In addition to the typically considered context dimensions of organization, industry and international situation, the framework can be extended to include the dimension of ecological environment in sustainable business management. 70 Brownstein, C. / Armisen, F. (2011) 71 De Wit, B. / Meyer, R. (2010a), p. 5 72 EU (2014) 73 See De Wit, B. / Meyer, R. (2010a), pp. 946o953. Case study about Nike and University of Oregon <?page no="71"?> 70 3 Strategic Sustainability Management @ www.uvk.de 33..77..11 OOrrggaanniizzaattiioonnaall CCoonntteexxtt Management and employees interact in a company-specific organizational context, which is determined by dimensions such as company size, age and stability of the business model. For that reason, a number of strategy researchers are of the opinion that “strategy follows organization” and not the opposite (“organization follows strategy”). 74 This debate is relevant for sustainability at an organization. A small start-up company can be aligned with the principles of sustainability already during its foundation and pursue a pure sustainability strategy. This is a characteristic of social entrepreneurship or social innovation. If organizations are already founded with the aim of solving social problems, the profit motive is of lesser importance. No dividends are paid and profits are reinvested to support additional growth. The transition to sustainable company management becomes more difficult for companies that have already reached a certain size with their traditional profit orientation. A quick and company-wide switchover is hindered by investment decisions that are amortized over long time periods, obligations from supplier contracts, responsibilities towards veteran employees, and technological decisions from previous periods. Examples for companies in a more complex environment with possible obstacles to switching are major automotive companies such as Daimler, Volkswagen and BMW, which have invested billions in production sites and drive systems and employ thousands of people at home and abroad. Case examples Major companies frequently employ the strategy of creating a new segment which is dedicated to new concepts and a focus on sustainability. Examples are the i3 and i8 for vehicles with an electronic drive by BMW 75 and the car sharing offer Car2Go by Daimler. 76 The activities of Ritter, a supplier of chocolate, in the field of fair trade organic chocolate while simultaneously maintaining its classical product line, must be seen in a similar light. 77 Potentially, however, this could lead to conflicts of culture between the traditional divisions and the divisions with a focus on sustainability, which could be perceived negatively by the public. 74 Bea, F./ Haas, J. (2013) pp. 374o375 75 BMW AG (2014) 76 car2go (2014) 77 Ritter Sport (2013) <?page no="72"?> 3.7 Strategic Context 71 @ www.uvk.de Other major companies involve the entire organization in the change process. They proactively position themselves with the statement that they are not perfect in every area, but that they are in a development process towards more sustainability, which will take many years. Important in this regard is the formulation of clear intermediate goals in the form of milestones and the regular reporting of goals that were either already reached or missed. An example for this approach is the sports goods company Adidas, which documents its sustainability strategy as a five-year plan in its sustainability report. 78 33..7 7. .2 2 IIn nd du us sttrry y C Coon nt te ex xtt The intensity of the sustainability orientation varies strongly between different industries. Regardless of the current status, each company faces the strategic choice of either following the industry rules or pursuing a company-specific path. 79 Starting from the assumption that all industry participants are subject to similar framework conditions and rules, companies need to determine whether they have the perspective of industry leadership and whether they are open or secretive towards the competition. Industries can differ substantially concerning their awareness of sustainability. The developmental dynamics of the sustainability dimensions depends among others on the positioning in the value chain. Industry-specific barriers to entry and exit can mean that for example retailers have more flexibility concerning sustainable product offerings than industrial companies, which are facing significant investments in material and immaterial resources (tangible assets and product development with patents). Companies in the raw materials sectors (mining companies, oil and gas production) are in a similar situation. The exploration of oil and gas deposits is a long-term engagemant. 80 Companies with a strong focus on sustainability (“missionaries”) put great emphasis on the positive signals that an “exemplary company strategy” sends to other market participants at the same stage of the value chain as well as to upstream and downstream companies (suppliers and buyers). In this way even small companies can trigger a process which also influences bigger companies. Such a pro-active company strategy can translate into a technological and procedural lead for the pioneer and put competitors under pressure to react. However, as with innovations in other sectors there is a danger that the market is not 78 Adidas (2013): Adidas Sustainability Report 2012 79 On this issue see the article by Baden-Fuller, C./ Stopford, J. (1992). Printed in: De Wit, B./ Meyer, R. (2010), p. 403 80 A good overview of the maturity level of sustainability in different industries is provided for example by a KPMG study: KPMG (2011) <?page no="73"?> 72 3 Strategic Sustainability Management @ www.uvk.de yet ready for the innovation and potential buyers show little interest in pioneering work. Competitors can then learn from the mistakes of the pioneers and provide a solution that is already optimized. Within the relevant industry, the question arises whether a leading position is taken with regard to the topic of sustainability, whether this is a joint initiative or whether the company follows the competition. 33..77..33 IInntte errnnaatti ioonnaall CCoonntteexxtt Since Chapter 5 by Carsten Herbes deals with the international challenges, we can refer to his elaborations at this point. In short, a sustainability strategy must take into consideration whether a company is active in different countries concerning procurement, production and sales. The awareness for sustainability depends among other things on the culture in the country as well as the level of material development and leads to questions about unified corporate standards in different market environments. In business ethics a distinction is made between relativism (region-specific adjustments) and normativism (globally unified standards). 81 33..77..44 EEccoollooggiiccaall CCoonntteexxtt Companies can either take the ecological context as invariant or start from the assumption that an individual enterprise can have an influence on ecology. The strength of interaction between the ecological environment and company success varies strongly from industry to industry. Some industries are seen by politicians and the public as causing environmental damage (“polluters” such as mining companies, utilities, automotive industry, airlines). Environmental change can also have a negative effect on business plans and the business model (“affected parties” such as agricultural companies, forestry or tourism). Even though a detailed analysis of the various effects will reach a conclusion that differs from the public perception, since companies that are considered to be affected parties have also contributed to the negative developments, the two groups face different challenges. The companies that are considered to be polluters by the public are challenged to act proactively in order to avoid long-term reputational damage for the company in the market and with the general public. The companies that are affected by the developments face the fundamental challenge to deal with the ecological context. Besides activities to counter negative environmental developments, these companies also need to establish alternative strategies as Plan B or C, which assure survival of the organization also in a negative environment. 81 Daniels, J. / Radebaugh, L./ Sullivan, D. (2009), p. 238 <?page no="74"?> 3.7 Strategic Context 73 @ www.uvk.de Case example Tourism operators are preparing for scenarios of less natural snow in the Alps. The operators of alpine skiing resorts are taking different types of precautions to prepare for these changes. The continuation of the current activities can be accomplished by covering the glaciers with protective tarp and by using snow-making installations. At least the latter point comes with high energy use, harmful emissions and costs. With regard to the ecological dimension it is thus not sustainable. More sustainable would be the shifting of the tourism offering towards other activities such as mountain biking in summer and snowshoeing instead of alpine skiing in winter. At a glance Questions of sustainability affect strategic management in numerous ways. The decision whether an organization will pursue sustainability in a serious, consistent and lasting fashion is ultimately decided at this level. The combination of the three target dimensions ecological, economic and social at the level of the industry and the company lays the foundations for future business success. The insufficient consideration of any one of these dimensions can put the existence of the company at risk. While the aims are defined at this stage relative to the organizational purpose, the measurement of accomplishments discussed elsewhere is an important source of information. As part of an integrated reporting, it provides input for the implementation of strategy and the further development of the sustainability strategy. To achieve these goals it is important to combine analytical and strategic thinking with creative lateral thinking, to develop a strategy that is suitable in the given situation and to derive concrete steps of implementation. The content of strategic topics needs to be defined at all levels of the company. Issues of sustainability need to be considered for all functions at the business level, the corporate level and the network level. Of particular interest is the business level, since it is the stage which determines the degree of sustainability of the products. Figure 3-4 provides a comprehensive summary of the strategy dimensions presented with a specific focus on central aspects of sustainability at the various levels. <?page no="75"?> 74 3 Strategic Sustainability Management @ www.uvk.de Figure 3-4: Overview of the strategic dimensions as well as central aspects of sustainability 82 The context considered at the strategic level is expanded to include the ecological dimension in addition to the traditional categories organization, industry and international environment. This reflects a growing awareness for the importance of that dimension for company success over the medium to long term. The familiar discussion whether the rules of an industry are immutable or whether active action of companies can create new framework conditions, should in the interest of sustainability be answered in favor of flexibility. Nonetheless it is clear that not all goals can be fully accomplished. 82 Own representation following De Wit, B. / Meyer, R. (2010), p.12 and p.14 incorporating the ecological context <?page no="76"?> OxZ|]šZX]| 75 @ www.uvk.de A lot more research needs to be done on concrete strategies to reach sustainability targets. This can only be successful through the close interaction between practitioners and academics as well as a general openness towards other disciplines. LLiitteerraattuurree Adidas (2013): Adidas Sustainability Report 2012, http: / / www.adidas-group.com/ SER2012/ downloads/ adidas_SPR2012_full.pdf Alter, K. (2013) http: / / www.4lenses.org/ setypology/ print Baden-Fuller, C./ Stopford, J. (1992): “The Firm matters not the industry”. printed in: De Wit, B./ Meyer, R. (2010), p. 403. Bea, F./ Haas, J. (2013): Strategisches Management, 6th edition, Konstanz. Belz, M./ Peattie, K. (2012): Sustainability Marketing, A Global Perspective, second edition, Chichester. Bonini, S. (2012): McKinsey Global Survey Results, Capturing value from sustainability, Silicon Valley. BMW AG (2014) http: / / www.bmw.com/ com/ en/ insights/ corporation/ bmwi/ phi losophy.html Braungart, M. / McDonough, W. (2009): Cradle to Cradle, London. Brownstein, C. / Armisen, F. (2011): Portlandia. Episode: “In the Restaurant”. car2go (2014): https: / / www.car2go.com/ en/ berlin/ what-is-car2go/ Cohen, E. / Taylor, S./ Muller-Camen, M. (2012): HRM’s Role in Corporate Social and Environmental Sustainability. http: / / www.wfpma.com/ sites/ wfpma.com / files/ CSR%20Report%20FINAL%202012.pdf Daniels, J. / Radebaugh, L./ Sullivan, D. (2009): International Business Environments and Operations. 12 th edition, Upper Saddle River. De Wit, B. / Meyer, R. (2010): Strategy Synthesis. 3 rd edition, Andover. De Wit, B. / Meyer, R. (2010a): Strategy: Process, Content, Context. 4 th edition, Andover. Edwards, A. (2010): Thriving beyond Sustainability, Gabriola Island. EU (2014): http: / / ec.europa.eu/ clima/ policies/ transport/ vehicles/ cars/ faq_en.htm <?page no="77"?> 76 3 Strategic Sustainability Management Freeman, E. / Reed, D. (1982), Stockholders and stakeholders: A new perspective on corporate governance. Published in California Management Review, Vol. 25, No.3, 1982. Kim, C./ Maubourgne, R. (2005): Blue Ocean Strategy, Boston. KPMG (2011) KPMG International Survey of Corporate Responsibility Reporting 2011, www.kpmg.com KPMG De Boer, Y. et. Al. (2012): Expect the Unexpected: Building Business Value in a changing world. www.kpmg.com Lacy, P. (2013): Wirtschaftswoche Sonderheft Green Economy, 18.3.2013, p. 21. Malik, F.: (2008) Die Richtige Corporate Governance. Frankfurt am Main. McDonough, W./ Braungart, M. (2013) http: / / www.McDonough.com/ speakingwriting/ design-for-the-triple-top-line/ Pies, I./ Beckmann, M./ Hielscher, S. (2012), Nachhaltigkeit durch New Governance: Ein ordonomisches Konzept für strategisches Management. Die Betriebswirtschaft, Ausgabe 72 (2012), pp. 325 - 341. Porter, M. (1985): Competitive Strategy, Boston. Porter, M./ Kramer, M. (2011), Creating Shared Value. How to reinvent capitalism - and unleash a wave of innovation and growth. Harvard Business Review, Jan- Feb. 2011, Reprint pp. 1 - 17, Boston. Prahalad, C.K. / Hamel, G. (1990): The Core Competence of the Corporation. Harvard Business Review, May-June 1990, Vol. 68. Pufé, I. (2012): Nachhaltigkeit, Konstanz. Reisach, U. (2012) http: / / blog.insm.de/ 2193-shared-value-die-neuerfindung-deskapitalismus/ Ritter Sport (2013), http: / / www.ritter-sport.de Walker, B./ Salt, D. (2008): Resilience Thinking: sustaining ecosystems and people in a changing world, Washington. Yunus, M. (2011): Building Social Business, New York. <?page no="78"?> o see Glossary @ www.uvk.de 44 SSuussttaaiinnaabbllee HHuummaann RReessoouurrccee MMaannaaggeemmeenntt by Horst Blumenstock Learning Objectives The readers ) are familiar with the main challenges for contemporary human resource management, ) are familiar with the main parameters for shaping sustainable human resource management, ) know the fundamental tasks of sustainable human resource management, ) know who is mainly responsible for sustainable human resource management. List of Key Terms ) Strategic human resource management ) Conception of man ) Culture of trust ) Cooperative-participatory leadership style ) Core competencies 44. .11 CCh haal ll le enng ge ess FFa ac ci inng g HHuumma ann RRe es so ou urrc ce e M Ma anna ag ge emmeennt t An d image of man that is based on contemporary values describes employees as individuals who contribute personal desires and interests, strive for personal initiative and control and consider self-realization to be an inherent part of work. 83 Since the mid-eighties the need for a strategic orientation of human resource management with a focus on the long term and on sustainability is also stressed. 84 From an economic perspective, the resource-based view of strategic management at the latest has highlighted the importance of human capital for company success and has challenged human resource management to make a contribution towards the achievement of corporate targets. 85 83 Scholz (2000), pp. 117o118 84 Allen/ Wright (2007), p. 91, Beer et all (1985), pp. 16o17 85 Allen/ Wright (2007), pp. 88o89 <?page no="79"?> 78 4 Sustainable Human Resource Management @ www.uvk.de Following these ideas, the key tasks of human resource management were developed. Systems of cooperation and participation clarify which responsibilities and which decision-making powers are delegated to employees in organizations. Decision criteria include the job satisfaction and motivation of the employees, but also the effect on the company result. By now generally accepted is the fact that both considerations support each other: stronger participation of the employees in the process of decision making, for example, increases their motivation and thus company success. Numerous studies have demonstrated the fundamental causality in this equation. Still discussed is the issue whether this assumption is true for all employees at all times or whether specific framework conditions need to be in place (for example qualification of the employees or specific work situation). 86 In all methods of personnel planning, personnel development and personnel marketing, the economic necessities are contrasted with the interests of the employees. 87 Long-term workplace security and interesting tasks must be combined with the profile of job requirements. The “careful” and cost-effective use of all resources implies that a policy of “hire and fire” needs to be abandoned in favor of sustainable personnel planning and development for the long term. The demographic change will also continue to pose challenges for human resource management. The implementation of incentive schemes that are as fair as possible and focus on achievements constitutes a further challenge. On the one hand the focus on achievements is needed to secure economic success. Quality bonuses, for example, aim at reducing waste and thus help to conserve resources. On the other hand, systems of flexible working hours are supposed to satisfy the demands of employees concerning their work-life balance and at the same time enable companies to react to changes in their market environment. The remuneration of employees has an incentive function for potential new hires, it is supposed to contribute to equilibrium between incentives and employee contributions and in addition it needs to be manageable for the company from a cost perspective. The organization of the work system comprises all questions related to the design of work spaces, the integration of information and technology as well as of efficiency and productivity. In addition - and this point gains in relevance with demographic change - it also includes d occupational health management. The fundamental aims of maintaining good health and avoiding job-related illnesses are expanded by the aspect that firms will increasingly employ people that are older than 50 years. Providing adequate qualifications, sustained moti- 86 Zaugg (2009), pp. 156o157 87 Stock-Homburg (2008), pp. 16o17 <?page no="80"?> 4.2 Development towards Sustainable Human Resource Management 79 @ www.uvk.de vation and a general ability to compete with older employees, for example if faced with changing production technologies or modern means of communication and information gathering, is a challenging task. 44..22 DDeevveellooppmmeenntt ttoowwaarrddss SSuussttaaiinnaabbllee HHuummaann RRee-ssoouurrccee MMaannaaggeemmeenntt 44..22..11 SSccooppee aanndd OOrri ieennttaattiioonn Sustainable Human Resource Management (SusPM) as it is understood in this contribution constitutes a refinement of d strategic human resource management and requires an emphasis on aspects that are already employed there. To provide direction and to measure success, Scholz suggests an orientation on basic postulates. He mentions among others: focus on success (goals of employees and of the company), flexibility (adaptation to changes of the internal and external environment), individuality (considering the needs and values of the employees), client orientation (existing and future employees) as well as a focus on quality. 88 Beer et al. in their human resource management approach with a strategic orientation demand a policy that aims at increasing the commitment of the employees towards their employer and that targets qualifications for the employees that are appropriate for the task. They furthermore require that personnel measures are cost effective and congruent with the goals and expectations of the various stakeholders. 89 This direction ultimately serves to contribute to the success of the company and the satisfaction of the employees and also to pursue sociopolitical aims. SusHRM expands on this value orientation and focuses on certain additional aspects. The required flexibility, the orientation towards stakeholders, the focus on competencies, knowledge and strategy are criteria already known from d strategic human resource management. 90 In his SusHRM approach, Zaugg especially stresses the importance of employee participation and broadens the idea of value creation. 91 Fundamental is the much stronger focus on the employees. Kosel and Weißenrieder in this context talk about a positive d image of man as an absolute prerequisite for SusHRM. 92 88 Scholz (2000), pp. 65o66 89 Beer et all (1985), pp. 20o21 90 Ulrich (1999), pp. 33o34 91 Zaugg (2009), pp. 61o62 92 Weißenrieder/ Kosel (2010), pp. 17o18 <?page no="81"?> 80 4 Sustainable Human Resource Management @ www.uvk.de The most fundamental term in the context of SusHRM, however, is the d culture of trust. 93 While previous human resource management approaches emphasized “trust” as a value orientation towards employees in various ways, 94 SusHRM considers employees to be partners with equal rights and on an equal footing in the organization. In a holistic approach, their interests are just as important as the specific interests of the various d stakeholders. 95 The distinctive difference to previous approaches is the deeply rooted inner conviction of all stakeholders that employees are able to align subjective interests, expectations and requirements with the values and aims of the organization. Differences in interests are bridged by both sides - employers and employees, in order to jointly reach the individual targets at a higher level. This leads to a harmonization of economic and social aims and reduces perceived tensions between the two targets. A high degree of employee participation and openness in the decision making process are part of this approach. Results include an improved acceptance of the decisions, heightened motivation and satisfaction and as a consequence higher efficiency and value creation. 96 44..22..22 FFuunnddaammeennttaall aaiimmss Starting from a value orientation, SusHRM integrates and harmonizes the aims of individuals, organizations and society in a target system. SusHRM follows a strategy of reconciliation by attempting to overcome the frequently mentioned conflicts between the various goals or by providing compensation. 97 The heavily instrumental approach (increased motivation leads to higher work effort, therefore we need to motivate employees) is abandoned in favor of a culture of cooperation and a d culture of trust which leads to a win-win situation. 98 In this concept the aims of employees and company are complementary; no conflict of interest exists. 99 93 Bleicher (1994), pp. 49o50 94 For example the approaches on cooperative leadership or on trust-based working hours 95 Campbell et all (2002), pp. 26o27 96 Zaugg (2009), p. 157; Weißenrieder/ Kosel (2010), pp. 19o20 97 Wöhe (2010), pp. 70o71 98 Weißenrieder/ Kosel (2010), p. 14; Kochan (2007), pp. 607o608 99 Lattmann (1982), p. 52, who talks about harmony of goals <?page no="82"?> 4.2 Development towards Sustainable Human Resource Management 81 @ www.uvk.de Figure 4-1: Target system of SusHRM Individual targets Organizational targets Social targets fulfilling task personal and professional development self-responsibility participation in decisions work-life balance fair and adequate remuneration profit sharing maintain the company company success return customer-orientation innovative products and services ability to adapt and change continuous improvement of the competitive position employment opportunities competitiveness of the economy economic growth social harmony participation of organizations and individuals in sociopolitical decisions sustainable use of resources Table 4-1: Examples from the target system of SusHRM 44..2 2. .33 CCuullt tuurre e oof f TTrru usstt aas s tthhee FFoou un nd daatti ioonn ffoor r SSu usstta aiinnaabbllee HHuumma ann RRe esso ou ur rc ce e MMa anna ag ge emmeenntt A major objective of SusHRM is the participation in establishing a normative d culture of trust, which serves as the foundation for all further SusHRM activities. In a somewhat circular fashion, the prevalence of trust among the members of an organization and within the organization is on the one hand a prerequisite for establishing a culture of trust; on the other hand it is the result. 100 The 100 Zaugg (2009), pp. 77o78 <?page no="83"?> 82 4 Sustainable Human Resource Management @ www.uvk.de aim is the creation of trust based on identification, which is characterized by common values and the commitment to common targets. 101 The main features of this culture of trust are as follows: - Culture of trust as a dominant, generally accepted value base with inherent and mutual obligations for all members of the organization and other stakeholders - Commitment to pursue joint values and targets - High degree of social responsibility vis-à-vis the employees - Employees assume responsibility in the pursuit of the company goals - Conviction in the necessity of personal and professional development of employees - Participation in the decision making process and freedom to make decisions as postulates - Self-organization and self-control instead of detailed guidelines and comprehensive third-party controls - Network structures instead of hierarchical structures - Culture of open information - Active listening and constructive feedback The implementation in the daily management routine can be described with reference to the process of reaching, implementing and securing decisions. The executive must make a decisive contribution towards establishing a culture of trust. When reaching decisions, trust is created when employees are empowered to participate in the process on the basis of detailed information and knowledge. Leadership based on cooperation and participation not only integrates the employee fully, but also expects active involvement and commitment. Decisions are implemented on the basis of a broad consensus and not based on power. The implementation of the defined goals is assured via self-control and activities are pursued in a responsible manner in order to correct possible deviations. The more distinctive a culture of trust is, the less systematic and detailed outside control is needed. 102 Establishing such a corporate culture o which has the character of a sustainable competitive advantage o is a core competency of SusHRM. 101 Weibler (2001), pp. 201o202 102 Steinle/ Ahlers/ Gradtke (2000), pp. 208o209 <?page no="84"?> 4.3 Central Tasks for Sustainable Human Resource Management 83 @ www.uvk.de 44..33 CCeennttrraall TTaasskkss ffoorr SSuussttaaiinnaabbllee HHuummaann RReessoouurrccee MMaann-aaggeemmeenntt In the following tasks and responsibilities will be sketched out that are particularly relevant for SusHRM based on the above considerations. Presented are mainly aspects that have a specific characteristic in the context of SusHRM. 44..33..11 LLeeaaddeer rssh hiipp Leadership is part of the scope of SusHRM. Similar to the co-terminality principle for services, human resource management is manifested mainly through the interaction between employee and executive. It is the responsibility of SusHRM to provide the foundations and framework conditions for this interaction. This is even more appropriate if a broader perspective on human resource management is taken and structural (shaping via leadership instruments) as well as cultural dimensions (shaping via interrelations between corporate culture and human resource management) are included. 103 Interactional leadership Structural leadership Cultural leadership - Orientation on leadership behavior that is cooperative and participative - Leadership training - Quality improvement processes - Feedback processes - Understanding of one’s role - Implementation of employee review meetings - Target agreement systems - Incentive systems - Structural anchoring of leadership as a central management task d Conception of man - Concept of cooperative and participative leadership - Establishment of a d culture of trust - Cultural anchoring of leadership as a central management task Table 4-2: Examples of design tasks of SusHRM in the context of human resource management 103 Weibler (2001), pp. 346o347; Bleicher (1994), pp. 46o47 <?page no="85"?> 84 4 Sustainable Human Resource Management @ www.uvk.de SusHRM demands a leadership style that values cooperation and participation. This relates to the basic behavioral focus of the superior in his interactions with employees. Cooperative stresses the aspect of working together while participative focuses on the involvement of the employee in reaching the decision. 104 As already mentioned previously, this leadership style requires a high degree of mutual trust in the sense of trust based on identification. The concrete implementation requires substantiation via structural measures. Feedback processes, employee review meetings and processes for establishing target agreement systems are only a few examples for the systematic use of relevant human resource management instruments. These are clearly defined design tasks of SusHRM. It is furthermore absolutely essential that executives fully embrace their leadership role. The high volume of operative responsibilities which is a practical reality cannot be used as an excuse for neglecting this role. The “secret” delegation of leadership responsibilities to the workers council is unacceptable in the context of holistic SusHRM. For that reason SusHRM must be solidly anchored within the corporate culture, for example via the development of principles of conduct and leadership. The responsible conduct of all leadership responsibilities must be stressed strongly as a central and valued task of executives that is accepted by everybody. There must be enough time available for the task, it needs to be rewarded and the quality needs to be raised constantly. SusHRM cannot leave executives alone in these endeavors. 44. .33. .22 HHu ummaann RRees soou urrcce e MMaannaaggeemmeen ntt ppllaannnniinngg Quantitative and qualitative personnel planning play a major role in any successful SusHRM. It makes a major contribution towards fulfilling the aims of Sus- HRM, for example via the individual target “personal and professional development,” the organizational aim “adaptation and ability to change,” or the societal goal of “offering work opportunities that meet the needs.” Most pronounced is the medium to long-term planning. 105 The determination of the manpower requirements is based on the following questions: 106 - Which number of employees (quantitative)? - Which qualifications (qualitative)? - At which point in time (temporal)? - In which location (spatial)? 104 Lattmann (1982), pp. 326o327, Weibler (2001), pp. 350o351 105 Doyé/ Eisele (2010), pp. 49o50 106 Scholz (2010), pp. 121o121 <?page no="86"?> 4.3 Central Tasks for Sustainable Human Resource Management 85 @ www.uvk.de Only well developed personnel planning allows companies with staying power to reach the aims of SusHRM. Not always can short-term adjustment mechanisms - both new hires and layoffs - be avoided. But the aim of SusHRM is to manage the necessary adaptation of the company to changing market and environmental conditions mostly with internal personnel resources and to avoid the short-termism of “hire-and-fire” policies. Specific points of reference of personnel planning in the context of SusHRM are therefore long-term orientation, focus on competencies and the accepted model of a d culture of trust. Over the long term this assures a reasonably predictable and shapeable framework for all activities. Quantitative statistics and indicators need to be checked against the background of the inferable activities. If employees with strategically relevant core competencies are to be promoted from within the organization, and this involves for example pursuing a degree in addition to working, a long-term perspective of five and more years is opened up. If the company o in line with the culture of trust o attempts to retain employees who do not possess strategic core competencies, this is also possible in the context of additional training, given a medium term perspective. 107 The orientation on job profiles with a rather short-term perspective is replaced by the guiding principle of strategically relevant core competencies. Core competencies are on the one hand an extension of the individual competencies (subject, social and methodological competency) in relation to the strategic relevance of these skills for the success of the company. On the other hand, employees with these competencies are in principle not available in the job market. The core competencies need to be identified in the context of qualitative personnel planning and employees need to be developed in that direction. In addition to these qualifications, personnel measures are necessary in order to keep employees with the company over the long term (for example incentive systems with a long-term orientation or internal career prospects). In addition to employees with core competencies, SusHRM focuses on employees who satisfy the criteria implied by a culture of trust. On the basis of the fundamental principles of a culture of trust as outlined above, these are employees who show a high degree of identification with the company, who want to grow personally and professionally within their abilities and who are willing to assume individual responsibility in order to reach the company goals. These groups of employees must be given the opportunity of a long-term working relationship and personnel planning needs to be structured accordingly. The 107 Doyé/ Eisele (2010), pp. 52o53 <?page no="87"?> 86 4 Sustainable Human Resource Management @ www.uvk.de personal and professional advancement of these employees thus specifically targets flexible work assignments and increased efficiency. Also relevant are corporate health management activities to support a successful and long working life. Figure 4-2: Aspects of personnel planning in the context of SusHRM 44..3 3. .33 HHu umma an n RRees so ou urrc ce e MMaan naaggeemme en ntt ddeev ve el lo op pmme en ntt Some of the above statements concerning personnel planning are also relevant for personnel development. The aim of personnel development planning is the qualification of employees for their current and future tasks. This includes both reactive and anticipatory measures. Frequently a distinction is made between training and further education (orientation on a specific activity) and advancement (professional development, career development). Consequently personnel development measures can range from into the job to out off the job. 108 Human Resource Management development has - based on its fundamental objectives - an orientation on sustainability. The focus is on assuring that company targets are met, providing lasting qualifications that enable employees to fulfill all relevant tasks and the support of employees in the sense of developing their careers. For that reason it also constitutes a fundamental building block of the d culture of trust. 108 Stock-Homburg (2008), p. 154, Doyé/ Eisele (2010), pp. 270o271 <?page no="88"?> 4.3 Central Tasks for Sustainable Human Resource Management 87 @ www.uvk.de Particularly relevant for personnel development as a fundamental pillar of SusHRM are creative ideas such as personnel development over the life-cycle, coaching and mentoring as well as feedback and assessment. Human Resource Management development over the life-cycle focuses on the various stages in professional life - from recruitment to departure of the employee. Figure 4-3: Systematic overview of personnel development measures, following Scholz (2010), p. 353 It therefore pursues a long-term approach, which provides employees with a personal and professional long-term development perspective in line with the d culture of trust of SusHRM. From the employee perspective this opens up possibilities for participation and the pursuit of work-life balance. Opportunities for adaptation and change become apparent for the company. Coaching and mentoring are a good fit for sustainable human resource management in more than one way. Employees are enabled to act in accordance with their individual abilities to learn and change. 109 The cooperation, for example, between executive and junior staff (mentoring) offers the chance of providing personal feedback, establishing a network, sharing experiences and in this way of increasing loyalty to the company. Feedback and evaluation processes enable the company to use the achievements and potential of their employees responsibly. Actions can be taken early on which help to shape individual careers with the company. At the same time the measures support the initiatives aimed at continuous improvement of the competitive position, since an open process allows the detection of strengths and weaknesses. 109 Zaugg (2009), pp. 304o305 <?page no="89"?> 88 4 Sustainable Human Resource Management @ www.uvk.de 44..33..44 SShhaappiinngg tthhee CCoorrppoorraattee CCuullttuurree Human resource management influences and shapes the business culture like few other corporate functions. Therefore it is of primary importance for Sus- HRM to continuously assess all measures concerning their fit with the d culture of trust as described above and to initiate corrective measures if needed. The required fit between strategy and culture is fully reflected in the fit between personnel measures and culture of trust. 110 The required responsible and performance-oriented performance of duties by the employees must be matched by fair personnel instruments. Personal interactions (interactional fairness), processes and methods (procedural fairness) as well as the material outcome (distributive fairness) are subject to critical scrutiny by employees. Figure 4-4: Considering different dimensions of fairness, following Stock-Homburg (2008), p. 62 SusHRM does not mean that employees will never be laid off. On the contrary: if tasks are not fulfilled in the spirit of responsibility, clear language is in order and ultimately layoffs may be the consequence. The difference between SusHRM and standard human resource management is the more pronounced holistic approach, which enables the employee to fulfill all his obligations in the context of his various roles largely free of conflict. This must be reflected for example in interactions with female executives and employees, who want to be able to fulfill their duties as mothers, but are also interested in career advancement. 110 Dillerup/ Stoi (2011), pp. 24o25 <?page no="90"?> 4.4 Organizational Structure of Sustainable Human Resource Management 89 @ www.uvk.de 44..44 OOrrggaanniizzaattiioonnaall SSttrruuccttuurree ooff SSuussttaaiinnaabbllee HHuummaann RRee-ssoouurrccee MMaannaaggeemmeenntt As mentioned above, SusHRM can be seen as an expansion of d strategic human resource management. This manifests itself in the focus and stronger emphasis on certain elements of strategic human resource management. The same is true for the organization of SusHRM, where the parameters of strategic human resource management largely apply. Differences are apparent especially in the roles of executives and employees. 44..44..11 PPoossiittiioonniinngg aanndd CCllaassssiiffiiccaattiioonn ooff SSuussHHRRMM In line with the importance of successful SusHRM for the achievement of company objectives, as discussed in this contribution, SusHRM must be represented in the organizational structure. SusHRM is a central component of the corporate strategy. The realization of the aims of SusHRM is thus a prerequisite for the achievement of the company objectives. 111 It therefore makes sense to consider SusHRM as a business partner. 112 The resulting tasks include consulting and assistance for the company leadership, support of employees in all tasks in cooperation with the executives, specific tasks that require expert knowledge such as selection processes, incentive and remuneration management as well as labor law, administrative tasks requiring quality and efficiency, such as payroll accounting or time recordings. Of particular relevance in this context is the role of the “change manager.” 113 SusHRM must support the necessary process of change at the company in line with its mission. The flexible adaptation of the company to its environment is a needed prerequisite for sustainable business success. SusHRM argues that this process requires a high degree of harmony with individual, organizational and societal aims. 114 Maintaining the culture of trust is of high priority from the perspective of SusHRM. At the same time, change processes are frequently reactions to an evolving competitive environment with far-reaching 111 Beer et al. (1985), pp. 19o20 112 Doyé/ Eisele (2010), pp. 26o27 113 Ulrich et al. (2008), pp. 22o23 114 Chapter 2.2 <?page no="91"?> 90 4 Sustainable Human Resource Management @ www.uvk.de economic consequences. Bridging the gap in differences of interest between employer and employee that can possibly arise in such a situation is a particular challenge and a fundamental touchstone for SusHRM. 44..44..22 IInnvvoollvveemmeenntt iinn SSuussHHRRMM Zaugg proposes the expansion of the current “dual” responsibility to a “trilateral” responsibility. 115 Trilateral stands for the distribution of all responsibilities related to personnel between personnel department, executives and employees. The latter group is increasingly involved in personnel issues due to the participative approach of SusHRM. 116 But even if a “dual” responsibility continues to be assumed, SusHRM requires certain adjustments. The tasks of the personnel department were already described above. This implies that the head of the personnel department should also be a member of the Management Board, but in addition that hierarchical structures should be replaced by professionalism, shared values and cooperativeparticipative structures. In this context Scholz talks about a central-cooperative classification of the personnel department. 117 More material, however, is the significantly increased responsibility of the company leadership for tasks related to SusHRM. The value base of SusHRM is the culture of trust described above. As already discussed, this culture becomes tangible mainly in the interaction between employee and superior. If the executive does not assume this fundamental management task and fails to reach out to employees in a credible way that reflects and demands a culture of trust, the most important pillar of SusHRM is without a solid foundation. This is concretely reflected in the aforementioned tasks of SusHRM. In addition to interactional human resource management, this relates to the responsible participation of all superiors in personnel planning, personnel development, remuneration and shaping of the corporate culture. Executives must actively engage in their responsibilities of shaping the organization in the context of human resource management. Superiors in the sense of SusHRM are those central participants with responsibility for success or failure of SusHRM. 115 Zaugg (2009), p. 389 116 Zaugg (2009), p. 389 117 Scholz (2010), p. 69 <?page no="92"?> 4.4 Organizational Structure of Sustainable Human Resource Management 91 @ www.uvk.de At a glance Companies with a focus on sustainability also need sustainable human resource management. SusHRM is characterized by the extensive effort to align the individual aspirations of the employees with the company targets and to overcome conflicts of interest. This is based on an d conception of man and a d culture of trust which assign employees the role of equal partner in a company. Traditional conflicts between the aims and interests of employer and employee are overcome in principle. This is related to the idea of maintaining the participation of employees for a long time and to consider layoffs as a last resort. The culture of trust mainly finds its expression in the interaction between superior and employee on the basis of a cooperative and participative leadership style. For that reason executives play a decisive role in the successful implementation of SusHRM. Suggestions for further reading Boxall, Peter F.; Purcell, John; Wright, Patrick M. (eds.) (2007): The Oxford handbook of human resource management. Oxford, New York: Oxford University Press (Oxford handbooks). Boxall, Peter F.; Steeneveld, Michael (1999): Human Resource Strategy and Competitive Advantage: A Longitudinal Study of Engineering Consultancies. In: Journal of Management Studies 36/ 4, 443-463. Pfeffer, J. (1995): Producing sustainable competitive advantage through the effective management of people. In: Academy of Management Executive, 9/ 1, 55-69. Zaugg, Robert J. (2009): Nachhaltiges Personalmanagement. Eine neue Perspektive und empirische Exploration des Human Resource Management. 1st edition. Wiesbaden: Gabler. Literature Allen, Mathew; Wright, Patrick (2007): Strategic Management and HRM. In: Peter F. Boxall, John Purcell und Patrick M. Wright (eds.): The Oxford handbook of human resource management. Oxford, New York: Oxford University Press (Oxford handbooks), 89-107. Beer, Michael; Spector, Bert; Lawrence, Paul, R.; Mills, Quinn, D.; Walton, Richard, E. (eds.) (1985): Human resource management. A general manager’s perspective: text and cases. New York: Free Press. <?page no="93"?> 92 4 Sustainable Human Resource Management @ www.uvk.de Beer, Michael; Spector, Bert; Lawrence, Paul, R.; Mills, Quinn, D.; Walton, Richard, E. (1985): A Conceptual Overview of HRM. In: Michael Beer, Bert Spector, Lawrence, Paul, R., Mills, Quinn, D. und Walton, Richard, E. (eds.): Human resource management. A general manager’s perspective: text and cases. New York: Free Press, 16-40. Bleicher, Knut (1994): Leitbilder. Orientierungsrahmen für eine integrative Managementphilosophie. 2. Aufl. Stuttgart, Zürich: Schäffer-Poeschel; Verl. Neue Zürcher Zeitung (Schriften / Institut für Betriebswirtschaft, Hochschule St. Gallen für Wirtschafts-, Rechts- und Sozialwissenschaften, Vol. 1). Boxall, Peter F.; Purcell, John; Wright, Patrick M. (eds.) (2007): The Oxford handbook of human resource management. Oxford, New York: Oxford University Press (Oxford handbooks). Campbell, David; Stonehouse, George; Houston, Bill (2002): Business strategy. An introduction. 2 nd ed. Oxford: Butterworth-Heinemann. Dillerup, Ralf; Stoi, Roman (2011): Unternehmensführung. 3 rd revised edition. München: Vahlen. Doyé, Thomas; Eisele, Daniela (2010): Praxisorientierte Personalwirtschaftslehre. Wertschöpfungskette Personal. 7 th completely revised edition. Stuttgart: Kohlhammer. Kochan, Thomas, A. (2007): Social Legitimacy of the HRM Profession. A US Perspective. In: Peter F. Boxall, John Purcell und Patrick M. Wright (Hg.): The Oxford handbook of human resource management. Oxford, New York: Oxford University Press (Oxford handbooks), 599-619. Lattmann, Charles (1982): Die verhaltenswissenschaftlichen Grundlagen der Führung des Mitarbeiters. Bern u.a: Haupt (Schriftenreihe Unternehmung und Unternehmungsführung, 9). Scholz, Christian (2000): Personalmanagement. Informationsorientierte und verhaltenstheoretische Grundlagen. 5 th revised and expanded edition. München: Vahlen (Vahlens Handbücher der Wirtschafts- und Sozialwissenschaften). Scholz, Christian (2010): Grundzüge des Personalmanagements. 1 st edition. München: Vahlen. Steinle, Claus; Ahlers, Friedel; Gradte, Britta (2000): Vertrauensorientiertes Management. In: zfo (4), 208-210. Stock-Homburg, Ruth (2008): Personalmanagement. Theorien - Konzepte - Instrumente ; . 1 st edition. Wiesbaden: Gabler. Uhle, Thorsten; Treier, Michael (2010): Betriebliches Gesundheitsmanagement. Gesundheitsförderung in der Arbeitswelt - Mitarbeiter einbinden, Prozesse gestalten, Erfolge messen. . 1 st edition. Berlin: Springer Berlin. <?page no="94"?> OxZ|]šZX]| 93 Ulrich, Dave (ed.) (1999): Strategisches Human-Resource-Management. München, Wien: Hanser. Ulrich, Dave (1999): Das neue Personalwesen: Mitgestalter der Unternehmenszukunft. In: Dave Ulrich (Hg.): Strategisches Human-Resource-Management. München, Wien: Hanser, 33-51. Ulrich, David; Brockbank, Wayne; Johnson, Dani; Sandholtz, Kurt; Younger, Jon (2008): HR competencies. Mastery at the intersection of people and business. Alexandria, VA: Society for Human Resource Management. Weibler, Jürgen (2001): Personalführung. München: Vahlen. Weissenrieder, Jürgen, Kossel Marijan (2010): Das NPM-Konzept - engagierte Mitarbeiter sind kein Zufall. In: Jürgen Weissenrieder und Marijan Kosel (eds.): Nachhaltiges Personalmanagement in der Praxis. Mit Erfolgsbeispielen mittelständischer Unternehmen. 1 st edition. Wiesbaden: Gabler, 11-24. Weissenrieder, Jürgen; Kosel, Marijan (Hg.) (2010): Nachhaltiges Personalmanagement in der Praxis. Mit Erfolgsbeispielen mittelständischer Unternehmen. 1 st edition. Wiesbaden: Gabler. Wöhe, Günter; Döring, Ulrich (2010): Einführung in die allgemeine Betriebswirtschaftslehre. 24 th revised and updated edition. München: Vahlen. Zaugg, Robert J. (2009): Nachhaltiges Personalmanagement. Eine neue Perspektive und empirische Exploration des Human Resource Management. 1 st edition. Wiesbaden: Gabler. <?page no="96"?> o see Glossary @ www.uvk.de 55 IInntteerrnnaattiioonnaall MMaannaaggeemmeenntt aanndd BBuussiinneessss SSuussttaaiinn-- ššbbiilliittyy by Carsten Herbes Learning Objectives The readers ) understand how cross-border issues and international organizations have shaped the debate on business sustainability, ) realize the degrees of freedom available to international companies and understand how different organizations attempt to set and monitor sustainability standards across borders, ) are aware of the major cultural differences in the understanding of sustainability, ) are familiar with the problems of sustainability in international strategy, procurement and marketing and the options for advancing sustainability in these areas. List of Key Terms ) Industrial flight hypothesis ) Race-to-the-bottom hypothesis ) Pollution haven hypothesis ) ILO ) Global Compact ) Culture ) Corruption 55..11 IInnttrroodduucctti ioonn 55..11..11 IInntteerrnnaattiioonnaall CCoorrppoorraattee AAccttiivviittiieess -- aann OOvveerrvviieeww The aim of this chapter is to take a close look at the specific challenges related to d sustainability in the international activities of corporations. The spectrum of possible international activities is broad. As an example, companies are active as sellers in international markets for goods and services and conduct crossborder transactions. At the same time they are also buying goods and services. On international financial markets, they obtain equity and debt capital from foreign investors while at the same time acting as investors in other countries. In the job market they also recruit personnel from abroad. <?page no="97"?> 96 5 International Management and Business Sustainability @ www.uvk.de Cross-border activities of companies have existed since antiquity. The merchants of the Roman Empire maintained international relations, the Silk Road has been an international trading route since pre-Christian times, and during the Middle Ages, German merchants traded with partners in the entire region of North Sea and Baltic Sea within the Hanseatic League. Today these cross-border activities account for a large share of overall global economic activity. Already by 2008, international trade reached more than 25% of global output. 118 In the period 2007-2011, exports accounted for close to half of Germany’s gross domestic product. 119 Foreign investors hold 56% in German DAX companies on average; in individual cases such as Deutsche Börse AG, this can be as high as 82%. 120 In other countries, the international influence is even bigger than in Germany. In the first section, we take a look at cross-border issues and international organizations, and how they shaped the sustainability debate. Then we inquire about the effects of international activities by companies on sustainable development. The following Section 5.2 deals with the specifics of sustainability in international activities compared to purely domestic operations. We will see that the scope of companies is larger in the international arena, but that there are agreements and organizations that attempt to move international companies in the direction of sustainable behavior. In Section 5.3 it becomes clear that the cultural and institutional background has a major influence on the way sustainability is understood and implemented by companies across the globe. In Section 5.4 we finally analyze different company functions such as procurement or marketing and shed light on the challenges with regard to sustainability that arise in the context of international activities. We then consider possible reactions of the various company functions aimed at increased sustainability of their international engagements. Section 5.5 closes with a summary. 55..1 1. .22 TTh hee IInnt te er rn naatti ioonnaal l DDiim meen ns siio onn oof f SSu usst ta ai innaabbiil liittyy Both with regard to contents and development of the term, sustainability always had an international aspect. Major problems such as the fight against global warming (ecology) or poverty, hunger and uncontrolled migration (social) are global phenomena. And the effects of company activities are also not limited to a single country. In the past, emissions from Eastern European industry were the cause of acid rain in Germany and radioactive emissions from Chernobyl 118 Kutschker M./ Schmid, S. (2011), p. 44 119 www.worldbank.org 120 www.faz.net (2011) <?page no="98"?> 5.1 Introduction 97 @ www.uvk.de reached Western Europe in the form of precipitation. On the other hand, foreign investors frequently play a major role in setting working conditions especially in developing nations. In the political sustainability discussion, the major publications were initiated by international organizations: In 1972 the Club of Rome published its report “The Limits to Growth” and for the first time formulated a position that strongly contrasted with the thinking in the fifties and sixties and its trusting belief in progress. Against the backdrop of the prevailing technologies available at the time, it pointed out that a continuation of unchecked growth would inevitably lead to both ecological and economic collapse. 121 In 1987 the World Commission on Environment and Development (WCED), also known as d Brundtland Commission in its report “Our Common Future” already provided a definition of sustainability that continues to be used widely: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” 122 This definition stresses both intragenerational equity (equitable development for the members of one generation, for example equity between industrial and developed nations) as well as intergenerational equity, which implies the necessity to embrace a lifestyle today that also assures that future generations will inherit a viable environment. In addition, the report stresses a global perspective as well as the close ties between developmental and environmental aspects. 55..1 1. .33 EEffffe ec cttss oof f IInntteerrnnaattiioonnaall TTrraannssaaccttiioonnss oonn SSu us st taaiin naabbi illiittyy Insight: International economic activities can both foster and hinder sustainable development. The optimistic view stresses the fact that international economic activities of companies support stronger growth and thus also higher wealth levels. This in turn increases the demand for environmental protection. Furthermore, international trade allows specialization and thus production technologies that are better for the environment. And finally, production sites of foreign investors can lead to knowledge spillover to companies in the host country (even 121 Meadows, D.H. et al. (1972) 122 WCED (1987), p. 41 <?page no="99"?> 98 5 International Management and Business Sustainability @ www.uvk.de though clear evidence of this is still lacking 123 ) and the spread of Western environmental and social standards. 124 It is pointed out frequently in the literature that production facilities of major multinational companies tend to be more productive and also cleaner than factories of local companies. 125 The pessimistic view holds that internationally active companies contribute to increased resource use in production, transport and consumption. 126 International companies have also used less developed countries as “pollution havens” (see 5.2.1) and moved industries with heavy emissions that are harmful to the environment there. 127 In the end both arguments can have merit. Even though international companies may use technologies in developing economies that are not as clean as at home, they are still superior to the local companies. Furthermore, international companies have an advantage concerning economies of scale and are therefore frequently able to produce cheaper than the purely local competition. If these products are then imported by a developing country, they prevent the establishment of local companies. Result: At any rate, companies that engage in cross-border transactions, such as investments in production sites, transfer their own understanding of sustainability to the host country, which can possibly be in conflict with sustainability as it is understood in the host country against its cultural background. We tend to focus on investments of Western companies in foreign countries in this context. But in recent years, the opposite direction of direct investments has gained in importance. Beginning in 2005, Chinese companies, for example, have increasingly acquired stakes in German mechanical engineering firms and in this way also export the Chinese understanding of sustainability. 128 For companies from countries which tend to have rather weak regulations in the field of sustainability, an expansion into markets with a pronounced focus on sustainability can be a particular challenge. 123 Taymaz, E. / Yilmaz, K. (2008), p. 1 124 Schlesinger, D. (2006), p. 149 125 Abdul-Gafaru, A. (2009), p. 51 and the studies mentioned 126 Schlesinger, D. (2006), p. 149 127 Abdul-Gafaru, A. (2009), p. 50 128 Herbes, C. / Schneidewind, P. (2007), pp. 27o28 <?page no="100"?> 5.1 Introduction 99 @ www.uvk.de The economic might of internationally active companies frequently surpasses government spending even of medium-sized countries such as Belgium or Austria. For smaller countries, even the domestic product is smaller than the sales of major global players. Result: The largest globalized companies in many cases have a larger and more direct influence on the stakeholders all over the globe than the governments of their home countries. Case e xample: Shell in Nigeria 129 Shell has been producing oil in the Niger delta as early as 1958 and for decades, the practices of the company have been subject to critical scrutiny by environmental organizations and the United Nations. Until recently, the natural gas produced together with the oil was almost completely flared (95% in the year 1995), for example. This does not only result in acid rain in the region, but also accelerates global warming due to the emission of CO 2 . As late as 2011, gas flaring was still common. And pollution from leaking crude oil, which damages the fragile mangrove forests, is a regular occurrence. To further advance the exploration of oil, forests are cleared. Shell states that in the year 2003 alone, close to 10,000 barrels of oil were released into the environment and that in the eighties, about 40% of all oil pollution globally by the company happened in Nigeria. In the year 2011, another severe incident occurred off the coast of Nigeria during the loading of an oil tanker. The occurrence of environmental pollution is several times higher than the comparable values in the US. These differences are due mostly to the lack of enforcement of environmental regulations in Nigeria. While Shell faces considerable penalties in other countries, these are not a threat in Nigeria. But the activities of Shell in Nigeria have repeatedly been publicized widely, most recently in a comprehensive report of the UNEP. In order to preserve its reputation globally, the company is under pressure to tackle these problems. At least in its communications, this is clearly observable. Nigeria takes up a lot of space in the sustainability report of Shell. Jointly with the International Union for Conservation of Nature, the company plans to appoint a scientific advisory board, which will look into the treatment of oil spills. Fur- 129 Abdul-Gafaru, A. (2009), pp. 56o57; UNEP (2011); Shell (2012) <?page no="101"?> 100 5 International Management and Business Sustainability @ www.uvk.de thermore, in early 2012, the French company Bureau Veritas, which offers testing, inspection and certification services was commissioned to investigate oil pollution caused by Shell. 55..22 IInntte errnnaattiioon naal l PPa arrtti iccuul laar riitti ie es s ooff SSuusst ta ai inna abbi illi itty y AAs sppe eccttss We have seen that the activities of international companies have a significant influence on the sustainable development of many countries. What are the particularities of sustainable management for international as opposed to purely domestic activities? First of all, companies from Europe and the US 130 have a much larger degrees of freedom in case of international activities due to a lack of binding international regulations. The largest number of laws and the greatest detail is provided at the national level. Second, there are large differences in the understanding and implementation of sustainability in various countries due to differences in institutional and cultural framework conditions. Third, expectations concerning sustainability in the host countries are higher for international companies than for local players. 55..22..11 EExxp paannddeedd SScco oppee Insight: Binding legal rules, especially on social and ecological aspects, frequently exist only at the national level. For that reason, companies tend to have more degrees of freedom in their international activities. In addition, companies can avoid regulatory constraints in the field of sustainability by moving their production locations. This idea is the core of the d industrial flight hypothesis. It states that companies in an effort to maximize profits will relocate in order to avoid costly governmental regulations. Furthermore, there is a d “competition among systems / nation states.” 131 This means that nations are competing for foreign investors and may run the risk of strategic use of low levels of protection, for example concerning the environment or workers’ rights. 132 One of the most important hypotheses in this regard 130 Meanwhile, companies from countries with low regulatory density in the area of sustainability will perceive less scope for action in their international activities. 131 Schlesinger, D. (2006), p. 150 132 Schlesinger, D. (2006), p. 150 <?page no="102"?> 5.2 International Particularities of Sustainability Aspects 101 @ www.uvk.de is the so-called d “race-to-the-bottom hypothesis” (RTB-hypothesis). It states that companies will choose those countries for investments that allow the highest profits. High taxes and strict rules for the protection of the environment and workers reduce profits. For that reason, companies will avoid countries that pursue such policies. In order to prevent investors from withdrawing their capital, countries will thus be forced to set increasingly lower standards. Even though this hypothesis is frequently quoted in discussions, especially by representatives of industry in the face of a threat of regulatory tightening, it receives little empirical support. Especially in the case where a country is opening up to global trade, a worsening of standards would have to be observed. But this is in fact untrue and the hypothesis has been refuted empirically numerous times. 133 Not infrequently, the particularly strict countries are also endowed with high labor productivity and other attractive features. Germany for example, as one of the most open economies in the world, is constantly tightening its already strict standards and still continues to attract foreign investors. Closely related to the RTB hypothesis is the d “pollution haven” hypothesis. It states that heavily polluting industries will move their production sites to countries with weak environmental regulation. Again, it is not easy to find empirical evidence for this hypothesis. Even though the three hypotheses may not completely reflect reality, there is still no doubt that international activities provide companies with additional opportunities, which may be detrimental to sustainable development. For that reason, numerous attempts have been made to establish supranational regulations and institutions. 55..22..22 SSuupprraannaatti ioon naall RReegguullaattiioonnss ooff SSu usst taaiinnaabbiilliittyy AAs sppeecct ts s A range of supranational or even global regulations and mechanisms has come into existence that is supposed to influence business activities in the direction of increased sustainability, also at the purely domestic level. These mechanisms start with classical international treaties, include the surveillance by nongovernmental organizations (NGOs), and also entail self-commitments and the informal supervision by consumers. One advantage of global standards is the creation of an equal playing field for all companies subject to global competition. It also becomes easier for companies to check their suppliers for the adherence to social and environmental criteria. On the other hand it is argued 133 See for example Millimet, D.L./ List, J.A. (2003); Drezner, D.W. (2006) <?page no="103"?> 102 5 International Management and Business Sustainability @ www.uvk.de that the standards are frequently rather soft, cause an additional administrative burden and prevent the “competition of creative concepts.” 134 The d core labor standards of the International Labor Organization ILO from the year 1998 define for all 185 members states of the ILO automatic minimum standards such as the freedom of association, the elimination of forced or compulsory labor, the abolition of child labor, and the elimination of discrimination in respect of employment and occupation. This converts eight international ILO agreements into binding standards. 135 The member states are required to report regularly to the governing body of the ILO. These reports are also distributed to the representatives of employers and unions, who are asked to comment. Quasi-judicial complaints procedures are open to unions, employer representatives, and governments. These procedures are not restricted to the home country. In extreme cases, the ILO can impose sanctions, for example against Myanmar because of forced labor. The main challenge relates to implementation. First, the ILO and the member states have only limited administrative resources. Second, many countries are characterized by a large informal economy, in which unions do not play a role. Third, companies have the option of moving into countries that have signed fewer agreements, for example via outflagging of ships. 136 The d OECD Guidelines for Multinational Enterprises offer “principles and standards for responsible business conduct in a global context […].” 137 They again cover human rights, employment, environment and additionally also corruption. The 34 members of the OECD as well as eight additional countries have made a commitment to encourage the adherence to the guidelines by multinational companies which conduct business on or from their territory. However, the OECD guidelines are not legally binding for the enterprises. Violations of the guidelines can be reported to the national contact points. Still, the publication of the violation is the only consequence that the company must face. 138 The Social Accountability Initiative (SAI) was founded in the year 1997 in the US and provides SA 8000, the first global standard for working conditions. The content is based on numerous conventions of the UN and the ILO that deal for example with child labor, safety and health as well as freedom of associ- 134 Rieth, L. (2003), p. 381, translation by the author 135 http: / / www.ilo.org/ declaration/ lang--en/ index.htm 136 Senghaas-Knobloch, E. (2003), pp. 12o13 137 OECD 2011, translation by the author 138 OECD 2012 <?page no="104"?> 5.2 International Particularities of Sustainability Aspects 103 @ www.uvk.de ation. The participating companies accept social responsibility and are certified by independent auditors such as TÜV Rheinland. However, certification is voluntary. In contrast to the guidelines of the OECD, environmental protection is not a topic of SA 8000. A total of more than 2000 enterprises are currently certified according to SA 8000. 139 The d Global Compact of the United Nations (GC) is a platform for companies. With more than 8,700 companies and other stakeholders it is the world’s largest initiative for corporate responsibility. 140 The participating companies make a commitment to adhere to the 10 principles of the Global Compact in the fields of human rights, environment, corruption, forced and child labor, and other employee rights. The GC was founded in the year 2000 by Kofi Annan and numerous CEOs of multinational companies and is coordinated by a small staff from an office in the General Secretariat of the UN. Therefore, the GC cannot be considered as a new standard setter or a supervisory authority. Instead it constitutes a platform for mutual learning and dialogue. However, it appears that membership in the Global Compact is merely a public relations measure for many companies. For the most part, already existing projects were subsumed under this new heading and few new ones were initiated. The companies specifically value the high global visibility and acceptance of the Global Compact. 141 The d Global Reporting Initiative (GRI), a joint initiative of the United Nations Environment Programme (UNEP) and the American NGO Coalition for Environmentally Responsible Economics (CERES) provides companies with guidelines for proper sustainability reporting. 142 Whether a company adheres to the GRI guidelines can be seen as a first indication of the quality of its sustainability reporting, but they are not binding. National norms can also have global effects. US agencies, for example, can prosecute bribery by companies on a global scale in the context of the Foreign Corrupt Practices Act (FCPA). 143 It applies to all companies that either have their headquarters in the US or their securities, for example shares, listed at a US-exchange. The bribery scandal at Siemens has been the largest German case in the context of the FCPA to date. 139 Gilbert, D.U.(2001); Vgl. http: / / www.sa-intl.org 140 http: / / www.unglobalcompact.org/ 141 Rieth, L. (2003), p. 384 142 https: / / www.globalreporting.org/ information/ about-gri/ Pages/ default.aspx 143 http: / / www.fcpa.us/ <?page no="105"?> 104 5 International Management and Business Sustainability @ www.uvk.de Codes of conduct are voluntary self-commitments of companies that are valid across borders. 144 However, only few codes explicitly draw on ILO standards or UN conventions. 145 Adherence to the norms is not legally enforceable. The norms can merely be supervised by citizens and NGOs and deviations can be publicized. Result: On balance, the adherence to supranational agreements and codes is frequently voluntary for companies and in other cases violators need not be worried about severe sanctions. Supervision of the activities of international companies in the field of sustainability remains difficult. 55..22..33 OOtthheerr SSuupprraannaattiioonnaall BBuussiinneessss SSuusstta aiinnaabbiilliitty y DDrriivve errs s Regulations and institutions are not the only elements for the supervision of companies in international business. Who else plays an important role? Internationally active NGOs deserve to be mentioned first. In the area of environmental protection, Greenpeace and World Wide Fund for Nature (WWF) are likely to be most prominent. Concerning human rights and social affairs, Human Rights Watch, Social Accountability International (see above) or the Fair Labor Association are best known. Some of these organizations control budgets in the millions, have broad support, and run an extremely professional communication policy. This gives them an influence even over the company policy of large corporations. In the face of continued criticism of working conditions at its suppliers, Adidas, for example, saw the need to join the Fair Labor Association. Next to NGOs, international investors are an additional stakeholder group which can wield large influence. Shareholder representatives as well as individual investors demand sustainability at annual meetings. Corporations that fail to consider long-term sustainability can expect a discount on their share price, since two thirds of all institutional investors make use of sustainability criteria for their investment decisions. 146 In addition, there are specific funds which consider aspects of sustainability to be important decision criteria for their investments and explicitly target investors with a high awareness of business sustainability issues. There are even stock market indexes that focus on sustainabil- 144 Rieth, L. (2003), p. 378 145 Gould IV, W.B. (2002), p. 44 146 http: / / www.presseportal.de/ pm/ 76432/ 2089162/ investoren-studie-grossanlegersetzen-auf-nachhaltigkeit-mit-bild <?page no="106"?> 5.3 Approaching and Understanding Sustainability in Different Countries 105 @ www.uvk.de ity such as the family of the Dow Jones Sustainability Indexes, which form the basis for global financial products valued at USD 8 billion. 147 Consumers, even without being explicitly organized in a non-governmental organization, can enforce the implementation of minimum standards for sustainability, simply because of their market power. However, spontaneous activities of that type are usually short-lived. An example is the spying scandal at Lidl in Germany that led consumers to prefer other discounters, but only for a short period of time. Cross-border employee representatives and international unions should also not be neglected, since they are stakeholder groups with an affinity for sustainability. 55..33 AApppprrooaacchhiinngg aanndd UUnnddeerrssttaannddiinngg SSuussttaaiinnaabbiilliittyy iinn DDiiff-ffeer reen ntt CCoouunnttrriieess Insight: Sustainability, just like other elements of company policy, is embedded in and influenced by institutional and cultural framework conditions which differ from country to country. Differences in institutional framework conditions in different countries provide companies with varying degrees of freedom concerning various aspects of sustainability. This relates to environmental and social standards, factor prices (for example minimum wages), values, and the degree of enforcement of rules and standards. Companies are free to move to locations where social and ecological costs are internalized to a lesser degree and where production is thus less expensive. The global spread of terms such as d corporate social responsibility (CSR) or sustainability should not obscure the fact that the term CSR was coined in the US and the underlying values are deeply influenced by American and European culture, principles and societal structures. 148 147 SAM (2012), p. 2 148 Fukukawa, K. / Teramoto, Y. (2009), p. 134 <?page no="107"?> 106 5 International Management and Business Sustainability @ www.uvk.de Culture in this context is understood as shared basic assumptions, values and artefacts of a group of people. There is broad agreement in the literature that cultural characteristics have a strong influence on specific aspects of sustainability. 149 It is generally accepted that cultures with strongly developed power distance (Hofstede) have a greater tendency towards corruption. This is due to the fact that in such paternalistic structures, subordinates depend more strongly on their superiors, who can distribute benefits and positions at will and expect loyalty in exchange. 150 Also cultures with high scores concerning masculinity are more prone to corruption. The reason for this is the stress on material success and the corresponding tendency to achieve wealth with the help of corrupt practices. 151 Figure 5-1 summarizes the influence of different characteristics of cultural dimensions on various aspects of sustainability. Figure 5-1: Culture and various sustainability activities 152 The table makes it clear that cultural influences can have contradictory effects on sustainability as a whole. As an example, collectivistic cultures tend towards behavior that supports the environment on the one hand, but are in- 149 Katz, J.P. et al. (2001) 150 Husted, B.W. (1999), pp. 350o352 151 Vitell, S.J. et al. (1993) 152 Own representation, contents: Husted, B. (1999); Parboteeah, K.P. et al. (2012); Katz, J.P. et al. (2001) <?page no="108"?> 5.3 Approaching and Understanding Sustainability in Different Countries 107 @ www.uvk.de clined towards corruption on the other hand. Meanwhile, masculinity, or assertiveness and performance orientation support both corruption and a behavior that is harmful for the environment. Activities in support of sustainability which are required routinely in sustainability concepts or rankings can be diametrically opposed to the values of certain cultures. Sustainability in the field of personnel, for example, requires diversity management to assure that applicants no matter what minority they belong to, have an equal opportunity to obtain the position. This does not align well with a particularistic attitude, which is widespread in India and China for example. It is considered to be completely natural in these countries to give preference to certain applicants, which are for example relatives or acquaintances of the decision makers. Equal rights and career opportunities for women are hard to convey in many cultures ranging from Japan to Saudi Arabia. And there are also cultural differences in environmental awareness: The position of most Chinese concerning the environment is characterized by low aesthetical or ethical values and the belief that nature needs improvement by humans. 153 Construction of the Three Gorges Dam and its disastrous effects on the environment are a reflection of this line of thought. Buddhism and Taoism may have inspired environmentalists in the West, but they are largely irrelevant for the relationship with nature in modern China. 154 Result: Any understanding of economic, social or ecological responsibility depends strongly on the respective culture. This brings us to a core problem of sustainability in an international context: How strongly should corporations (as well as governments and NGOs) insist on the global implementation of norms that were developed on the basis of their own cultural context (universalism)? To what extend is it possible to give up these standards and allow each culture to develop their own norms (cultural relativism)? While a certain cultural flexibility is for the most part necessary to succeed in doing business abroad, complete relativism, which approves of child labor or corruption as “culturally motivated” is certainly misplaced. Internationally active companies have to deal with these conflicts on a daily basis. 153 Harris, P.G. (2006), p. 8 154 Shafer, W.E. (2010), p. 37 <?page no="109"?> 108 5 International Management and Business Sustainability @ www.uvk.de 55..44 PPrroobblleemmss aanndd AApppprrooaacchheess ffoorr SSuussttaaiinnaabbllee IInntteerr-- ``ššZZxx__``aall AAccttiivviittiieess ooff CCoorrppoorraattiioonnss In the various functions discussed in this section, the same measures apply in principle as for domestic activities (see for example the chapters on value creation, marketing or financing). The certification of suppliers can take place in Germany as well as in India and diversity management is an issue for the German headquarters as well as for the branch located in Saudi Arabia. However, implementing the measures abroad is frequently more complex and challenging than at home. In this section, the functions strategy, procurement and marketing serve as examples which will be considered in detail. 55..44..11 SSttrraatteeggyy When formulating an internationalization strategy, company leadership must choose the countries where they want to be active with their different operative functions such as procurement, research, production or distribution. Sustainability means in this context that all effects of the activities on the host countries or regions need to be considered already in the planning stages. This leads to questions such as: Are we supporting a dictatorship or war economy with our activities or investments? What are the effects on the local population if we establish a site; will this for example make relocations necessary? How can we involve local stakeholders early on and in a comprehensive manner? Will our sales activities crowd out local producers and thus reduce domestic value creation? 55..44..22 PPrrooccuurreemmeenntt The procurement activities of companies are becoming increasingly more complex. In many industries, the value of goods and services obtained from third parties surpasses the direct value creation at the company many times over. The proportion of value added for the entire industry in Germany declined from 40% in the seventies to 28% in the year 2006. 155 Two thirds of sales of German companies are thus spent on inputs from third parties and an increasing share is sourced abroad. In many cases, suppliers from foreign countries are an important part of the value chain. If goods are sold abroad o for example energy transmission systems in China o a certain percentage of local content is frequently required. For that reason it is not sufficient to embed sustainability within the company, but all suppliers along the value chain must be encouraged to do the same thing. 156 Therefore most supranational regulations 155 Ludwig, U. et al. (2010), p. 15 156 Wolters, T. (2003), p. 8 <?page no="110"?> @ www.uvk.de not only focus on specific companies alone, but also take their suppliers into consideration. A certification under the SA8000 standard for example also asks for the certification of the suppliers. Otherwise it would be quite easy for companies to evade their social and ecological responsibilities via outsourcing into countries that are less strict. While procurement may still provide a loophole for companies that are unwilling to embrace sustainability, committed companies can also become global multipliers for the idea of sustainability with their activities. How can companies assure sustainability in procurement? A first lever is the list of criteria to choose suppliers. The fulfilment of certain sustainability standards or the completion of certain certifications can become a prerequisite for joining the pool of suppliers. The choice of standards also depends on the type of industry. Working conditions at the supplier are usually a main issue in the textile industry, where SA 8000 is widely used. Important CSR criteria in the food industry are animal protection, use of genetically manipulated organisms as well as the use of fertilizers and herbicides. 157 Second, suppliers can be chosen mainly from the region in order to minimize transport costs and related CO 2 emissions. Firms can assure adherence to the criteria by conducting their own audits in the home countries of the supplier and by providing development measures that enable compliance. The last point already transposes to an additional set of measures that can be captured by the heading “development of local suppliers.” Companies can support the development of capable suppliers in the countries of origin of their input material. In that way, they enable these suppliers to participate more fully in value creation and the prosperity created in this way. Their market power relative to the frequently small suppliers would enable them to enforce extremely low prices, but in the context of “fair trade,” many corporations have decided to pay “fair” prices to the producers in the countries of origin. The various initiatives in the coffee market are outstanding examples for “fair” prices and supplier development. 55..44..33 MMaarrkkeettiinngg && DDiissttr riibbuuttiioonn 55. .4 4. .3 3. .1 1 PPr ro oddu ucct t PPoolli ic cy y With their product policy, companies can support products that specifically meet the needs of consumers in developing countries and contribute to sustainable development in these regions. Frequently the population segments that are located at the base of the income pyramid and live in slums, for example, are excluded from the regular market and are forced to spend significantly 157 Maloni, M.J. / Brown, M.E. (2006), p. 38 5.4 5]_˜s|a\ š`} n^^]_š~y|\ {_] 4X\Zšx`š˜s| P`Z|]`šZx_`šs n~ZxVxZx|\ 109 <?page no="111"?> 110 5 International Management and Business Sustainability @ www.uvk.de more even on daily necessities than the population in developed neighborhoods. As an example, they purchase drinking water from mobile merchants at a price that is marked up by a factor of almost forty, 158 instead of obtaining it from the drinking water system, to which they are not connected. The situation is similar for financial products, where interest rates for the poor can be astronomical. Specific products can help to overcome this problem. As an example, Allianz in India, in cooperation with local NGOs, offers microinsurance that is extremely inexpensive (for example €0.70 per annum for life insurance) and partly managed by village communities. It contributes to a lowering of the poverty risk from natural disasters and thus allows social and economic participation for a larger share of the population. For the company, such products offer an opportunity to win over future customers, even though they may not initially fulfil the usual profitability standards. 159 To provide a second example, Danone, in cooperation with local NGOs, is selling a specific type of yoghurt in Bangladesh that contains particularly high doses of vitamin A, zinc, iron, and iodine and thus specifically addresses the nutritional deficiencies in the region. What is more, the yoghurt is offered at an attractive price and the inputs are obtained locally. Danone values the learning experience in less developed markets and the early positioning of the brand. Profit margins in line with usual conditions cannot be expected in this venture. 160 Ecological sensitivity can also be reflected in the product policy. It is possible to optimize products with respect to recycling. This requires that the recycling infrastructure in the respective target markets is already taken into consideration or established during the design stage. 55..44..33..22 PPrri ic ci in ng g PPoolli ic cyy Whenever certain products are absolutely essential for survival, international pricing policy has an ethical dimension in addition to purely economic considerations. 161 A typical example concerns the pricing strategies of international pharmaceutical companies for AIDS medications in developing countries. In principle, patent rights provide international protection for twenty years. This puts the owners, for example in the case of innovative medications, in a monopoly position for a certain time period, which opens up specific opportuni- 158 Prahalad, C.K. / Hammond, A. (2002), p. 52 159 Schrader, C. (2011), pp. 64o65 160 Schrader, C. (2011), p. 92 161 Spinello, R. (1992), p. 619 <?page no="112"?> @ ww w.uvk.de ties when setting prices. With regard to the pharmaceutical industry, many NGOs have criticized this pricing power and in the 2001 Doha declaration it was agreed that nations are allowed to deviate from the patent rules if severe negative effects for public health can be expected. Brazil, for example made use of this possibility when producing generic medications for the treatment of AIDS. 162 Two opposing views are held in the debate: The critics of the pharmaceutical industry demand that the companies waive the rights to their patents for certain countries, so that they can be manufactured at lower prices in these countries. Human rights dominate the right of the pharmaceutical industry to invoke their patent rights. The pharmaceutical companies argue that high costs and failure rates in the development stages necessitate high prices and that no development would take place otherwise. They fear that waiving patent rights for certain countries will result in exports from those countries into the markets where prices are high. As a more detailed analysis is undertaken, the discussion becomes even more complicated and many new aspects arise. For example questions about the severity of an illness, about alternative treatments and their disadvantages, about the effects of the costs on the well-being of the patients or about the financial state of the supplying companies must be answered. When reaching pricing decisions, especially in emerging markets, companies, not only in the pharmaceutical industry, should always ask whether social or ethical aspects need to be considered in addition to the pure business perspective. 55..44..3 3. .3 3 CCo om mm muun ni ic caat ti io onn PPo olli ic cy y One of the aims of communication policy, especially of marketing, is the activation of needs of potential customers. All other things equal, this leads to more consumption with corresponding effects on the environment. This implies a fundamental tension between marketing and sustainability. Beyond the ecological perspective, the topic is contentious because of the perspective of social sustainability in developing countries. Is it sustainable to generate a desire for consumption goods that are not essential, if consumers do not even have access to the basics such as nutrition, clean drinking water or health care? Can it be sustainable to entice parents to purchase mobile phones, while their children cannot get an education for financial reasons? Let us turn to corruption, an additional core problem of sustainability in international marketing and distribution which plays a large role in markets for investment goods, especially infrastructure projects. These projects are frequently 162 Buckley, J./ O Tuama, S. (2005), p. 130 5.4 5]_˜s|a\ š`} n^^]_š~y|\ {_] 4X\Zšx`š˜s| P`Z|]`šZx_`šs n~ZxVxZx|\ 111 <?page no="113"?> 112 5 International Management and Business Sustainability @ www.uvk.de valued in the millions if not in the billions of Euro and the order often comes from a foreign government. It appears that the high order volumes make significant payments of bribes attractive for the offering companies, as numerous scandals (for example Siemens, MAN, Ferrostaal) have shown over the past years. The damage for the client is huge: equipment is purchased at exaggerated prices and technically inferior solutions may be obtained. This frequently happens in parts of the world that are already characterized by poverty. And if it is in fact impossible to obtain contracts without bribery in many countries, companies with a commitment to sustainability must forego these contracts. In this regard, company management must not only make sure that bribery payments are not approved, but also implement relevant control systems, which assure that employees globally do not use bribery. Case example: Siemens 163 Over many years, the Siemens group had established a system of secret accounts and bribery. Apparently a total of EUR 1.3 billion was spent to obtain lucrative large contracts in many countries in Africa and South America. More than 300 employees at Siemens were supposedly involved, even members of the d compliance department, who actually had the job of fighting corruption. Since 1999, bribery abroad was also liable to prosecution in Germany. The case was made public in 2006 and since the early morning of November 15, the public prosecutor’s office with a staff of several hundred persons began a search of the Siemens offices. The case quickly turned out to be the largest bribery scandal in German post-war history. This is the way the system worked: Siemens entered into consulting agreements with external firms, who did not provide any consulting services, but rather passed on the payments made by Siemens in the form of bribes, for example to decision makers in foreign countries. These practices were not officially condoned at Siemens. The “Business Conduct Guidelines” implemented in 2001 and the “Code of Ethics for Financial Matters” from 2003 provided precise guidance for law-abiding behavior. But apparently the guidelines were at odds with reality. 163 http: / / www.spiegel.de/ wirtschaft/ unternehmen/ schmiergeldaffaere-ex-siemensvorstand-kommt-mit-geldzahlung-davon-a-763651.html; vgl. http: / / www.welt.de/ wirtschaft/ article2035729/ Der-Herr-der-schwarzen-Kassen-packt-aus.html; http: / / www.siemens.com/ press/ pool/ de/ events/ 2008-12-PK/ MucStaats.pdf; http: / / www.siemens.com/ annual/ 07/ de/ index/ nachhaltigkeitsbericht.htm; http: / / www.ebef.eu/ Business_Ethics_Paris_22-01-09.pdf <?page no="114"?> @ www.uvk.de In contrast to many other cases of corruption in the past decades, the bribery affair at Siemens ushered in a sea change that reached the top management. Even members of the managing board, the highest leadership level at Siemens, were temporarily taken into pre-trial detention. The CEO and the head of the supervisory board were forced to leave the company. A number of managers faced law suits had to pay fines and pay damages to Siemens. The company made a massive effort to take control of the issue of corruption. External lawyers, auditors and consultants were hired to conduct independent reviews, a former public prosecutor was appointed as compliance officer and the compliance department was increased significantly from 173 employees in the year 2007 to 621 in the financial year 2008. Fines, payment of back taxes and internal investigations cost the company about EUR 2.9 billion. In 2007, Peter Löscher became the first CEO who was appointed from outside the group and a number of new management appointments were made. Peter Löscher repeatedly stressed that “only clean business is Siemens business. Everywhere - everybody - every time! ” Consulting agreements in particular were checked thoroughly for compliance risks. Following all the changes, the question arises: Did Siemens lose business because of this? According to Siemens, the answer is no! At a glance We have seen that internationally active companies wield enormous influence over the sustainable development of our planet. Occasionally it exceeds the influence of governments of individual nations. Additionally, companies can relocate their activities and therefore avoid the regulatory oversight of individual governments. On the other hand, there are also supranational regulations and institutions such as the OECD Guidelines or the Global Compact. International NGOs such as Greenpeace, investors and consumers with a commitment to sustainability reduce the options available to the companies. Additionally it has become clear that different cultures also have different positions concerning sustainability and its various elements. As an example, corruption is more widespread in cultures with high power distance and masculinity. Finally we looked at the challenges and opportunities for sustainability at the various company functions. 5.4 5]_˜s|a\ š`} n^^]_š~y|\ {_] 4X\Zšx`š˜s| P`Z|]`šZx_`šs n~ZxVxZx|\ 113 <?page no="115"?> 114 5 International Management and Business Sustainability @ www.uvk.de Literature Abdul-Gafaru, A. (2009): Are multinational corporations compatible with sustainable development? The experience of developing countries. In: McIntyre, J.R., Ivanaj, S. und Ivanaj, V. (eds.): Multinational Enterprises and the Challenge of Sustainable Development, Cheltenham und Northampton, pp. 50- 72. Buckley, J./ O Tuama, S. (2005): International pricing and distribution of therapeutic pharmaceuticals: an ethical minefield. In: Business Ethics: A European Review 14 (5), pp. 127-141. Drezner, D.W. (2006): The race to the bottom hypothesis: an empirical and theoretical review, Working Paper, The Fletcher School, Tufts University. Fukukawa, K. und Teramoto, Y. 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(2008): Foreign Direct Investment and Productivity Spillovers: Identifying Linkages through Product-based Measures, Working Paper. Vitell, S.J.; Nwachukwu, S.L.; Barnes, J.H. (1993): The effects of culture on ethical decision-making: An application of Hofstede’s typology. Journal of Business Ethics 12, pp. 753-60. Wolters, T. (2003): Transforming International Product Chains into Channels of Sustainable Production - The Imperative of Sustainable Chain Management, Introduction. In: GMI 43, pp. 6-13. <?page no="118"?> › www.uvk.de 66 IInnnnoovvaattiioonn MMaannaaggeemmeenntt aanndd SSuussttaaiinnaabbiilliittyy by Frank Andreas Schittenhelm Learning Objectives The readers ) understand the importance of innovations in the process of value creation, ) comprehend the linkages and interrelations inside the innovation triangle, ) are aware that legal and in-house framework conditions can promote innovation, ) recognize the relevance of innovations for sustainable business management. List of Key Terms ) Product innovation ) Process innovation ) Innovation process ) Stage-gate model ) Fuzzy front end ) Culture of innovation ) Innovation manager 66..11 IInnttrroodduuccttoorryy CCoonnssiiddeerraattiioonnss The first step in the process of value creation is innovation management. It is related to the concepts of research and development, but the latter two usually have a narrower focus. Innovation management for most authors is different from pure research and development, because of the explicit orientation on market success. In practice, however, the difference is frequently less clear. Typically three types of innovations are distinguished: 1. Product innovations, 2. Process innovations and 3. Social innovations. Since social innovations already have a clear orientation on a sustainability target, we will focus mainly on the two remaining categories. <?page no="119"?> 118 6 Innovation Management and Sustainability @ www.uvk.de Innovations are always tied to change and new approaches, but the degree of change can differ widely. Path-breaking innovations such as the invention of the automobile or the computer frequently lead to substantial advances over time. The initial development is not the final stage and is followed instead by a large number of incremental innovations. 164 In the current environment, shorter product life cycles and profit-orientation require constant innovation 165 and the relevance of marketing has strongly increased in this context. 166 If a company wants to remain competitive, constant innovations are required, 167 both for products and for processes. In the previous years it has become apparent that the innovative process is also in need of continuous development. The improvement process at the company level is also subject to international competition and corporations are well advised to pursue an approach that is targeted and inexpensive as well as efficient and effective at the same time. In addition to clearly defined innovation processes and lively internal innovative structures, there is a need for qualified employees who take responsibility for the entire sequence from invention to innovation (the decisive success in the marketplace): the so-called innovation managers. The primary task of an innovation manager is the transformation of ideas or inventions into innovations that are a commercial success. 168 Innovations play a dominant role in the context of business sustainability. They provide the foundation for the social, ecological and at the same time economic development of a company. However, innovation management typically pursues mainly economic goals. Stöger 169 for example defines innovation management as “turning a novelty into a market success.” Three key terms that are derived from this understanding are novelty, market success and leadership. While leadership plays an important role in this definition, it is mainly seen as an instrument which enables successful innovation. A consistent ecological focus is missing and could only be justified if it implied economic success. 164 Seymer, M. (2008) p. 14 165 Vollmuth, H. (2008) p. 364 166 Scholtissek, S. (2009) p. 16 167 Berger, J. (2006) p. 13 168 Vahs, D. (2010) p. 9; Daecke, J. (2009) p. 179 as well as Pechlaner, H.; Fischer, E.; Priglinger, P. (2006) p. 123 169 Stöger, R. (2011) pp. 3o4 <?page no="120"?> 6.2 Prerequisites for Success at the Company Level 119 @ www.uvk.de 66..22 PPrreerreeqquuiissiitteess ffoorr SSuucccceessss aatt tthhee CCoommppaannyy LLeevveell Modern innovation management is characterized by three factors: a culture of innovation, an innovation process and one or several innovation managers. Since all three factors are mutually dependent, companies must always consider them jointly. Figure 6-1: The d innovation triangle - Interrelations between innovation manager, innovation process and culture of innovation as components of innovation management. (Source: Dziatzko, N., Kielkopf, M., Schittenhelm, F.A. & Steinwandt, A. (2011), p. 47 The innovation manager implements and supports the process of innovation. He acts as reference person for all employees concerning the management of innovations and promotes a lively culture of innovation, he brings the innovation process to live and he needs to fuel the generation and discovery of ideas. The process provides orientation for him. A look at business practice clarifies that organizational aspects are of primary importance when setting up innovation management at the company level. This includes the definition of a comprehensive innovation process, the establishment of a corresponding organizational unit and its integration into an existing organizational structure. Software <?page no="121"?> 120 6 Innovation Management and Sustainability @ www.uvk.de tools and controlling instruments serve to support and coordinate the innovative processes. Drawing on the Chinese principle of Yin and Yang, these features can be considered hard factors (“Yin”). 170 These are complemented by the soft factors (“Yang”) - the elements of the culture of innovation. Obviously, the culture of innovation should be aligned with the corporate culture. It forms the basis for the acceptance of innovation management in general, the innovation process and the innovation manager and is a prerequisite for his success. Numerous companies neglect the extremely high importance of a culture of innovation. Components of the culture of innovation are a clear message from management, an open communication, as well as educational opportunities and incentive systems for employees. The Yin thus stands for the enablers in the innovative process. The Yang meanwhile represents the driving forces which are essential for the generation of successful innovations. The difficulty at the company level consists of continuously balancing the Yin and the Yang. While this is happening automatically and without any external impetus in the original concept of Yin and Yang, the professional guidance by the innovation manager is needed at the company level. He must continuously focus on the overarching goals of the company and their relevance for innovation management. Especially the need for constant adaptation complicates the task of the innovation manager, since resistance and opposition can never be ruled out. In their study, Vahs and Schmitt 171 have summarized the link between culture of innovation and organization and derive recommendations for action for ideal companies. The systematic collection of ideas, for example, pays off and contrarian thinkers should be supported. At the same time, clear and binding termination criteria also play an important role and should be supplemented by innovation controlling. Finally, the role of corporate leaders as shapers of the innovative process needs to be stressed. 170 Compare on this terminology the corresponding discussion in Lam, J. (2003) 171 Vahs, D. / Schmitt, J. (2010a), pp.4-11 as well as Vahs, D. / Schmitt, J. (2010b), pp. 40-46 <?page no="122"?> 6.2 Prerequisites for Success at the Company Level 121 @ www.uvk.de 66..22..11 IInnnnoovvaattiioonn PPrro occeesssseess Innovation processes are important in order to assure a structured approach in innovation management aimed at securing the success of the innovation. A large number of different models for the definition of processes exist in the literature. Characteristic for all of them is a stepwise sequence, during which ideas are continuously assessed and discarded if necessary. The basis for most approaches is the d stage-gate model developed by Robert G. Cooper. While various interpretations of the theoretical models can be found at the company level and loops in the process are frequently present, applied innovation processes are often based on these simple models. Figure 6-2: An overview of the stage-gate model (Source: Kleinschmitt, E./ Geschka, H./ Cooper, R.: Produktinnovationen an Markt und Kunden ausrichten, Berlin 1996, pp. 52 - 53) From the corporate perspective, the generation of ideas remains a major problem in the innovation process. Complaints about the low number of ideas “produced” are frequently voiced. Especially the early phase during which ideas are generated (d fuzzy front end) should always be designed in an open and dynamic way to maintain its attractiveness for the providers of ideas. 66..22..22 CCuullttuurree ooff IInnnnoovvaattiioonn Empirical studies allow the conclusion that practitioners assign a high relevance to an established culture of innovation. <?page no="123"?> 122 6 Innovation Management and Sustainability @ www.uvk.de Research by the Institute for Change Management und Innovation 172 revealed the following picture. When asked about conditions that would facilitate the work of the corporate innovation manager (Figure 6-3), close to 81% of all respondents stressed that “a culture which supports innovation at the company” is very important. “Feedback culture,” “openness towards new approaches” and “fault tolerance” are other important factors in the innovative process which support a corporate culture that values innovation. It additionally becomes clear that “support by top management” is very important for the daily work and acceptance of an innovation manager (78.6%). Figure 6-3: Prerequisites for successful innovation management (Source: Dziatzko, N., Steinwandt, A. (2011), p. 38) While these are predominantly “soft” factors, “hard factors” such as the “provision of resources” (43.9%) also play an important role for the innovation management of the companies interviewed. The least significance is assigned to quick innovative processes (26.5%) in this context. Innovation managers typically have or at least share responsibility for the implementation of innovative processes. The low relevance assigned to this item by innovation mangers can possibly be explained by the fact that they are typically confronted with cultural obstacles and acceptance problems in their daily work. 172 For a comprehensive discussion Dziatzko, N., Kielkopf, M., Schittenhelm, F.A. & Steinwandt, A. (2011), pp. 41o57 <?page no="124"?> 6.2 Prerequisites for Success at the Company Level 123 @ www.uvk.de 66..22..33 IInnnnoovvaattiioonn MMaannaaggeerr Innovation managers can be described as corporate leaders with the ability to detect innovation potential, to design and advance innovation processes at the company, to assess and actively manage innovation projects as well as to provide targeted support in their economic application. To achieve this, the innovation manager needs to assume three central roles: ) Driver and motor of the process: the process must be continuously restarted; new ideas must be developed and introduced. ) Organizer and coordinator of the process: ideas need to be assessed as part of the process. They are either developed further or abandoned. Transparency, traceability and fairness play a major role in this process and need to be continuously assured. ) Moderator and trainer in the process: the coordination of various participants in the process constitutes a constant challenge and requires the neutral positioning of the innovation manager. Figure 6-4: Tasks of the innovation manager (Source: Dziatzko, N., Kielkopf, M., Schittenhelm, F.A. & Steinwandt, A. (2012), p. 23) <?page no="125"?> 124 6 Innovation Management and Sustainability @ www.uvk.de According to this understanding, the innovation manager can be assigned the following major tasks: 1. Implementation, respectively optimization, of the innovative process at the company. 2. Realization of a holistic innovation strategy including controlling. 3. Development and maintenance of external networks via cooperation in projects and in the market. 4. Development and maintenance of a comprehensive knowledge management. 5. Assuring a consistent market orientation. 6. Establishing a clear innovation strategy and supporting a company and innovation culture that favors innovation. Empirical research shows that the expectations placed on innovation managers are not always uniform across institutions. Of course it is also the responsibility of the innovation manager to define and find his own role in the company. Proficiencies, abilities and competencies of the innovation manager In order to fulfill all these roles and tasks in the internal and external innovation network of the company, the innovation manger needs specific proficiencies and abilities which will be discussed in the following paragraphs. The proficiencies and abilities then serve as the basis for the competencies of the innovation manager. Proficiency is very broadly defined as knowledge in a certain topic area. It is expected of an innovation manager that he has mastered the specific terminology of innovation management. Furthermore he should be involved in debates about the newest theoretical and applied approaches in his field of specialization. Awareness of new methods to generate ideas and availability of supporting software tools plays an important role in this regard. Depending on the type of innovation, knowledge in the field of law, for example with regard to patent registrations, patent protection or legal framework conditions can be relevant as well. In summary, the following desirable proficiencies can be identified: ) Knowledge of the theory of innovation management ) Legal skills ) Knowledge of project and resource management ) Knowledge about software to support the innovation process ) Knowledge about methods to foster creativity <?page no="126"?> 6.2 Prerequisites for Success at the Company Level 125 @ www.uvk.de Abilities are an integral component in the establishment of competencies. In contrast to the proficiencies which the innovation manager can acquire simply by studying diligently, abilities are abstract features which are frequently impossible to measure. They describe character traits on the one hand and on the other hand are based on a multitude of personal experiences. For the job profile of the innovation manager, the following abilities can be identified: The ability to communicate in a way that goes beyond the mere exchange of information: this also includes the skill of encouraging others to communicate by initiating and establishing functioning networks between different departments and companies. The ability to recognize innovation potential: this includes an inherent or acquired intuitive understanding for promising ideas. The ability to make a positive contribution to a team: this means that a strong team player should not be in the limelight too much, but at the same time has the ability to become active and restart processes that are stalled. Management skills describe the attributes which enable the innovation manager to lead a group or a project and to achieve the corresponding targets. Adaptability describes the ability to quickly react to change, to overcome difficulties and to pursue new approaches. Figure 6-5: Skills necessary for successful innovation management (Source: Dziatzko, N., Kielkopf, M., Schittenhelm, F.A. & Steinwandt, A. (2012), p. 24) <?page no="127"?> 126 6 Innovation Management and Sustainability @ www.uvk.de Figure 6-5 displays the proficiencies and abilities needed by an innovation manager based on survey results. The most important attribute is the ability to communicate (76%). Furthermore it appears rather important to recognize innovation potentials (75%). The ability to work well with a team (60%) is particularly important to bring together various areas and to coordinate their cooperation. 57% think that flexibility is very important, since innovation managers constantly face new situations and need to drive change. Management skills were ranked as important by only 50% of the survey participants. This low percentage was explained by the survey participants with the fact that management skills are important for every leadership role. They are not specific to innovation management. The results show that the abilities described above are of particular relevance for business practice. Proficiencies and acquired skills are less relevant. Their availability is assumed or they can be purchased externally. We use three groups of competencies: subject matter competency, methodological competency and social competency. Subject matter competency and methodological competency are usually hard to distinguish. Hauschildt and Salomo 173 define subject matter competency especially as knowledge about technologies and markets in the respective area of expertise. Correspondingly we will focus on the technological, legal and economic aspects of innovation when talking about subject matter competency. Subject matter competency implies that the innovation manager can align his theoretical knowledge with the abilities described above. He is able, for example, to combine his skill of spotting innovative potential with his knowledge about technological feasibility to pick the most promising ideas. Following Scholz, 174 the methodological competency includes areas such as work planning, diagnosis training or work and problem solving techniques; in short, the application of knowledge. In innovation management, methodological competency focuses on the design and management of processes as well as the application of different methods for the generation of ideas, their assessment and selection. Knowledge about creativity methods is supplemented by the ability to lead and manage teams and results in the generation of numerous ideas. According to Steinmann and Schreyögg 175 , social competency in general is “…the ability to work together effectively with others and to affect change 173 Hauschildt, J.; Salomo, S. (2007), p. 45 174 Scholz, C. (1993), p. 374 175 Steinmann, H.; Schreyögg, G. (2005), p. 24 <?page no="128"?> 6.2 Prerequisites for Success at the Company Level 127 @ www.uvk.de through others.” With regard to innovation management, this requires abilities and knowledge which enable the innovation manager to have a positive influence on all parties involved in the process so that innovations become a success. Most innovation managers already possess these abilities, frequently called soft skills, but are able to refine them as they gain additional experience in the corporate environment. The expectations of the companies concerning proficiencies and competencies are similar to those of the innovation managers. In the context of the above mentioned study, social competencies (63%) were ranked ahead of methodological competencies (39%) and subject matter competencies (27%). Since innovation managers are mainly generalists, even if they are assigned to a technological field, they work like managers. They coordinate and receive technical input from experts. Figure 6-6 summarizes the results and underlines the importance of the role of the innovation manager as intermediary at the company. Figure 6-6: Required competencies of the innovation manager (Source: Dziatzko, N., Kielkopf, M., Schittenhelm, F.A. & Steinwandt, A. (2011), p. 44) <?page no="129"?> 128 6 Innovation Management and Sustainability @ www.uvk.de 66..33 SSppeecciiffiicc SSuussttaaiinnaabbiilliittyy AAssppeeccttss Sustainable innovation management is caught in the area of tension between profitability and sustainability targets. As already pointed out, sustainability does not really have a role in traditional innovation management. 176 Exceptions are social innovations, where social aspects are already the drivers of innovation. Since innovations - both in the area of product and process - are the key to survival for every company, we face a problem that is similar to the one discussed later in the chapter on financial management. In fact the decisive role is played by the valuation of innovations in the course of the process. The inclusion of aspects of sustainability is frequently made impossible by the lack of knowledge concerning the effects on profitability. The main reasons for this are incomplete valuation methods and insufficient risk management. We want to address these two aspects and combine them to arrive at sustainable innovation management. 66..33..11 SSuussttaaiinnaabbllee IInnnnoovvaattiioonn PPrroocceessss The innovation process depends on the generation of a sufficient number of ideas at an initial stage. This implies that especially in the beginning (the socalled d fuzzy front end), there should be no limits on creativity, since this would negatively impact the motivation of all involved parties. At a certain point in time, the stage-gate process of innovation necessitates that a decision must be made about which projects to advance. As the projects continue, ideas that are not in line with a sustainable development must be filtered out. Sustainable innovation management thus requires an adjustment of the relevant decision criteria. Sustainability aspects with their ecological and social dimensions must be integrated. This must be done in a convincing fashion which prevents the impression of arbitrariness and maintains the motivation of everyone involved in the innovation process. 176 Gasior, S.; Schittenhelm, F.A. (2012), pp. 51o52 <?page no="130"?> 6.3 Specific Sustainability Aspects 129 @ www.uvk.de 66..33..22 SSuussttaaiinnaabbllee CCuullttuurree ooff IInnnnoovvaattiioonn A sustainable culture of innovation requires first of all the credible commitment of the company management to pursue sustainability. For conventional innovation processes that are in place at the company, this need not be in conflict with the previously established requirements for a culture of innovation. However, concepts such as open innovation, network innovations or crowd sourcing, which target cooperation across companies pose new challenges for the management of innovations. 66..33..33 SSuussttaaiinnaabbllee IInnnnoovvaattiioonn MMaannaaggeerrss The innovation manager holds the most important role with regard to sustainable innovation management. He needs to highlight the importance of a sustainable development of the company and if necessary for the cooperation partners and convince all involved parties of its relevance. For that reason the proficiencies and abilities of the innovation manager need to be assessed one more time at this point. In addition to the areas of expertise already discussed above, the innovation manager also needs to have knowledge about sustainable management, sustainable valuation methods and risk management. His abilities need to be reassessed with the inclusion of these sustainability aspects. The ability to recognize potential future success should include the ability to identify the consequences of any violation of sustainability in a timely manner. His management abilities need to include the ability to convince all involved parties of the advantages of business sustainability and the strength to push through “unpopular” decisions against product or process ideas caused by a lack of sustainability. The importance of the innovation manager is thus likely to increase in the future even though not every innovation manager may hold that precise title. <?page no="131"?> 130 6 Innovation Management and Sustainability @ www.uvk.de At a glance Sustainability is often more of a concern for economics than for the individual firm. In most cases, aspects of business sustainability involve costs and in that sense hurt companies. In such a situation the intervention of the government is required. Disadvantages in the international competitive position and economic stagnation need to be prevented with the help of innovations or incentives for innovative behavior. The circle is complete: sustainability needs innovations and innovative thinkers. This is the only way to achieve all aims of sustainable management in a truly “sustainable” fashion. Suggestions for further readings Applied introduction to innovation management: Afuah, Allan (2014): Business Model Innovation - Concepts, Analysis, and Cases, Routledge Chapman & Hall. The authors set a focus on non-financial aspects: Bridge, Simon and Hegarty, Cecilia (2013): Beyond the Business Plan: 10 Principles for New Venture Explorers, Palgrave. Literature Berger, J. (2006): Gehen Deutschland die Ideen aus? In: Berger, Johann; Piper, Nikolaus (eds.): Innovationen - Mehr Wert für Deutschland. Heidelberg: Redline Wirtschaft, 11-30. Cooper, R. (2002): Top oder Flop in der Produktentwicklung. Erfolgsstrategien: von der Idee zum Launch. Weinheim, Wiley-VCH. Daecke, J. (2009): Nutzung virtueller Welten zur Kundenintegration in die Neuproduktentwicklung - Eine explorative Untersuchung am Beispiel der Automobilindustrie. Dissertation, Wiesbaden, GWV Fachverlage. Dziatzko, N.; Schittenhelm, F.A. & Steinwandt, A. (2011): Berufsbild Innovationsmanager. Spektrum Heft 33, 99-102. Dziatzko, N.; Schittenhelm, F.A. (2011): Technologie-Trüffelschwein. Innovationsmanager. Heft 14, 88-89. <?page no="132"?> OxZ|]šZX]| 131 @ www.uvk.de Dziatzko, N.; Steinwandt, A. (2011): To be or not to be an Innovation Manager. Zeitschrift für Innovationsmanagement in Forschung und Praxis zifp, 02/ 2011, 32-43. Dziatzko, N.; Kielkopf, M.; Schittenhelm, F.A. & Steinwandt, A. (2011): Die Bedeutung des Innovationsmanagements in mittelständischen Unternehmen - eine empirische Untersuchung. In: A. Haubrock et al. (Hrsg.): Zweite Aalener KMU Konferenz - Beiträge zum Stand der KMU Forschung 2011. 41- 57. Dziatzko, N.; Kielkopf, M.; Schittenhelm, F.A. (2011): Das Berufsbild des Innovationsmanagers. In: Schildhauer, Trobisch, Busch (eds.): Realität und Magie vom Heldenprinzip heute. 158-164, Monsenstein und Vannerdat. Dziatzko, N.; Kielkopf, M.; Schittenhelm, F.A. & Steinwandt, A. (2012): Der Innovationsmanager als Netzwerker in KMU, Zeitschrift für Innovationsmanagement in Forschung und Praxis zifp, 03/ 2012, 20-27. Gasior, S.; Schittenhelm, F.A. (2012): Finanzierung von Innovationsvorhaben - Was erwartet der Kapitalgeber? In: Spektrum, 35/ 2012, 51-52. Hauschildt, J.; Salomo, S. (2007): Innovationsmanagement. 4 th edition , München: Vahlen Verlag. Kleinschmidt, E.; Geschka, H; Cooper, R.G. (1996): Erfolgsfaktor Markt: Kundenorientierte Produktinnovation (Innovations- und Technologiemanagement). Berlin, Springer Verlag. Lam, J. (2003): Enterprise Risk Management. Hoboken. Müller-Prothmann, T.; Dörr, N. (2009): Innovationsmanagement - Strategien, Methoden und Werkzeuge für systematische Innovationsprozesse. München: Carl Hanser Verlag. Pechlaner, H.; Fischer, E.; Priglinger, P. (2006): Die Entwicklung von Innovationen in Destinationen - Die Rolle der Tourismusorganisationen. In: Pikkemaat, Birgit; Peters, Mike; Weiermair, Klaus (eds.) Innovationen im Tourismus - Wettbewerbsvorteile durch neue Ideen und Angebote. Berlin: Erich Schmidt Verlag, 121-136. Scholtissek, S. (2009): Die Magie der Innovation. Erfolgsgeschichten von Audi bis Zara. München: mi-Wirtschaftsbuch. Scholz, C. (1993): Personalmanagement, 3 rd edition , München: Vahlen Verlag. Schori, K.; Roch, A.; Faoro-Stampfli, M. (2006): Innovationsmanagement für KMU. Bern, Stuttgart, Wien: Haupt Verlag. <?page no="133"?> 132  P``_VšZx_` Nš`šz|a|`Z š`} 4X\Zšx`š˜xsxZC Seymer, M. (2008): Erfolgreiches Innovationsmanagement im Mittelstand - Eine Analyse am Beispiel des Best-Innovator-Siegers 2004, der CoreMedia AG. Saarbrücken: Verlag Dr. Müller (VDM). Steinmann, H.; Schreyögg, G. 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(2008): Controllinginstrumente von A - Z. . 7 th edition , Planegg/ München: Haufe Verlag. Wildemann, H. (2011): Innovationsmanagement - Leitfaden zur Einführung eines effektiven und effizienten Innovationsmanagements. 11 th edition , München: TCW Transfer-Centrum für Produktions-Logistik und Technologie. <?page no="134"?> › www.uvk.de 77 OOp peerra attiioonna al l EEnnv viirroon nmmeennt taall MMa annaag geemmeennt t by Hans-Jürgen Gnam and Lisa Schwalbe Learning Objectives The readers ) are familiar with the term operational environmental management and the evolution of corporate environmental protection activities, which initially had a legal and technical orientation, then led to environmental management systems and finally sustainable material flow management, ) know how environmental management systems are structured and how they are meaningfully implemented at the corporate level, ) recognize that environmental management systems make an important contribution towards a legally sound organization of the company and can lead to efficiency gains and cost savings. List of Key Terms ) DIN EN ISO 14001 ) EMAS ) Material flow cost accounting ) EFQM 77..11 DDeevveellooppmmeenntt ooff EEnnvviirroonnmmeennttaall MMaannaaggeemmeenntt Environmental protection only reached the mainstream in the 1970s when it was realized that manmade environmental damage necessitated behavioral change in the way available resources were treated. The first corporate activities which focused on the environment can be summarized under the heading of technical environmental protection. Technical environmental protection based on the adherence to legally prescribed framework conditions is thus the predecessor of environmental management. Its aim is the avoidance or reduction of ecological damage. Expensive and elaborate technologies for the treatment of waste and sewage as well as exhaust air purification systems are needed. Since the end of the 1980s, Germany is a global role model in the use of these environmental technologies. <?page no="135"?> 134 7 Operational Environmental Management @ www.uvk.de In some fields, further improvements of the technical level of environmental protection can only be obtained at very high costs. For that reason environmental controlling systems and environmental management systems were developed in the 1990s to achieve additional relief for the environment. Technological environmental protection was further enhanced by organizational aspects which facilitated the development step from aftercare to preventive measures, namely the avoidance of environmental damages. The basis for the introduction of environmental management systems was the insight that every effort to protect the environment can also make a positive contribution to the bottom line. The reduction of energy consumption or waste will simultaneously lower costs. 177 d EMAS and d ISO 14001 are two internationally recognized guidelines for environmental management systems which aim at supporting a process of ecological improvement at the company level. The concepts rely on the initiative and responsibility of the companies. A further development step in environmental management was taken around the turn of the millennium when flows of materials and energy became a focal reference point. The transparency concerning volumes and costs of material and energy flows not only led to the realization of cost savings potentials, but helped the environment at the same time. This development stage of environmental management is also called material and energy flow management. With the focus on flows, environmental protection became a part of all corporate activities and was given more importance at the foundation of the company. 178 One of the major challenges for a sustainable society in the 21 st century is a reduction in the use of materials and energy. Efficiency improvements for materials and energy are of particular importance at the company level. Company studies have revealed that simple measures are already able to increase the material efficiency by 2 to 3%. This means that a reduction of the costs of material enables a much slighter improvement in the return on sales rather than an increase in sales. 179 The management of flows of material and energy is an important instrument that supports the environmental management systems EMAS and ISO 14001 and aims at increasing the efficiency of materials and energy use. The norm ISO 14051 which was published at the end of 2011 provides guidelines for the framework conditions of d materials flow cost accounting. 177 Enzler, S. (2000), pp. 11 following 178 Enzler, S. (2000), pp. 14 following 179 Simon, F.-G.& Dosch, K. (2010), p. 759 <?page no="136"?> 7.1 Development of Environmental Management 135 @ www.uvk.de Time period Development stages of environmental management (methods and instruments - examples) 1970- 1979 Environmental protection based on legal requirements (laws and regulations, representatives) 1980- 1989 Environmental protection based on technology (filter and cleaning technology, status of the technology) 1990- 1990 Environmental controlling (environmental cost accounting, key figures, ecological balance sheet, corporate environmental information systems), environmental management systems (EMAS, ISO 14001), integrated management systems (processoriented management system) 2000- 2009 Energy and materials flow management (materials flow analysis, materials and energy balance sheets), materials flow management (materials and information flow analysis) Eco efficiency (energy and materials efficiency), environmental management approaches for small and medium sized companies (EMASeasy, Öko-Profit), integrated product policies (lifecycle analysis, eco design) since 2010 Materials flow cost accounting (ISO 14051), sustainability management (sustainability reporting, ISO 26000, social life cycle assessment), energy management systems (ISO 50001) Table 7-1: Development stages of environmental management Table 7-1 provides an overview of the development of methods and instruments of environmental management from its beginnings to its current state. Terminology: environmental management, environmental management systems Environmental management is a sub-field of the strategic management of an organization (company, institution, association, municipality, administration and so forth), which deals with recording, assessing, valuing and influencing in a targeted fashion all environmental effects that result from processes and production. <?page no="137"?> 136 7 Operational Environmental Management @ www.uvk.de An environmental management system is a component of a comprehensive management system, which determines processes, strategies and instruments that are utilized as a part of environmental management and which support the implementation of environmental management. The aim of an environmental management system is to assure that the activities of an organization result in a minimized environmental burden and that negative environmental effects are avoided. To achieve this aim, organizational structures, responsibilities, processes, instruments and resources need to be defined. 180 77..22 UUsse ess o off a ann EEnnvviirroonnmme ennttaall MMaannaaggeem meen ntt S Sy ysst te emm There are numerous uses for an environmental management system: ) Support for environmental protection at the company level via inclusion in the company goals, ) Provision of transparency concerning the environment at the company level, ) Clarification that legal requirements and company-specific policies are fulfilled, ) Reduction of costs, particularly with regard to energy and raw materials by revealing cost saving potentials and lowering of insurance premiums in the environmental area, ) Creating awareness and increasing motivation among employees, ) Improvement of the corporate image due to an increase in trust of the customers, the public and authorities, ) Increased credibility on the basis of an efficient environmental management, ) An environmental management system is increasingly becoming a requirement for suppliers - forward looking environmental protection thus serves to secure the viability of the company in the long term. 180 Cord-Landwehr, K. & Kranert, M. - Eds. (2010), p. 495 <?page no="138"?> 7.3 Environmental Management based on DIN EN ISO 14001 137 @ www.uvk.de 77..33 EEnnvviirroonnmmeennttaall MMaannaaggeemmeenntt bbaasseedd oonn DDIINN EENN IISSOO 1144000011 The globally accepted norm DIN EN ISO 14001 contains requirements for an environmental management system including instructions how this system can be applied. The requirements are detailed in chapter 4 of the norm and the instructions are contained in an appendix. If a company seeks certification, the requirements which are briefly described in the following must be fulfilled and documentation needs to be provided. 77..33..11 RReeqquuiirreemmeennttss ooff DDIINN EENN IISSO O 1144000011 According to e DIN EN ISO 14001, the environmental management system needs to be introduced, documented, implemented and maintained. Its scope needs to be determined and it must be demonstrated how the requirements can be met. In addition, the environmental management system needs to be constantly improved. The norm requires that the company formulates an appropriate environmental policy. The topics of continuous improvement of the environmental management system and the adherence to the basics of environmental law need to be included. The environmental policy needs to be communicated to all persons inside the company and all persons that work for the company. It must be accessible to the public and well documented. The environmental policy also needs to provide a framework for dealing with relevant environmental targets. The company must identify critical environmental aspects which arise from activities, products and services in order to determine the main implications for the environment. Among the environmental aspects are emissions into the air, discharges into water, contamination of the soil, use of raw materials and natural resources, use and release of energy, waste and side effects. Additionally, the following aspects need to be considered and evaluated if appropriate: design and development, production processes, packaging and transport, environmental record and practices of contract partners, extraction and distribution of raw materials and natural resources, distribution, use and treatment of products that are no longer in use as well as biodiversity. A further demand relates to legal obligations. Their application concerning the environmental aspects needs to be evaluated and the proper implementation must be assured. Finally measurable targets must be set and the implementation must be controlled reliably. An environmental management representative who is appointed by the top management has the task of supporting the system in a credible fashion. Persons <?page no="139"?> 138 7 Operational Environmental Management @ www.uvk.de who carry out tasks with relevance for the environment need to possess the necessary competencies and demonstrate these competencies if necessary via training courses. External companies that work for the firm need to be aware of the activities that affect the environment and they need to know the implications of any deviation for the environment. The internal communication concerning the environment must be organized. Proof must be available that the current documents (for example the policy or the environmental aspects) and written notes (for example protocols) can be read and identified on site. All processes that are relevant for the environment need to be identified and documented, if relevant, they need to be brought to the attention of the suppliers. Emergencies which affect the environment need to be identified and measures for their prevention must be established, checked and tested. Corrective and preventive measures to limit the negative effects on the environment also need to be available and must be assessed. The internal audit checks whether the environmental management system is actually taken seriously and whether all documentation is up-to-date. Results are summarized in a written report. The following issues need to be established: the frequency of the audit, the topics covered as well as the audit criteria (test criteria). The assessment by top management serves to evaluate the entire environmental management system. This includes among others the results of the internal audit, the assessment concerning the adherence to legal standards, statements made by third parties (for example neighbors) and the environmental performance, namely the improvements made in critical areas. 181 77..33..22 IIn nttrroodduuccttiioonn ooff aann EEnnvviirroon nmmeennttaall MMaannaaggeemmeenntt SSyysstteemm bbaasseedd oon n IISSOO 114 4000 011 Since most companies that plan to implement an environmental management system already have a functioning process-oriented quality management system in place, the integration of the environmental management system into this structure makes sense. Some of the topics are in fact identical in the two systems. This is particularly true for documentation requirements, recording requirements, training, supplier assessment, errors (called emergencies in the environmental management system), corrective and preventive measures, internal audits and systems evaluation. Before possible processes with relevance for the environment can be considered, the term process needs to be defined. A process entails a step-by step sequence. A process always begins with a trigger and ends with a result. 182 A 181 DIN EN ISO 14001: 2009-11 (2009), pp. 13 following 182 Wagner, K. W. & Käfer, R. (2010), p. 5 <?page no="140"?> 7.3 Environmental Management based on DIN EN ISO 14001 139 @ www.uvk.de possible trigger could be the lowering of a needed input below a predefined critical level. The various steps are usually presented in a flowchart which uses symbols defined by the company in order to improve legibility. For each step in the process the responsible persons, other participants (if needed) and possibly the information requirements at the company are defined. 183 In order to avoid any misunderstandings, it is important that the responsibility for each process step always lies with only one person. The quality of the processes should be measured with the help of key indicators. An example is the total duration from establishing a need to successful remedy, measured in days or number of incorrect deliveries within a year. Step 1: Preparation When an environmental management system is introduced, the starting situation should initially be assessed. It needs to be established why the system is needed. Ideally the company wants to improve its environmental performance or a customer demands the implementation. This is typical, for example, for the automotive sector. Step 2: Determination of the qualitative and quantitative environmental aspects In the next step, the current situation is determined. This means that all environmental aspects and their qualitative and quantitative effects need to be assessed. Example A plant which is subject to the Federal Pollution Control Act and exceeds the throughput defined in the fourth regulation on the Federal Pollution Control Act needs to issue a declaration about emissions. This includes data about emitted pollutants via the chimney, the concentration of carbon dioxide and the annual emission of carbon dioxide. Step 3: Determination of environmental law Now it is important to determine the applicable environmental law. This requires a compilation of the legal bases and the corresponding requirements for the company (Table 7-2). 183 Wagner, K. W. & Käfer, R. (2010), p. 194 <?page no="141"?> 140 7 Operational Environmental Management @ www.uvk.de Legal basis As of Corresponding requirements Notes KrWG 24.02.2012 08.04.2013 Changes not relevant §3 Terms: (11) Carrier: … commercial or in the context of active companies §6 Waste hierarchy, order: Avoidance, preparation for reuse, recycling, other uses, especially energy recovery and backfilling, disposal §7 Basic obligations of the closed cycle economy: producer of waste has obligation to process §8 Ordering and quality of the recovery and disposal activities needs to be considered §9 Separation of waste, mixing ban... §3: Waste carrier §6, §7, §8, §9, ....consider ... Table 7-2: Example of a legal register Step 4: Determination of all processes and procedures that are relevant for the environment Among the required processes with relevance for the environment are procedures for the determination of the environmental aspects and the basics of environmental law as well as for the assessment of the adherence to legal texts with relevance for the environment. Additional processes relate to internal and possibly external communication, management of documents and protocols, emergency preparedness and risk prevention, surveillance and measurement, non-conformity, corrective and preventive measures as well as internal audits. The following flow chart (Figure 7-1) presents a possible way of structuring the process for determining and implementing changed environmental requirements. The process starts with a trigger indicating that it is time to check for changes in the legal foundations. This could be a monthly or quarterly rhythm (1). Next it needs to be assessed whether this is relevant for the company (3). A note in the legal register, stating whether the change is relevant or not (4), shows that the review took place. Segments which are affected (8) are informed. If action is required (10), the needed implementation is prepared (11). The measure is implemented (12) and confirmed via mail to the responsible environmental manager (13). In the following audit (14), the effectiveness is confirmed and documented in the audit report (15). <?page no="142"?> 7.3 Environmental Management based on DIN EN ISO 14001 141 @ www.uvk.de Figure 7-1: Possible process for updating legal demands Step 5: Organization Once all procedures and processes have been defined - ideally in cooperation with the persons involved in the process - the organization should be adjusted in order to optimize all processes. This includes, for example, changes in responsibilities, additions to functions that need to be informed and changes in the process sequence. It may even be necessary to adjust the organizational structure of the company. <?page no="143"?> 142 7 Operational Environmental Management @ www.uvk.de Figure 7-2: Meaning of symbols Step 6: Preparation of the required certifications and documents for the environmental management system Starting with the processes and procedures that are relevant for the environment, the binding environmental laws and the qualitative and quantitative environmental aspects, certifications and documents for the environmental management system need to be prepared. The environmental policy must be set by company management. Ideally, this should become a component of the existing company policy or possibly the quality policy. From the environmental policy, targets with relevance for the environment are derived in cooperation with all affected persons. It needs to be assured that the targets can be achieved and are free of conflicts. If a handbook on quality management is available at the company, it should be expanded to include aspects of the environmental management system. Existing operating instructions, process instructions and process descriptions should be amended to cover environmental aspects. Example Purchasing assures the availability of all required means of production. The focus should not only be on costs, but also on environmental aspects. A cleaning agent for example could be carcinogenic or evaporate easily. Any existing training offers should be expanded to include the topics of environmental management and environmental performance. Suppliers should also be assessed concerning their environmental performance; internal audits need to be performed and the results documented. Additional documentation on dealing with environmental emergencies needs to be compiled and assessed critically. This leads to the definition and implementation of preventive measures. Finally the management system needs to be assessed and a program aimed at improving environmental efficiency must be developed. <?page no="144"?> 7.4 Environmental management following EMAS 143 @ www.uvk.de Step 7: Certification Ahead of the certification preliminary talks with the certification agencies should be held. They are asked to make an offer for conducting the certification based on a questionnaire. Once the certification agency has been chosen, the required documentation is forwarded to the auditor. The auditor assesses the documents, determines whether certification is justified and provides recommendations for changes or amendments. For the external audit, the audit plan is coordinated between auditor and company. The result of the external audit is an audit report, which is compiled by the external auditor. It contains recommendations which should be implemented and/ or deviations, which must be corrected. If larger discrepancies exist, the company does not receive a certification and needs to make adjustments. Once the certificate is awarded, it can be used for advertising purposes on the letterhead. 77..44 EEnnvvi irroonnmmeennttaall mmaannaaggeemmeenntt ffoolllloowwiinngg EEMMAASS d EMAS stands for “Eco-Management and Audit Scheme.” Based on a Council regulation from the year 1993, the common European system for environmental management and auditing was introduced into law in Germany in December 1995. The regulation was amended several times and the currently binding version is Regulation (EC) No. 1221/ 2009 of the European Parliament and of the Council of 25 November 2009 (EMAS III). Participation in EMAS is voluntary and open for organizations from different economic sectors inside and outside of the European Union. An organization is free to introduce the environmental management system in one or several locations. EMAS contributes to increased resource efficiency and a reduction of environmental risks at participating organizations. The costs of introducing an environmental management system are easily offset by the savings. 184 Term: Organization “Organization” means a company, corporation, firm, enterprise, authority or institution, located inside or outside the Community, or part or combination thereof, whether incorporated or not, public or private, which has its own functions and administration. 185 184 Commission Decision of 4 March 2013 (2013) establishing the user’s guide, p. 5 185 Regulation (EC) No 1221/ 2009 of the European Parliament and of the Council (2009), p. 5 <?page no="145"?> 144 7 Operational Environmental Management @ www.uvk.de 77..44..11 DDeemmaannddss ooff EEMMAASS The main goal of EMAS is the continuous improvement of environmental efficiency of organizations by establishing an environmental management system and conducting environmental audits. Certain requirements must be met in order to introduce EMAS. Initially the organization needs to conduct an environmental review. During the review all activities of the organization are assessed concerning environmental aspects and the relevant environmental legislation is determined. It forms the starting point for the introduction of an environmental management system in line with e ISO 14001. With an environmental management system, the environmental efficiency of the organization is measured with the aim of continuous improvement. Next, the environmental management system needs to be checked by carrying out an internal audit and management reviews. The establishment of an environmental statement is a further demand of the regulation. An external accredited or licensed environmental verifier assesses the procedure, the process for conducting the environmental review and the suitability of the environmental management system in light of the established targets. The environmental verifier also validates the environmental statement, confirming the implementation and contents of the environmental statement. Following the validation, the organization can submit a request for EMAS registration with the responsible authorities. With the inclusion in the EMAS register, the organization is certified according to EMAS. Figure 7-3: Steps in introducing EMAS <?page no="146"?> 7.4 Environmental management following EMAS 145 @ www.uvk.de 77..44..22 VVoorrggeehheennsswweeiissee ffüürr ddiiee EEiinnffüühhrruunngg vvoonn EEMMAASS A systematic approach is recommended for the introduction of an environmental management system (Figure 7-3). Step 1: Environmental review The first step in introducing e EMAS is the conduct of an environmental review. The organizations must carefully assess their internal structures and activities. The aim is to identify all aspects with relevance for the environment. Environmental aspects can relate to inputs (such as materials and energy) or outputs (for example emissions into the atmosphere, waste). To gain an overview of the spectrum of environmental aspects, the use of an enterprise ecobalance is suggested. This involves assembling, registering and assessing the relevance of all inputs and outputs. When analyzing the relevance, the following aspects need to be considered: potential for harming the environment, fragility of the local, regional or global environment, extent (volume of emissions, usage of energy and water) and number of aspects or effects, existence of relevant environmental legislation and its demands as well as interests of third parties and employees of the organization. Examples for environmental aspects of activities and their impact on the environment are listed in Table 7-3. Activity Environmental aspect Environmental impact Transport ) Used oils for machinery ) Carbon dioxide emissions of trucks ) Soil, water, air pollution ) Greenhouse effect Office services ) Use of materials such as paper, toner and so forth ) Electric power consumption ) Mixed municipal waste pollution ) Greenhouse effect Chemical industry ) Waste water ) Emissions of volatile organic compounds and ozone depleting substances ) Water pollution ) Photochemical ozone ) Ozone layer depletion Table 7-3: Examples of environmental aspects and environmental effects 186 186 Commission Decision of 4 March 2013 (2013) establishing the user’s guide, p. 10 <?page no="147"?> 146 7 Operational Environmental Management @ www.uvk.de Both direct and indirect environmental effects need to be considered. Direct environmental aspects relate to the activities of an organization which it directly controls, while indirect environmental aspects relate to activities, products and services of an organization that it cannot fully control (Table 7-4). Direct environmental aspects Indirect environmental aspects ) Air emissions, water emissions, waste ) Use of natural resources ) Local issues (noise, vibrations, odors) ) Land use ) Air emissions related to transport ) Risks of environmental accidents and emergency situations ) Product life cycle related issues ) Capital investments ) Insurance services ) Administrative and planning decisions ) Environmental performance of contractors, subcontractors and suppliers ) Choice and composition of services (for example transport etc.) Table 7-4: Examples for direct and indirect environmental aspects 187 The assessment helps to identify weaknesses and to derive necessary actions. This is used to determine targets and priorities for the environmental program of the company. Step 2: Implementation of an environmental management system In the second step an environmental management system needs to be established. It serves to define processes, strategies and instruments and to establish organizational structures and responsibilities so that an organization can continually improve its environmental performance. The demands of ISO 14001 with respect to an environmental management system are also included in EMAS (see Chapter 7.3). The system relies on the well-known PDCA-structure (Plan - Do - Check - Adjust) and requires an environmental policy, environmental targets and an environmental program. The organization’s top management needs to adopt written environmental principles which are included in the corporate principles. The environmental policy includes a commitment to the continuous improvement of the environmental performance and the compliance with relevant environmental legislation and 187 Commission Decision of 4 March 2013 (2013) establishing the user’s guide, p. 10 <?page no="148"?> 7.4 Environmental management following EMAS 147 @ www.uvk.de regulations. The environmental policy forms the framework for the setting of environmental targets and needs to be shared with all employees. A program for the realization of the environmental objectives and individual targets must be introduced and maintained. This environmental program must include responsibilities, instruments, and time period needed for accomplishing the environmental objectives and individual targets. An adjustment of the program may be needed in case of new developments, new or modified tasks, products or services. Example 188 Environmental objective: Minimize hazardous waste generation Target: Reduce the use of organic solvents in the process by 20% within 3 years Action: Reusing solvents whenever possible, recycling organic solvents Top management must be willing to provide the resources needed (personnel, financial funds) for implementing and controlling the environmental management system. It needs to appoint a management representative and define his responsibilities and competencies in order to assure that the environmental management system functions properly. The tasks need to be documented and published in order to facilitate an efficient environmental management. Step 3: Environmental audit of the operations An internal environmental audit helps to determine whether an organization adheres to the defined procedures and whether problems or opportunities for improvement arise in relation to these procedures. Within a specified timeframe all activities of an organization must undergo an environmental audit. The auditors can either be employees of the organization with well-founded training and experience in the specific auditing tasks, or external experts. They need to demonstrate sufficient independence concerning the tasks which they are auditing in order to allow an objective and neutral assessment. The activities during the environmental audit of the operations include talks with employees, evaluation of operating conditions and operating equipment, checking of archives, written instructions and other relevant documents with the aim of assessing the environmental performance of the audited activities. 188 Commission Decision of 4 March 2013 (2013) establishing the user’s guide, p. 13 <?page no="149"?> 148 7 Operational Environmental Management @ www.uvk.de Following each environmental audit and after the completion of each cycle, the auditors prepare a written environmental audit report in adequate form and appropriate contents for formal presentation. The report contains all insights and conclusions of the environmental audit. The insights and conclusions must be formally presented to the organization’s management. The environmental audit or the auditing cycle must be completed in regular intervals which cannot exceed three years (respectively four years for small and medium-sized companies). The frequency of auditing an activity depends on the following factors: nature, scale and complexity of the activity, significance of associated environmental impact, importance and urgency of the problems detected during previous audits and history of environmental problems. More complex tasks with more severe impact on the environment need to be audited more frequently. The organizations establish their own environmental audit program and determine the frequency of environmental audits. The organization’s top management must evaluate the environmental management system in predefined intervals in order to ascertain the continued suitability, appropriateness and effectiveness. The assessment by the top management needs to address the possible need for changes of the environmental policy, environmental targets and other elements of the environmental management system as a result of the audits or changing circumstances and the obligation to seek continuous improvement. Step 4: Environmental statement When first registered, an organization provides environmental information, which is called environmental statement. This information needs to be validated by the environmental verifier. The aim of the environmental statement is the comprehensive information of the public and other interested parties about the environmental impact and the environmental performance of the organization as well as about the continuous improvement of the environmental performance. The environmental statement is one of the defining features of the EMAS system. Concerning the environmental performance, key indicators must be stated. The key indicators are relevant for all types of organizations and serve to measure the environmental performance in the following key areas: energy efficiency, materials efficiency, water, waste, biodiversity and emissions. The organization must provide all information in a consolidated printed version when it is first registered and every three years thereafter (respectively four years for small and medium-sized companies). The organization must update the information annually (respectively after two years for small and medium-sized companies) and all changes must be validated annually by an environmental <?page no="150"?> 7.4 Environmental management following EMAS 149 @ www.uvk.de verifier. Following the validation, these changes need to be communicated to the responsible bodies and publicly made available. Step 5: Assessment by environmental verifier If an environmental management system based on e EMAS is introduced at an organization, it needs to be verified by government accredited environmental verifiers or respectively organizations of environmental verifiers. Both the adherence to all legal obligations as well as the implementation of self-imposed goals, including the environmental statement is assessed. The environmental verifier can deny the certification if a violation of legal standards is detected during the audit. The accreditation of the environmental verifiers is based on the general principles concerning necessary qualifications contained in the EMAS regulation. The authorities can approve individuals, organizations, or both, as environmental verifiers. Appointment and monitoring of verifiers in Germany is clearly defined via the Environmental Verification Committee (UGA) and the German Association for Accreditation and Recognition of Environmental Auditors (DAU). Step 6: Registration and publication of the environmental statement Following the successful completion of the audit and the validation of the environmental statement, the organization requests the EMAS registration from the responsible body. In Germany this responsibility lies with the chambers of commerce and industry and the trade boards. The application needs to be supported by the validated environmental statement and the confirmation that the assessment and the validation were conducted in line with the EMAS regulation, signed by the environmental verifier. The responsible body should reach a final decision about the EMAS registration of an organization within three months of the submission of the application. Following this, the environmental statement can be published. With the EMAS registration, the organization obtains the right to use the EMAS logo (Figure 7-4). The EMAS logo signifies that the EMAS system was applied correctly and verifies the suitability of communicating environmental awareness to the outside world. The EMAS logo may only be used by organizations with a valid EMAS registration. It cannot be used on products or product packaging in order to avoid confusion with environmental product labels. 189 189 Commission Decision of 4 March 2013 (2013) establishing the user’s guide, p. 35 <?page no="151"?> 150 7 Operational Environmental Management @ www.uvk.de Figure 7-4: EMAS logo 190 In comparison to ISO 14001, EMAS is considered to be the more challenging system. EMAS requires compliance with an environmental management system according to ISO 14001 and additionally an environmental statement and specific efforts concerning the adherence to legal obligations, environmental performance, external communication and the inclusion of employees. EMAS focuses specifically on communication, participation, dialogue and transparency. This creates trust and credibility and brings reliability and drive to the process of continuous improvement of the environmental performance. EMAS is used predominantly in Europe, while ISO 14001 is accepted globally and not only in the European Union. 77..55 SSiimmpplliiffiieedd SSyysstteemmss AApppprrooaacchheess EMAS and ISO 14001 are only of limited use for smaller and medium-sized companies due to the high commitment in time and money that is required. Environmental management approaches mostly support small and medium sized companies in the implementation of an environmental management system. The methods usually target specific groups (for example craftsmen or camp ground operators). All environmental management approaches are based on the requirements of EMAS, however, most of them focus narrowly on environmental aspects and savings. External audits are the preferred mode of quality assurance, but no system of accrediting the verifiers exists. Table 7-5 compares a number of well-known environmental management approaches. 190 Commission Decision of 4 March 2013 (2013) establishing the user’s guide, p. 35 <?page no="152"?> 7.5 Simplified Systems Approaches 151 @ www.uvk.de ECOCAMPING EMAS easy Ökoprofit Target group Camp ground operators Small and medium sized companies Small and medium sized companies Regional spread Germany, Austria, Switzerland EU Austria, Germany, other countries Available since 2001 2002 1993 Focus points Environmental and quality management Environmental and sustainability management Environmental and worker protection management Institutional structure Administered by ECOCAMPING e.V. Administered by ECE (ecoconseilenterprise) - a network of advisors that is active all across Europe. Based on eco-mapping (simple check lists, tables, forms) and continued until an environmental management system is established. (“10 days of work for 10 employees, based on 10 forms”) CPC (cleaner production center Austria) is the central administrator of the Ökoprofit license. Municipalities that implement the program enter into a contract with CPC about the use of the materials. Contract parties are usually consultants and companies. External assessment Assessed by advisors from ECOCAMP- ING e.V. Validation by approved environmental advisors Assessment by a commission comprised of representatives of the chamber and of the community, on occasion also environmental verifiers EMASorientation Closely tied to EMAS (70% of EMAS requirements are met) EMAS requirements are met Closely tied to EMAS. Inexpensive start of an environmental management system (50-70% of EMAS requirements are met) Table 7-5: Environmental management approaches 191 191 See BMU, UBA (2005), pp. 36 following <?page no="153"?> 77..66 FFuurrtthheerr DDeevveellooppmmeennttss ooff EEnnvviirroonnmmeennttaall MMaannaaggeemmeenntt SSyysstteemmss MMaatteerriiaall ffllooww ccoosstt aaccccoouunnttiinngg d Material flow cost accounting is a management instrument that can help to support companies in pointing out improvement potential with regard to costs and the environment in the areas of materials and energy use. It was developed in the nineties in the German speaking countries by Wagner and Strobel and has found its greatest use and implementation in the Japanese manufacturing industry. 192 The norm ISO 14051 formulates general framework conditions for material flow cost accounting. The development of a model of material flows, which captures and quantifies flows and stocks of materials as well as energy usage at the company level in physical units, increases the transparency concerning the use of materials and energy. All costs which result from these activities are also quantified and categorized. The focus of material flow cost accounting is on the comparison of costs that are attributable to products and costs that result from losses of material (such as waste and wastewater). The actual cost of material losses is unknown in many cases, since the data about loss of materials and the associated costs can only be obtained with great difficulty from the conventional environmental information systems that are available at the company. With the help of material flow cost accounting, this data can be made available and used to provide options for the reduction of usage and/ or loss of materials. This in turn helps to improve the use of materials and energy, reduce unwanted environmental impact and lower costs. 193 Material flow cost accounting does not replace conventional cost accounting, but is an additional and specific tool. In a scenario analysis, the cost savings from a complete elimination of waste are made explicit. While this does not give any information about technical feasibility, a savings potential in the neighborhood of 5% of sales appears realistic - whether this is actually implemented depends largely on the willingness to innovate and to pursue change at the company. 194 192 Schmidt, M. & Schneider, M. (2010), p. 163 193 DIN EN ISO 14051: 2011-12 (2011), pp. 8 following 194 Schmidt, M. & Schneider, M. (2010), p. 164 <?page no="154"?> 7.6 Further Developments of Environmental Management Systems 153 @ www.uvk.de Flow cost accounting is becoming a central instrument of sustainable business and ecological efficiency. 195 In Japan a dynamic development of material flow cost accounting as an established tool of sustainability management is already observable. The focus is specifically on process innovation. In the future, material flow cost accounting in Japan will be developed in the direction of contributing towards social sustainability as well. In Germany and Europe meanwhile, the topical focus of politicians and companies is strongly on resource efficiency. 196 SSoocciiaall AAccccoouunnttaabbiilliittyy ooff OOrrggaanniizzaattiioonnss FFoolllloowwiinngg IISSOO 2266000000 A globalized world requires a joint international understanding about values, principles and rules in the field of responsible corporate management. With the publication of DIN ISO 26000 in November 2010, organizations have access to internationally developed and accepted guidelines including suggestions for implementation. DIN ISO 26000 recommends that organizations align their behavior along certain principles, core topics and fields of action. Core topics are human rights, working practices, fair corporate and business practices, environmental protection, consumer concerns and an active participation in the societal environment of the organization. 197 The introduction of an environmental management system in line with e EMAS or e ISO 14001 can be seen as the concrete and practical introduction of structures and principles of action and the fulfilment of environmental commitments which are formulated as non-binding recommendations and suggestions only in ISO 26000. ISO 26000 itself is not the description of a management system, but instead lists aspects of social responsibility and a recommended course of action. Most guidelines of ISO 26000 dealing with the environment are already regulated by law in Germany. 198 According to ISO 26000, social responsibility clearly goes beyond activities that support charitable causes and the adherence to legal provisions. Instead, social responsibility is the contribution that an organization can and should make towards the sustainable development of a global society. 199 195 Strobel, M. (2001), pp. 305 following 196 Wagner, B., Nakajima, M., Prox, P. (2010), p. 202 197 Bundesministerium für Arbeit und Soziales - Eds. (2011), p. 9 198 Geschäftsstelle des Umweltgutachterausschusses - Eds. (2012), p. 1 199 Kleinfeld, A. (2011), p. 5 <?page no="155"?> 154 7 Operational Environmental Management @ www.uvk.de Term: Social responsibility DIN ISO 26000 defines social responsibility as “the responsibility of an organization for the impacts of its decisions and activities on society and the environment through transparent and ethical behavior that contributes to sustainable development, including health and the welfare of society, takes into account the expectations of stakeholders, is in compliance with applicable law and consistent with international norms of behavior, is integrated throughout the organization and practiced in its relationships.” 200 EEn neerrggyy MMa anna agge emmeenntt SSy ysstte em ms s FFool ll lo ow wi in ngg IISSOO 550 00 0001 1 Energy efficiency is a key aspect of the environmental and energy policies of the EU. In order to achieve energy efficiency, energy and environmental management systems at corporations play an important role. In the summer of 2011 the international norm ISO 50001 was published under the heading “ISO 50001: Energy management systems - Requirements with guidance for use.” 201 This norm is providing guidance to organizations that want to establish systems and processes to improve their energy efficiency. The systematic approach is supposed to enable the organization to achieve a continuous improvement in the performance of energy management, energy efficiency and energy conservation. The norm was developed as an independent application, but it can also be integrated into or adapted to other management systems and is applicable for all types of organizations. The structure of ISO 50001 is based on the joint elements of ISO management system norms, especially ISO 9001 and ISO 14001. EMAS and ISO 14001 do not automatically fulfil all requirements of ISO 50001. But for most companies, energy consumption is already an important environmental aspect and thus already included in the environmental management system. For that reason, only few adjustments of the contents or specifications concerning energy or energy assessment will be needed. Licensed EMAS environmental verifiers are authorized to issue certifications for ISO 50001. As part of the certification procedure, they are required to assess all demands of the norm. 202 200 Bundesministerium für Arbeit und Soziales - Eds. (2011), p. 11 201 DIN EN ISO 50001: 2011-12(2011), pp. 1 following 202 Umweltgutachterausschuss - Eds. (2012), p. 3 <?page no="156"?> 7.6 Further Developments of Environmental Management Systems 155 @ www.uvk.de AApppplliiccaattiioonn ooff tthhee GGuuiidde elliinneess ooff BBuussiinneessss EExxcceelllleennccee ttoo tthhee EEnnvviirroonnmmeenntt It can be shown that an application of the guidelines of the Business Excellence Model leads to a more favorable economic development of the company compared to not using the model. The model aims at excellent results concerning output, customers, employees and society. Achieving this excellence requires adherence to the following fundamental concepts: ) create value for the customer, ) secure a sustainable future, ) develop the skills of the organization, ) foster creativity and innovation, ) lead with vision, inspiration and integrity, ) actively manage change, ) achieve success with the help of employees, ) deliver continuously outstanding results. The approach rests on a self-assessment which helps to identify strengths and weaknesses. The assessment criteria of the e EFQM model not only include results (which are indicative of strong performance in the past), but also socalled enablers, activities that are purposeful and systematic and assure a strong future performance. The EFQM Excellence Model establishes nine main criteria which are broken down into enablers (leadership, employees, strategy, partnerships and resources) and results (related to employees, customers and society). These main criteria are further broken down into sub-criteria, which establish the link with the fundamental concepts. The topic area “leadership with vision, inspiration and integrity” for example is represented among others in questions on the criteria “leadership,” “strategy” and “partnership and resources.” If these criteria are expanded to include the topic of environmental protection by adding “regarding environmental protection” to the sub-criteria, the environmental performance will be considerably enhanced. Main criterion “Leadership” - Leaders develop the vision, mission, values and ethical principles and act as role models - Leaders define, review and improve the management system and the performance of the organization - Leaders personally interact with external interest groups - Leaders, jointly with the employees at the organization, strengthen the culture of excellence <?page no="157"?> 156 7 Operational Environmental Management @ www.uvk.de - Leaders assure the flexibility of the organization and the ability to effectively manage change Main criterion “Client-related events” - Observations - Performance indicators Figure 7-5 displays the criteria including weights for the internal and external evaluation of the degree of business excellence. 203 Figure 7-5: Main criteria of EFQM At a glance With the introduction of environmental management systems in the nineties, technological environmental protection was expanded to include organizational aspects and made the development step from aftercare to preventive measures. With e EMAS and e ISO 14001, two internationally recognized environmental management systems are available to companies that aim to support a process of ecological improvement. The concepts rely on the initiative and responsibility of the companies. The requirements defined in ISO 14001 for an environmental management system are also a core component of EMAS. A process orientation is helpful to integrate these systems into the organization and a quality management system following ISO 9001 supports this approach. Material and 203 EFQM, pp. 1 following <?page no="158"?> 7.6 Further Developments of Environmental Management Systems 157 @ www.uvk.de energy flow management is an important instrument to support environmental management systems based on EMAS and ISO 14001 and aims at increased efficiency for materials and energy. The norms ISO 14051 and ISO 50001 provide guidelines for the framework conditions of e material flow cost accounting and energy management systems. Flow cost accounting is a central element of sustainable business and ecological efficiency. ISO 26000 states that social responsibility does not end with the support of charitable causes and the adherence to legal provisions. Instead, social responsibility is the contribution that an organization can and should make towards the sustainable development of a global society. Quality management based on e EFQM supports companies in assuring excellent results through a planned and systematic approach. Suggestions for further reading Additional information about corporate environmental management: Baumast, A.; Pape, J. (eds.) (2009): Betriebliches Umweltmanagement - Nachhaltiges Wirtschaften im Unternehmen, 4 th edition, Stuttgart. Handbook on the introduction of an environmental management system: Förtsch, G.; Meinholz, H. (2011): Handbuch Betriebliches Umweltmanagement, 1 st edition, Wiesbaden. Additional insights on quality management: Wagner, K. W.; Käfer, R. (2010): PQM Prozessorientiertes Qualitätsmanagement - Leitfaden zur Umsetzung der ISO 9001, 5 th edition, München. DIN EN ISO 9001: 2008-12 (2008): Qualitätsmanagementsysteme - Anforderungen (ISO 9001: 2008), Berlin. Moll, A; Kohler, G. (eds.) (2013): Excellence-Handbuch Grundlagen und Anwendung des EFQM Excellence Modells, 1 st edition, Düsseldorf. Literature Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit (BMU), Umweltbundesamt (UBA) (ed.) (2005): Umweltmanagementansätze in Deutschland, 1 st edition, Berlin. Bundesministerium für Arbeit und Soziales (ed.) (2011): Die DIN ISO 26000. Leitfaden zur gesellschaftlichen Verantwortung von Organisationen - Ein Überblick, 1 st edition, Bonn. Commission Decision of 4 March 2013 establishing the user’s guide setting out <?page no="159"?> 158 7 Operational Environmental Management the steps needed to participate in EMAS, under Regulation (EC) No 1221/ 2009 of the European Parliament and of the Council on the voluntary participation by organizations in a Community eco-management and audit scheme. Cord-Landwehr, K. & Kranert, M. (eds.) (2010): Einführung in die Abfallwirtschaft, 4 th edition, Wiesbaden. DIN EN ISO 14001: 2009-11 (2009): Umweltmanagementsysteme - Anforderungen mit Anleitung zur Anwendung (ISO 14001: 2004 + Cor. 1: 2009), Berlin. DIN EN ISO 14051: 2011-12 (2011): Umweltmanagement - Materialflusskostenrechnung - Allgemeine Rahmenbedingungen, Berlin. DIN ISO 26000: 2011-01 (2011): Leitfaden zur gesellschaftlichen Verantwortung (ISO 26000: 2010), Berlin. DIN EN ISO 50001: 2011-12 (2011): Energiemanagementsysteme - Anforderungen mit Anleitung zur Anwendung, Berlin. EFQM (2012): EFQM Excellence Model 2013, Brüssel. Enzler, S. (2000): Integriertes Prozessorientiertes Management: die Verbindung von Umwelt, Qualität und Arbeitssicherheit in einem Managementsystem anhand der betrieblichen Prozesse, 1 st edition, Berlin. Geschäftsstelle des Umweltgutachterausschusses (ed.) (2012): Die ISO 26000 unter der EMAS-Lupe, 1 st edition, Berlin. Kleinfeld, A. (2011): Gesellschaftliche Verantwortung von Organisationen und Unternehmen - Fragen und Antworten zur ISO 26000, 1 st edition, Berlin. Regulation (EC) No 1221/ 2009 of the European Parliament and of the Council on the voluntary participation by organizations in a Community ecomanagement and audit scheme. Schmidt, M. & Schneider, M. (2010): Kosteneinsparungen durch Ressourceneffizi enz in produzierenden Unternehmen, uwf 18, 153-164. Simon, F.-G. & Dosch, K. (2010): Verbesserung der Materialeffizienz von kleinen und mittleren Unternehmen, Wirtschaftsdienst 11, 754-759. Strobel, M. (2001): Systemisches Flussmanagement - flussorientierte Kommunikation als Perspektive für eine ökologische und ökonomische Unternehmensentwicklung, 1 st edition, Augsburg. Umweltgutachterausschuss (ed.) (2012): Erfüllung der Anforderungen der DIN EN ISO 50001 „Energiemanagementsysteme“ durch EMAS, 1 st edition, Berlin. Wagner, B.; Nakajima, M.; Prox, P. (2010): Materialflusskostenrechnung - die internationale Karriere einer Methode zur Identifikation von Ineffizienzen in Produktionssystemen, uwf 18, 197-202. Wagner, K. W. & Käfer, R. (2010): PQM Prozessorientiertes Qualitätsmanagement. Leitfaden zur Umsetzung der ISO 9001, 5 th edition, München. <?page no="160"?> 88 FFi innaanncciiaall MMaannaagge em meen ntt aanndd SSu usst ta aiinnaabbiilliitty y by Frank Andreas Schittenhelm Learning Objectives The readers ) understand the basic methods of investment analysis, ) are able to adequately assess the term shareholder value, ) recognize the importance of risk management for sustainable financial management. List of Key Terms ) Cash Flow Analysis ) Portfolio theory ) Risk-return analysis ) Utility value analysis ) Venture capital ) Shareholder value ) Risk management 88..11 IInnttrroodduuccttiioonn The financial management of a company consists of various aspects which for the most part provide support to the operative functions. The task of financing optimizes capital procurement in order to assure the liquidity of the company while keeping the cost of capital as low as possible. The task of investing deals with the general decision criteria for judging investments. Ross, Westerfield and Jordan 204 define the increase of the company value as the central goal of financial management. Since financial management for the most part involves quantitative aspects, financial mathematics plays an important role in the assessment of decisions. The purely quantitative focus frequently conveys a negative image of this subfield of business studies. Modern financial mathematics in particular is partially blamed for the exploitation of resources, short-term profit maximization and financial crises. Thus the following questions arise: ) Is this perspective simply wrong and not supported by the facts? 204 Ross, S./ Westerfield, R./ Jordan B. (2011) <?page no="161"?> 160 8 Financial Management and Sustainability @ www.uvk.de or ) Are the models used in financial management consistent, but the input parameters are frequently chosen incorrectly and thus lead to undesirable results? or ) Are the models in need of fundamental reassessment and reform? Before these questions can be answered, the fundamental decision rules for investments are discussed. In the following section, issues of financing in a company are discussed. We then want to draw theoretical and practical implications for the management of a company. To do this, the models and methods used are analyzed in light of the principles of sustainable business management. A fundamental insight for financial management from a sustainability perspective is the need to continuously improve risk management at the company. For that reason we close with a section that provides an outline of a successfully implemented risk management system. 88..22 IInnvveessttmmeenntt AAnnaallyyssiiss From the perspective of financial management, the success of a company is based on the fundamental relationship between sources (liabilities) and uses (assets) of funds. The cash flow from operations can therefore either be reinvested in capital assets and current assets (in the form of reserves) or returned to the providers of equity and debt capital. The following figure clarifies this link: 205 Figure 8-1: Cash flows in the company 205 Flad, M./ Günther, P./ Schittenhelm, F.A. (2012), p. 96 <?page no="162"?> 8.2 Investment Analysis 161 @ www.uvk.de Two aspects are relevant in this regard: 1. First of all, it needs to be understood that a company is neither poor nor rich. It merely manages funds (from providers of equity and debt capital). In line with actual or perceived risk, these groups have differing expectations or demands on the returns of their investments. 2. It is the task of the company to meet these return expectations. A company is only successful financially if the actual return of the funds used (from providers of equity and debt capital) exceeds the expected return. Simply put, this means that a company that receives funds at a rate of 5%, needs to invest in a way that at least returns 5%. In most cases the different providers of funds have different return expectations. This means that the company needs to work with a weighted average cost of capital (d WACC). It must be taken into consideration that the return expectation may not be known explicitly. While debt capital usually comes with a fixed loan rate, equity capital is usually only characterized by a return expectation of the provider of equity capital. This expected return should specifically take the riskiness of the venture into consideration and thus increase with risk. If the return expectation of the provider of equity capital is missed, this initially does not massively affect the company, even though it could be considered as value destruction. If, however, the interest rate on the debt capital cannot be matched, the existence of the company is fundamentally threatened. Bankruptcy and a discontinuation of operations may be the consequence. Invested funds (meaning capital assets and current assets) need to be liquidated and (frequently) sold on unfavorable terms. The providers of funds may only receive a fraction of their initial investments. Difficulties arise because the company is engaged in a type of maturity transformation. Interest and dividend payments as well as the repayment of the principal do not necessarily occur at the same time the revenue is generated. Frequently the investment returns, more precisely inflows, only happen with some delay, while interest has to be paid continuously. Thus the company is asked to make an assessment about the suitability of investments in light of the demands described above. For that reason, we will deal with two questions in the following: ) How does a provider of funds assess the risk-return profile of his investment? ) What is the role of sustainability in this regard? On the first question: modern approaches are based on the premise that there is a close relationship between return and risk and that higher risk should always be compensated by higher expected return or higher utility. If this is not the <?page no="163"?> 162 8 Financial Management and Sustainability @ www.uvk.de case, the investor either acts irrationally or does not have sufficient information about his investment. Three possible methods are: 1. Cash Flow Analysis 2. Modern Portfolio Theory 3. Utility Analysis 88..22..11 CCa assh h FFl loow w AAn naallyyssiiss The method of cash flow analysis is based on the idea of time value of money of the future cash flows. Any assessment of an investment initially requires an estimate of the future inflows and outflows of cash. Investment criteria derived from cash flow analysis consider the time value of money. This means that they evaluate all inflows and outflows which happen at different points in time at the same point in time. To facilitate the process of discounting, additional assumptions are occasionally made. The evaluation of projects usually employs a uniform interest rate. The analysis is strictly limited to inflows and outflows. 206 Investment criteria based on cash flow analysis are widely used by practitioners. The three most frequently used key figures which are derived from this analysis are presented in the following. The net present value (NPV) is obtained by discounting all future cash flows of a project to the current date. All discounted future payment streams of an investment or investment project are added up to arrive at the net present value. A positive net present value can be interpreted as the value added generated by the investment. Since every company pursues the goal of raising the value of the company, the investment with the highest positive net present value will be selected. Mathematically, the discounting of the payment streams is done as follows: , where i represents the discount rate and z t the respective (annual) payment streams, namely inflows and outflows. The discount factor should be equal to the WACC in order to adequately capture the return requirements of the providers of equity and debt capital. A net present value of zero just meets these expectations while a net present value in excess of zero exceeds the expectations and generates additional value which ultimately accrues to the providers of equity capital. 206 Flad, M./ Günther, P./ Schittenhelm, F.A. (2012), pp. 57o59 * 3 0 0 - 3 0 0 0 0 0 0 0 - 3 T 1 t t t 0 T T 2 2 1 1 0 ) i 1 ( z z ) i 1 ( z ) i 1 ( z ) i 1 ( z z ) i ( NPV & <?page no="164"?> 8.2 Investment Analysis 163 @ www.uvk.de The criterion of the internal rate of return (IRR) determines the interest rate i* for which NPV = 0. An investment is favorable if the internal rate of return exceeds the required rate of return of the capital employed. This minimum requirement should again be equal to the WACC. In case of several investment alternatives, the project with the highest (non-negative) internal rate of return is selected. We do not want to deal with mathematical issues in calculating the internal rate of return and refer the reader to the available specialized literature. The criterion of the payback period finally determines the time needed to “recapture” the invested capital via the cash inflows. Preferred is the investment alternative that recovers the capital in the shortest time period (payback period). The aim is again to minimize the uncertainty with regard to the timing of the flows by focusing on quick recovery of the capital. No general criteria for the appropriateness in case of only one investment project can be derived. The criterion payback period cumulates inflows generated by an investment and the time values of these inflows are explicitly taken into consideration. Example: Innovations When valuing innovations, which are a significant aspect of sustainable business (see the Principles 4 and 7), the method of cash flow analysis is mostly used to assess the financial implications. The approach will be outlined briefly. The aim is to model an innovation and its future development and to assess profitability with the help of investment criteria from cash flow analysis . The approach involves the following individual steps : 1. Modeling of the inflows and outflows that are tied to the innovation over a number of years with the help of pro-forma financial statements (pro-forma balance sheets and pro-forma profit and loss statements . 2. In the following, determination of the resulting annual (other time periods are of course also possible) cash flows . 3. Valuation of the cash flows with the investment criteria which were introduced here . 4. Double-checking of the results : a) The model based on scenario and sensitivity analysis , b) The solvency of the company with the help of short-term liquidity planning , c) The profitability with the help of a breakeven analysis which compares revenues to fixed and variable costs . <?page no="165"?> 164 8 Financial Management and Sustainability @ www.uvk.de The risk assessment in the context of the cash flow analysis usually involves a scenario or sensitivity analysis, which takes different circumstances as well as positive and negative developments into consideration. However, no explicit risk assessment is conducted. The inadequate analysis of risks can lead to the misallocation of company capital, for example if a company-wide discount rate is used for the valuation of individual projects. This is problematic because riskier investments (or assets) are likely to imply higher cash flows. This can be explained with reference to the above stated premise that more risk leads to higher returns. But this automatically implies that riskier investments (for the same unified discount factor) show better net present values than less risky ones. The same is true for the internal rate of return, which will be higher for the riskier undertakings. As this rate will again be compared to the benchmark of the unified discount rate, the riskier projects are again ranked higher. As it turns out, cash flow analysis already takes the principles of sustainable business management into consideration or is at least in a position to do so. With the help of the future payment structure, long-term developments of the company are incorporated while risks are captured at least theoretically via the discount factor. To sum up, the biggest weakness of cash flow analysis is its purely quantitative focus, which makes it difficult to incorporate qualitative factors. While ecological and social goals can be integrated, they will tend to result in a risk reduction rather than an increase in return. The various measures would have to affect the discount factor, but this is not usually the case in practice. One of the goals of sustainable financial management must thus be a focus on risk management. As part of the risk analysis, negative effects on the sustainability principles discussed above must be worked out carefully in order to avoid the misallocation of capital. 88..22..22 MMooddeerrnn PPo orrttffoolliioo TThheeoorryy The method of d risk-return analysis is part of modern portfolio theory, which goes back to the work of Harry Markowitz 207 from the year 1952. It mainly addresses a weakness of the cash flow analysis tools, namely the lack of an explicit quantification of the risk of an investment. In modern portfolio theory, risk is measured for the most part with the help of the expected variance of the investment returns. Since this risk measure does not yield satisfactory results for many applications, a number of alternative risk measures have been 207 Markowitz, H. (1952) <?page no="166"?> 8.2 Investment Analysis 165 @ www.uvk.de developed over the years. These include beta, lower partial moments or valueat-risk. For these measures, we refer to the relevant specialized writings. 208 The basis for the analysis is provided by three parameters: ) ' i : = Expected value of the return of an investment A i , ) ; i : = Standard deviation of the return to measure the risk of an investment A i , ) > i,j : = Correlation coefficient of the returns of two different investments A i and A j . Since the parameters ', ; and > are unknown, they need to be estimated. In the case of securities, for which modern portfolio theory is most widely used, the estimations are based on empirical return data from the past and the appropriate statistical estimation procedures for the individual parameters. One major insight of portfolio theory is the so-called d diversification effect. Modern portfolio theory in its base model has the advantage that risk can be incorporated explicitly. This offers numerous opportunities for the aspect of sustainability. However, there is a large dependence on past data for the estimation of relevant parameters. In summary it can be stated that modern portfolio theory does not advance sustainability at the company level. Nonetheless, sustainable financial management needs to integrate portfolio theory. Modern portfolio theory provides information about the motives of a major group of stakeholder of the company, namely its investors. The significant capital demand of companies implies that investors and companies are less and less connected. A purely quantitative assessment of the investments is the logical result. This knowledge about the motives of investors must be considered in sustainable business management. More comprehensive approaches explicitly incorporate social and ecological aspects in addition to the parameters risk and return. This increases the number of relevant dimensions in the process of decision making. Such a methodology plays a role for example in the case of sustainable investments, so-called sustainability funds. The core of the approach remains unchanged, but an assessment of the social and ecological performance is difficult, especially since future developments need to be considered. 208 Flad, M./ Günther, P./ Schittenhelm, F.A. (2013), pp. 93o97 <?page no="167"?> 166 8 Financial Management and Sustainability @ www.uvk.de 88..22..33 UUttiilliittyy AAnnaallyyssiiss Utility analysis is concerned with the fact that investment decisions of companies frequently involve more than just financial and quantitative considerations. Especially for complex investment decisions, qualitative features are also important. Utility analysis incorporates this multidimensional set of criteria in the decision making process in the form of a scoring model. It measures the overall utility of an investment alternative with the help of the following steps: 209 1. Establishing the relevant quantitative and qualitative decision criteria. 2. Setting of weights for the criteria. 3. Assessing the criteria with the help of an established scoring system. 4. Calculation of averages to arrive at the utility value of the alternative. The apparent advantage of the utility analysis is the incorporation of features that are not quantitative in nature. At the same time, this is also a weakness of the method, since the establishment of the criteria, their weights and scoring must be done in a subjective manner. And finally it must be noted that risk is not systematically captured or measured. Nonetheless, utility analysis provides a tool for a holistic perspective on the investment decision. Among the methods presented, it thus offers the greatest overlap with the principles of sustainable management. The disadvantages of utility analysis, however, can lead to a problem of acceptance. Cash Flow Analysis is rather popular with many decision makers thanks to its apparently objective precision and frequently constitutes a component of utility analysis. Modern portfolio theory frequently serves as the basis for the investment decisions of institutional investors. Every company with a focus on sustainability must therefore consider this method. In conclusion, all three methods presented here are lacking a sufficient quantification of risk arising from a lack of sustainable development. 88..33 FFiinnaanncciinngg Financing primarily serves to cover the existing demand for capital. In other words, financing assures that the company is supplied with the financial funds needed for investments and the participation in economic activity. The demand for capital of a company arises for example from the procurement of factors of pro- 209 Flad, M./ Günther, P./ Schittenhelm, F.A. (2012), pp. 84o85 <?page no="168"?> 8.3 Financing 167 @ www.uvk.de duction, in other words all positions characterized as fixed assets and current assets, or the ongoing servicing of debt and equity capital, which implies the payment of interest, amortization and dividends. Finally capital is needed to pay taxes. Capital must be raised in order to assure the ability to make needed payments at all times and thus guarantees the independence of the company. Financing must thus assure the provision of liquidity at all times. While securing the liquidity is the main goal of financing, the reduction of the cost of financing is another important consideration. These aims are supported by financial planning, which reduces uncertainty about the company’s future financial situation, as all future payment streams are recorded with their estimated date. This method primarily has the aim of preventing surprising liquidity bottlenecks, which helps to avoid the need for expensive loans or the forced liquidation of assets. It also allows the allocation of free cash towards more lucrative investment opportunities. Sustainable financing basically does not constitute a revolutionary development. The classical business plan which includes project calculations and the application of cash flow analysis as the basis for every capital investment has always focused on the long-term success of the company and thus on sustainability. 210 Two aspects, however, are of particular relevance. First, sustainable financing focuses on soft factors. The position of capital recipient should change from supplicant to partner of the investor. If this was frequently not the case in the past, it was due mostly to arrogance and misguided customer awareness on the part of the providers of capital and not so much to a lack of sustainability in the business model. Second, there should be a search for new models of financing, which could, for example be tied to sustainability figures. Innovative products by the providers of capital could for example focus on option rights to improve business sustainability. This could apply to loan increases or prolongation or even to interest rate reductions. This requires - not least in the context of Basel III - the validation of positive correlation effects between risk minimization or return enhancement and improvements in sustainability. Types of financing can simply be characterized based on their balance sheet treatment and thus their legal status in equity and debt financing. The following key aspects need to be considered when raising capital: 1. Cost of capital 2. Availability of capital 3. Legal aspects 4. Tax considerations 210 Gasior, S./ Schittenhelm, F.A. (2012), pp. 24o25 <?page no="169"?> 168 8 Financial Management and Sustainability @ www.uvk.de A full treatment of these issues including the explicit discussion of various types of financing can be found in the literature. Instead we want to focus again on the link between financing activity and investment. Every time a company receives financing, this is an investment from the perspective of the provider of capital. As discussed in the previous sections, providers of capital will make a sustainable investment if they can benefit. They will thus only provide financing at specific terms to a company that pursues the principles of sustainability if there are no alternative investments which either offer a higher return or have lower risk. It remains true that the overall returnrisk profile of the capital provider must improve. It is interesting to note that specifically funds with a focus on sustainability are currently developing this aspect. It can be argued that companies that pursue sustainability are in fact also more successful in business and thus contribute to an improved performance. Equity capital has the advantage that its availability is not limited. Therefore it stands to reason that a high share of equity capital can be considered an important aspect of sustainable management. However, demands of institutional investors for short-term profitability can turn this idea on its head. This is true in particular for publicly listed companies, but also for start-ups, that seek d venture capital financing. Long-term bank credit meanwhile implies stronger control and thus frequently a more sustainable orientation of the company. In summary it can be stated that the interest in sustainable management of an inv est or ( pr ovi der o f capi tal) an d his will to pur sue supp ort in g measures increases with the length of time for which he has committed his capital to the company. As a disinvestment becomes increasingly simple, the interest in shortterm value increases at the expense of sustainable value creation becomes more pronounced. A large number of recent measures in the capital markets aimed at increasing liquidity and flexibility have unfortunately led in this wrong direction. Example: d Collateralized Debt Obligations Collateralized Debt Obligations (CDOs) are collections of securities or loans aimed at creating more liquidity in the market. This type of securitization enables investors such as banks to pass along its loans to third parties. At the same time, however, the responsibility to check the creditworthiness of the applicant is reduced, since the risk can easily be passed along to third parties. It is sufficient to convince the third party that “in the short term” the risk-return profile is favorable. In this way, the creation of Collateralized Debt Obligations contributed to the financial crisis of 2008. <?page no="170"?> 8.4 Implications for Company Management and Controlling 169 @ www.uvk.de Example: d Initial Public Offerings IPO The situation is similar in the equity market. Simple access to the capital market in the form of an Initial Public Offerings enables the original owners to pass along risks to third parties even if the business model lacks sustainability. The wave of IPOs during the internet boom at the end of the last millennium and the corresponding Dot.com bubble can serve as illustration. Sustainable financial management thus also means the creation of framework conditions that lead to long-term investments of the providers of capital. 88..44 IImmpplliiccaattiioonnss ffoorr CCoommppaannyy MMaannaaggeemmeenntt aanndd CCoonnttrrooll-lliinngg In addition to organization and personnel management, controlling is one of the leadership instruments of a company. It covers all financial aspects. Controlling has massively gained in importance over the past decades and over time was also subject to significant change. The biggest change was caused by the orientation on the so-called d shareholder value, a concept introduced by Alfred Rappaport in the year 1986. 211 In the approach of Rappaport, the orientation towards shareholder value is the most important, if not the only goal of corporate management. The value of the company is measured with reference to the discounted cash flow which is generated in the future. The discount factor is the weighted cost of capital and the cost of equity is estimated using insights from modern portfolio theory (specifically the capital asset pricing model). The shareholder value idea can thus be interpreted as a consistent application of the net present value criterion from investment theory in connection with insights from modern portfolio theory as presented above. While this approach rapidly gained acceptance, critics mostly stress the one-sided focus on monetary values. A first alternative was presented by Robert Kaplan und David Norton 212 who introduced the Balanced Scorecard, which defines additional management goals, 211 Rappaport, A. (1998) 212 Kaplan, R./ Norton, D. (1992) <?page no="171"?> 170 8 Financial Management and Sustainability @ www.uvk.de mostly with a perspective on finance, customers, process and potential. Ultimately the Balanced Scorecard was never successful in replacing the shareholder value idea, since the financial perspective continues to play a major role in the Balanced Scorecard. Basically the Balanced Scorecard is merely an extension of the shareholder value idea. The shareholder value idea was consistently advanced with the notion of Value Based Management. 88..55 SSuussttaaiinnaabbllee FFiinnaanncciiaall MMaannaaggeem meen ntt At this point we want to deal with the questions which were raised in the beginning. The answers to these questions constitute the foundations for our approach to sustainable financial management. Initially it needs to be stated that in our opinion market forces failed to fulfil the allocative function which was expected by many observers. The orientation on quantitative thinking has resulted in o an increase in financial scandals, o an enormous increase in management remuneration, o an increase in financial market volatility. However, the methods discussed here reflect current financial management practice. They are not fundamentally in conflict with business sustainability, but can only support it if appropriate external framework conditions are in place. The alternative would be to completely abandon the idea of shareholder value. Several authors and statements point in this direction. Alternative approaches which are developed in line with this criticism ultimately also stress the profitability of a company. In the end, this also leads to an increase of the shareholder value. More likely, the idea of shareholder value is rather trivial. Obviously the investor or owner of a company has the desire to see investments develop profitably and increase in value. The alternative would be to define value destruction as the company goal. The negative effects described above can also be due to the fact that either company activities are valued incorrectly on a risk-adjusted basis in the short term or that activities which are not sustainable can in fact raise the company value. Both explanations appear possible. The first aspect, short-term mispricing can be in the interest of both management and investors: <?page no="172"?> 8.5 Sustainable Financial Management 171 @ www.uvk.de o The so-called principal-agent problem remained unsolved in many cases. Company management thus had the wrong incentives for the creation of sustainable company value. This is the case particularly if components of the remuneration package are tied to the share price (and thus the current company value) without concern for the long-term preservation of the company value. If the remuneration can additionally be leveraged via options, this effect becomes even more pronounced. Ultimately it is the possibility for mispricing in the short-term, which gives rise to inappropriate management behavior. If this possibility is ruled out, the only sensible option for the management is sustainability. o Short-term mispricing can also be in the interest of investors who want to sell at a maximum price or who want to take money from the company at the expense of others. 213 The root cause is again a lack of transparency which makes it possible to leave buyers in the dark concerning the true riskreturn profile of the company. The second aspect relates to the fact that companies may indeed have increased their value, but at the expense of others, namely by utilizing resources that were obtained at excessively low prices, natural resources that are available for free or at minimal cost or by exploiting labor. It can thus be concluded that the idea of shareholder value will continue to be the goal of company management (possibly under a different name) or one component of a catalogue of targets. 214 From the perspective of sustainable management this leads to the definition of two main tasks: o First of all, all advantages of sustainable management must be clearly presented. And in fact, studies show that companies that adhere to principles of sustainability do not record systematically weaker results than companies that do not share such a commitment. In addition, the transparency of companies must be strengthened further in order to avoid or at least to reduce mispricing. This transparency is created via further advances in risk management. If risk is captured in a realistic fashion, all quantitative models presented here will show adjusted company valuations. 213 At this point the reader should again be reminded that the company itself cannot become richer - it is neither poor nor rich. It merely manages funds (investments) of third parties. 214 In an interview, Alfred Rappaport clarified his concept of shareholder value: “My concept of shareholder value always embraced the sustainable value increase of a company. Unfortunately numerous CEOs merely showcased this postulate as a political statement. They were more concerned with driving up profits and share prices instead of securing the long-term flow of capital.” In Schiessl, Michaela Interview mit Rappaport, A. (2002): „Alle folgten der Meute“, Der Spiegel, 22.07.2002. <?page no="173"?> 172 8 Financial Management and Sustainability @ www.uvk.de o Second, sustainable financial management must identify areas where the desired sustainability does not lead to an increase in the company value. In these cases sustainable financial management can become the trigger for external corrective measures. 88..66 RRiisskk MMaannaaggeemmeenntt The above remarks have elaborated on the central role of risk management in the context of sustainable financial management. Risk management does not only fulfil the purpose of dealing with risk, but additionally allows riskadjusted investment valuations. This reveals future negative effects of today’s actions, which in turn helps to avoid short-term mispricing or provides opportunities for corrective interventions from the outside into the economic process. Risk management is usually broken down into a strategic and an operative component. The strategic part of risk management deals with the integration of risk management into all business processes, the fundamental definition of the treatment of risks, and the provision of the organizational framework for risk management. When defining the goals of risk management, the creation of value for the company and the fulfillment of legal obligations are central components. In addition, social and ecological aspects should be included by setting appropriate targets. Operative risk management is mostly characterized by a four-step process. The first step describes the identification of risks and thus captures systematically all risks the company is exposed to. In the second step, the identified risks are adequately quantified and classified. The complexity and soundness of the methods used follows from the strategic aims of risk management. Since transparency constitutes an important aspect within risk management, the comprehensibility of the method plays a large role when choosing a valuation model. The aim of risk management is to create awareness for risks in the entire company. In the third step measures to manage risks are taken. Fundamentally, the following possibilities exist: risks can be avoided completely if certain technologies are not used. Risks can be reduced if a portfolio strategy is employed and diversification effects are captured. Risk reduction can also play a role in the social sphere, by implementing personnel measures which reduce employee fluctuation in the company. Risks can simply be limited, for example by defining upper boundaries for the use of resources that are not environmentally friendly. For other risks, protection is possible. The strategies include security services to prevent theft, classical insurance products, and derivatives for the <?page no="174"?> 8.6 Risk Management 173 @ www.uvk.de hedging of capital market investments. And finally it is possible to consciously accept risks, because the company is in a position to absorb the financial costs if necessary or because this is part of the business model of the company. The fourth step in the process of risk management is focused on controlling and reporting. This last step provides the transparency which was demanded earlier on and thus allows for a better risk assessment of the company which leads to a fairer valuation of the risk-return profile. In addition to preventing the mispricing of companies, risk management can thus also serve as the basis for risk adequate management remuneration. At a glance It cannot be the task of the field of business management to produce altruistic human beings. Instead the task lies in creating a sustainable economic system in the context of current conditions. In order to improve framework conditions and to force all economic agents to act sustainably in their economic environment, the constant assessment of reality is thus required. It is desirable that management techniques undergo change as a result. Suggestions for further reading Comprehensive introduction to risk management: Lam, J. (2003): Enterprise Risk Management, Hoboken. Detailed explanation of the shareholder value concept: Rappaport, A. (1997): Creating Shareholder Value: A Guide for Managers and Investors, Free Press 1997. Literature Arnold, G. (2008): Corporate Financial Management, 4 th edition , Financial Times Prentice Hall, 2008. Berk, J./ DeMarzo, P. (2011): Corporate Finance, 2 nd edition , Pearson International, Boston, 2011. Blohm, H./ Lüder, K. (2006): Investition. Schwachstellen im Investitionsbereich des Industriebetriebes und Wege zu ihrer Beseitigung, 9 th edition , Vahlen, München. 2006. <?page no="175"?> 174 8 Financial Management and Sustainability @ www.uvk.de Eayrs, W./ Ernst,D./ Prexl S. (2007): Corporate Finance Training, Schaeffer- Poeschel, Stuttgart, 2007. Ermschel, U./ Möbius, C./ Wengert, H. (2009): Investition und Finanzierung, Physica-Verlag, Heidelberg, 2009. Flad, M./ Günther, P./ Schittenhelm, F.A. (2012): Finanzmanagement, Pro Business, 2012. Flad, M./ Günther, P./ Schittenhelm, F.A. (2013): Investments, Pro Business, 2013. Gasior, S./ Schittenhelm, F.A. (2012): Mehr als nur ein Modewort - Wie nachhaltige Finanzierungskonzepte in Zukunft aussehen könnten, in VentureCapital Magazin, July 2012, 24-25. Günther, P./ Schittenhelm, F.A. (2003): Investition und Finanzierung, Schaeffer- Poeschel, Stuttgart, 2003. Kaplan, R./ Norton, D. (1992): The Balanced Scorecard - Measures that Drive Performance. In: Harvard Business Review. 1992, January/ February, 71-79. Kruschwitz, L. (2011): Investitionsrechnung, 13 th edition , Oldenbourg, München, Wien, 2011. Lam, J. (2003): Enterprise Risk Management, Hoboken, 2013. Markowitz, H. (1952): Portfolio Selection, Journal of Finance, 7/ 1952, 77-91. McGuigan, J./ Kretlow, W./ Moyer, R.C. (2009): Contemporary Corporate Finance, South-Western, 2009. Megginson, W./ Smart, S./ Lucey, B. (2008): Introduction to Corporate Finance, South-Western, 2008. Perridon. L./ Steiner, M. (2009): Finanzwirtschaft der Unternehmung, 15 th edition , Vahlen, München, 2009. Rappaport, A. (1997): Creating Shareholder Value: A Guide for Managers and Investors, Free Press, 1997. Rappaport, A. (1998): Shareholder Value, Schäffer-Poeschel Verlag Stuttgart, 1998. Ross, S./ Westerfield, R./ Jordan B. (2011): Fundamentals of Corporate Finance, 9 th edition, McGraw-Hill, 2011. Ryan, B. (2007): Corporate Finance and Valuation, Thomson, 2007. Spremann, K. (1996): Wirtschaft, Investition und Finanzierung, 5 th edition, Oldenbourg, München, Wien, 1996. von Flotow, P./ Häßler, R./ Kachel, P. (2003): Nachhaltigkeit und Shareholder Value aus Sicht börsennotierter Unternehmen. In: von Rosen, R. (ed.): Studien des Deutsches Aktieninstituts, Heft 22, 2003. <?page no="176"?> 99 CCoonnttrroollliinngg by Ulrich Sailer Learning Objectives The readers ) know tasks and relevance of controlling, ) are familiar with the differentiation between simple, complicated and complex systems and know how this influences the appropriate procedures, ) know the approach of holistic problem solving and know how it differs from traditional solutions, ) are aware of the limits of traditional accounting and controlling which focus primarily on key figures and know the main characteristics of sustainable controlling. List of Key Terms ) Complicated Systems ) Complex systems/ Complexity ) Modeling/ Model ) Self-organization 99..11 WWhhaatt iiss MMeea anntt bbyy tthhe e TTe errmm CCoonnttrroolllliinngg? ? Two misconceptions about controlling need to be corrected at the outset: First misconception concerning controlling Frequently controlling is associated only with control, even though the aspects of management and regulation are far more important. While control is a component, controlling entails numerous other tasks. Since control usually has a negative image, after all control implies that the other person cannot be trusted or is incapable, controlling is also often associated with distrust or an attitude of superiority. But controlling does not mean control alone, instead it involves target formation, planning to reach that target as well as management, which means overseeing the implementation, analyzing deviations and getting involved if needed. <?page no="177"?> 176 9 Controlling @ www.uvk.de Figure 9-1: Components of controlling Second misconception concerning controlling The second error relates to the assumption that controlling is apparently only the task of the controller. But obviously everyone who does not just strictly follows orders, but instead can choose among alternatives, needs to plan his approach and his targets, make decisions, supervise their implementation and intervene and correct if things develop unfavorably. For the controller this is the focus of his work. The controller’s responsibility across the entire company is to assure a purposeful, planned and well informed approach. In this function the controller takes on the role of economic conscience of the firm. Figure 9-2: Controlling as product of manager and controller <?page no="178"?> 9.1 What is Meant by the Term Controlling? 177 @ www.uvk.de Economic decision making is ultimately in the hands of the management. But the controller provides the necessary and relevant information and thus is partly responsible for the achievement of targets. He enables the top executives to be even better at target formulation, planning and management. Controller and manager work together closely and a successful cooperation is indeed a prerequisite for business success. In addition to the controlling information, the manager is familiar with the specific decision situation, knows the persons involved and can contribute experience gained in similar situations. A rather broad consensus about controlling and the tasks of a controller exists and can be summarized in the controller mission statement of the IGC International Group of Controlling 215 : o Controllers assure transparency concerning strategy, result, finances and processes and in that way contribute to increased economic efficiency. o Controllers coordinate individual targets and plans in a holistic fashion and organize forward-looking reporting across the organization. o Controllers moderate and shape the management process of target definition, planning and managing, so that every decision maker can act in a goaloriented fashion. o Controllers provide the required service of maintaining the needed business data and information. o Controllers design and maintain the controlling systems. Controllers and controlling departments can be found in all mid-sized and large companies. But why was the function of controller such a global success? Especially in the recent past the importance of controlling has increased further and controlling departments are frequently being enlarged as a consequence. To make a company successful, to provide clear targets, strategies and plans, to make sure that processes are functioning and to provide employees with needed information are not only controlling tasks, but fundamental obligations of management. This is true for the managing director or CEO as well as for the head of a business unit or product area, but also for the manager with responsibility for individual functional units such as distribution or production. Why don’t the managers take care of these things themselves? They simply lack the necessary time and frequently also the needed expert knowledge about methodologies to complete all these tasks in a responsible manner. The existence of controlling thus results from a division of labor at the management level. To implement an investment calculation, to determine minimum prices, to develop inte- 215 http: / / www.igc-controlling.org/ EN/ _leitbild/ leitbild.php <?page no="179"?> 178 9 Controlling @ www.uvk.de grated corporate planning systems or to analyze a make-or-buy decision requires significant methodological knowledge, which many managers simply do not possess. Given the need for experts, who have knowledge and provide recommendations to management, the division of labor results in specialization. Nonetheless it can be observed that the importance of controlling has again increased significantly over the previous two decades. On the one hand this is due to the fact that management increasingly needs support from controlling as a result of globalization, the enormous increase in information processing capacities caused by rapid advances in information technology and an increasingly dynamic business environment. The vast amount of information, quick changes in information and numerous demands to provide detailed information overwhelm management. On the other hand, the increased relevance of controlling was caused by the companies themselves. Many companies reacted to changing framework conditions with an increasingly decentralized organization and with the removal of hierarchy levels. The increased demand for management tasks had to be shouldered by fewer managers. It is this gap which enabled controlling to gain more and more influence. The reaction to a lack of management capacities was an expansion of controlling systems, intensified information procurement, comprehensive analyses and extensive reporting. Ultimately this led to the replacement of individual and personal leadership by managers with an anonymous system to measure success based on key performance indicators and comprehensive reports. In that way, company leadership became more objective and reliable, but also less personal and more technocratic. 99..22 CCoonnttrroolllliinngg TTa asskkss If management confirms the following statements, controlling has fulfilled its task: Management perspective : Controlling has provided : 1. We know the targets which the company wants to achieve in the long term and are convinced that they are reasonable and feasible! transparent corporate goals and visions 2. We fundamentally know the way to achieve our vision and are convinced that the measures are basically valid! clear corporate strategy (do the right things) <?page no="180"?> 9.2 Controlling Tasks 179 @ www.uvk.de 3. We know where we stand on our way towards accomplishing the vision and it is clear which operative measures will support the strategy! transparent strategy implementation, for example with the help of a balanced scorecard 4. The operative targets of the company, particularly with regard to result, profitability and costs are known, consistent and realistic when considered at the level of the different sections, departments and teams! consistent and implementable operative corporate planning (do things right) 5. We know whether we are on schedule concerning the operative targets, which products and segments are profitable and how different measures and ideas affect the operative result! management reports targeted at the recipients and case by case analysis and forecasts 6. We know the risks we are taking and have appropriate measures in place in order to limit those to the desired level! comprehensive risk management systems Table 9-1: Controlling tasks The task of controlling will remain incomplete if it is conducted exclusively at the headquarters and all information and management functions are concentrated there. Controllers depend to a large degree on the information obtained from the operative functions and units and their knowledge about the operative processes and approaches so that they can communicate in a way that is understood by the operative units. Consequently major companies assign to the central units predominantly tasks such as strategic controlling, establishing a unified controlling method, coordination and integration of corporate planning, controlling of all equity investments and the surveillance of the broader corporate environment. Decentralized controlling tasks are found at the various divisions or broken down by function as sales controlling, procurement controlling, production controlling, project controlling, investment controlling and so forth. <?page no="181"?> 180 9 Controlling @ www.uvk.de In practice, the tasks of a controller are distributed as follows: Figure 9-3: Controlling tasks in practice (Source: Weber (2008), p. 97) 99..33 FFr room m T Trraad di ittiioon na all t to o S Suusst taaiin naab bl le e C Co on nt tr rool ll li inng g What differentiates sustainable from traditional controlling? Even if this may initially come to mind, the difference is not in the time horizon. Traditional controlling also has a fundamental long-term perspective. This is particularly true for strategic controlling. Instead the difference lies in an integrated consideration of economic, ecological and social aspects. The latter two are not simply binding constraints, which act as guard rails and reduce the scope of management but leave the ultimate goal, the maximization of purely economic targets, unchanged. Sustainable controlling no longer asks for the major target, for minor targets and constraints. In the end the company needs to be maintained as a system that can continue to exist. And no viable system maximizes individual targets. Just as a physician checks numerous blood values and aims at bringing them all to a healthy level, the controller needs to steer the numbers that are important for a viable company into a sound range. In the field of sustainable controlling, which is still in its infancy, this transformation from hierarchy of targets to balance of targets is not shared unanimously. 216 The closer the tasks are to the operations, the easier it is to define clear targets. At the company level, considering the issue of viability, the balanced treatment of different targets is recommended. 216 Weber, J./ Georg, J./ Janke, R./ Mack, S. (2012), p. 73. They demand that the hierarchy between economic, ecological and social targets must be determined before a controlling system can be implemented. <?page no="182"?> 9.3 From Traditional to Sustainable Controlling 181 @ www.uvk.de Example: BMW AG “It is the claim of BMW Group to substantiate the proposition of sustainability and integrate it in to daily business life. The targets are clearly defined: It is essential to use resources gently and efficiently within the company, to recognize risks and to strengthen the Group’s reputation through responsible interaction with associates and society.” 217 In comparison to a one-dimensional treatment that ignores numerous interactions, the field of controlling now gains d complexity. A management system that only takes its information from accounting data, such as the well-known DuPont system, is no longer sufficient. The causal relations that dominate in accounting and that can be used to derive costs, company result and return cannot simply be expanded to include ecological and social criteria. Instead of reliable causal chains that are suitable for the purpose of prediction, the controller is now faced with multi-faceted networks of effects. Factors such as employee satisfaction, return, environmental damage, ethical procurement standards or innovative power are linked inseparably and characterized by feedback loops. Such a system can be understood at best approximately, but due to the dynamics of change, results are almost unpredictable. The meaningful incorporation of d complexity is thus an important insight from sustainability. We can thus comprehend sustainable controlling as follows: Insight Sustainable controlling integrates economic, ecological and social targets to establish holistic management at the company level. This assures the long-term viability of the company. Sustainable controlling has the ability to deal adequately with the d complexity of the company environment and the company as a social system. This d complexity is present in the tasks of the managers, in the environment as well as at the company. But there is no need to reinvent controlling. A lot of procedures are appropriate and well established, but other aspects are not as suitable for d complex systems and new approaches are needed. It is important to understand the defining features of a system in order to take suitable measures. 217 http: / / www.bmwgroup.com/ d/ 0_0_www_bmwgroup_com/ investor_relations/ fakten_zum_unternehmen/ nachhaltigkeit.html, accessed on 16.02.13, translated <?page no="183"?> 182 9 Controlling @ www.uvk.de We can distinguish three types of systems: simple systems complicated systems complex systems Simple systems consist of a limited number of factors. Such systems are easily comprehended and their workings are understood. This is true even if they change. d Complicated systems in contrast consist of so many factors that understanding the system requires a major effort. But the system is stable and therefore the effects of changes that come from the outside are predictable in principle. d Complex systems also consist of many factors. But even major efforts are inadequate to obtain a detailed understanding, since the system is constantly changing. Instead, events happen as surprises and cannot be predicted. Companies must deal with all three types of systems. Figure 9-4: Types of systems and competencies (source: Sailer, U. (2012), p. 129; Kruse, P. (2009), p. 41.) Examples for simple, e complicated and e complex systems: Simple systems: accounting for standard transactions, controlling of incoming goods, inventory procedures Complicated systems: software programming, development of a machine, production planning Complex systems: development of a company strategy, heading a major project group, leading a team, long-term client retention, managing a company <?page no="184"?> 9.3 From Traditional to Sustainable Controlling 183 @ www.uvk.de Depending on the type of system, specific and appropriate approaches are recommended: 218 - Managing simple and stable systems: necessary steps can be planned in detail in advance and implemented accordingly. An example is the machining of a workpiece on an assembly line. - Reaction in the case of simple and instable systems: if deviations from the planned procedure occur, these are recognized and an adequate reaction is possible. An example is the interruption of the production process due to a delay in the delivery of raw materials. - Managing complicated systems: a binding and comprehensive plan replicates the system in detail. On this basis it is possible, for example, to build a machine or to install the security system of a power plant. - Systems design and self-organization in the case of complex systems: the system cannot be regulated, since its development is not predictable. It is also impossible to react to changes, since the system is too complex. Since management form the outside is bound to fail, the system itself must be enabled to deal with change. Example: the central product development is closed down due to a lack of success and responsibility is transferred to the individual business units. Training measures are no longer centrally provided by the personnel department, but the employee receives a budget for his responsible use. Employees are not given directions, but expectations are discussed and the necessary competencies are granted. Insight Both controller and manager need to direct, regulate, react and enable a system for self-organization. A frequent cause of failure is the inappropriate handling of d complex systems. Often an attempt is made to conquer d complexity with the help of detailed regulations. Examples include detailed company planning in a very dynamic market or the precise and binding planning of a major project. In d complex systems there is no need for even more detailed analysis, instead the pattern of basic interrelations and interdependencies must be recognized. In this regard, the method of d modeling and simulation can be helpful. 218 Sailer, U. (2012), pp. 128o31 <?page no="185"?> 184 9 Controlling @ www.uvk.de Insight Sustainable controlling includes the ability to recognize the character of a system, to determine the most appropriate approach and to apply helpful methods. Example for dealing with complex systems: a soccer game No coach would even think about pre-planning an entire game second by second and then expect that at the beginning of minute 69 the planned lateral pass actually happens. Instead the coach needs to enable his players to independently and creatively make the right decisions on the field. It is the player who decides how to play in a given situation and not the coach. What the coach provides is the lineup and the playing tactics, which provide a framework and orientation. At the same time, there are solid rules in soccer as well, which assure an orderly game. For standard situations, such as a corner kick or a free kick, the game is interrupted and therefore resembles a stable system for a moment. Now previously practiced routines dominate. It is the task of the coach to identify suitable players, train them well, nominate them for play as appropriate, develop an order and a playing system for the team and, if necessary, get involved from the sideline. Much of this resembles the task of a manager. 99..44 HHool liisstti icc SSo olluutti ioonnss We are able for the most part to deal adequately with simple and complicated systems. This is not the case for complex problems. A six-step solution process was developed at University of St. Gallen. 219 It is applied repeatedly to improve the solution after each iteration, even in the presence of complexity. Once the aim has been established, the problem needs to be d modeled. While a model is only a limited depiction of reality, it focuses on the major interactions and is thus more easily understood. When setting up the model, all influential factors are identified and the relations between them are determined. The factors can have a strong or weak, positive or negative, quick or slow influence. Once the model has been built, it can be used to assess the roles of the individu- 219 Ulrich, H./ Probst, G. (1990), S. 103ff. <?page no="186"?> 9.5 The Limits of Accounting in Sustainable Controlling 185 @ www.uvk.de Figure 9-5: 6 steps of holistic problem solving; (source: following Ulrich, H./ Probst, G. (1990), p. 114.) al factors in the complete system. To establish such a model, the use of adequate modeling software is required. 220 The simulation allows the identification of factors that are suitable for corrective action or that help to determine the state of the system. Certain factors can be expected to show an immediate reaction, while others take a long time to become useful. But a system can also be shaped by adding additional factors. For example the ability to d selforganize can be improved in that way. However, use of a model does not guarantee that the results of interventions can be anticipated with precision. This is impossible in complex systems. It is possible however, to detect typical behavioral patterns and to obtain a better understanding of the system. The software-based simulation allows the assessment and optimization of individual measures, ahead of their practical implementation. 99..55 TThhee LLiimmiittss ooff AAccccoouunnttiinngg iinn SSuussttaaiinnaabbllee CCoonnttrroolllliinngg A manager will be able to use discussions with employees, customers and suppliers to gain a solid understanding about the chances of success of a company, about its strengths and weaknesses. Nonetheless quantitative data which describe the success and current position of the company are absolutely essential. The positive feedback of customers about products must ultimately be reflected in order volume and sales. The announcement of the division head that processes will be streamlined needs to be reflected in lower costs. Thus the data provides facts which confirm the numerous subjective impressions - or fail to do so. But these quantitative facts also entail significant dangers. 220 Suitable for example are the sensitivity model Frederic Vester, the iModeler of Consideo GmbH or System Dynamics Vensim of Ventana Systems Inc. <?page no="187"?> 186 9 Controlling @ www.uvk.de The first danger results from the huge workload of management. The quantitative information from controlling are no longer just used to assess and validate the subjective impressions from discussions with employees, customers or suppliers, but they replace them. The manager reaches his decisions predominantly on the basis of numbers which he receives as monthly reports from controlling. The orientation on numbers even goes beyond accounting. What a customer truly wants is unknown. At the same time the detailed results from a customer satisfaction survey are available. And if it is of interest how employees feel about the latest restructuring, this can also be ascertained with the help of a survey about employee satisfaction and the comparison with the values from the previous year. Of course it would also be possible to simply talk to the employees. This approach might be more subjective and the manager needs to allocate more time, but the information will be more qualified and comprehensive. At the same time, management keeps employees informed and expresses its appreciation in this way. If employees are directly informed in the case of unpleasant decisions, they are more likely to support them. Unlike the completion of a standardized questionnaire, such personal engagement of the management motivates employees. Problems also arise if the management is not familiar with the way the data was compiled. A good controller has the ability to provide data in a way that meets management expectations. If the manager expresses his joy about the increase in sales compared to the previous month, it is important that the cause was not merely the correction of a bookkeeping error from the previous period. If management praises the division head for the lowering of costs in his division, this may have simply been caused by a revision of internal transfer prices by the controlling department. And finally comparisons to the previous year frequently have little explanatory power, since the company was restructured in the interim. As a consequence the cost centers were newly designed. One product area may show lower costs compared to the previous year, since product-specific research was outsourced to a new centralized development area. Management should know in all cases how controlling compiles its data. In order to avoid the incorrect interpretation of data, controlling and management need to communicate well. Accounting data is also limited by the fact that only business transactions in an accounting sense are captured. Obviously this is only a fraction of the data relevant for management. Sustainable controlling needs to expand the management concept based on accounting data and include information specific to clients and employees. This is the only way to satisfy the economic goal which requires satisfied customers and committed employees. To fulfil its social and ecological responsibility, controlling also needs to include methods for measur- <?page no="188"?> 9.6 Controlling Based on Key Figures versus Sustainable Controlling 187 @ www.uvk.de ing the effectiveness in the social and ecological domain. The economic, social and ecological targets are thus integrated in a unified management concept. While concepts for managing ecological and social aims are already utilized today, they tend to be separate from the economic management. 221 But sustainability requires that these criteria are integrated in the management concept. Not everybody who publishes a sustainability report also manages the company in a sustainable fashion. An additional complication arises from the fact that the accounting data is typically short-term. The relevant period is usually a month, a quarter or a year, but the goal is sustainable success. There can frequently be contradictions between the short-term data and the goal of sustainable success for the long-term. In the short term it is possible to cut costs and raise earnings and important return figures by cutting investments. Research and development projects are reduced, personnel development measures and training are reduced and the advertising budget is cut. This will be reflected in an improved result for the current fiscal year. This may have a positive effect on the company rating or the remuneration or the prolongation of a management contract, but it is likely to weaken the long-term viability of the company. 222 Against this backdrop the frequently criticized, but also poorly understood shareholder value approach appears promising. It has a long-term orientation and could prevent the short-term optimization of results if used appropriately. 99..66 CCoonnttrroolllliinngg BBaasseed d oonn KKeeyy FFiigguurrees s vve errssuuss SSuussttaaiinnaabbllee CCoonnttrroolllliinngg We have understood that linear planning and strictly causal thinking is unsuitable in d complex systems. Instead systemic thinking is needed. This insight should also be reflected in the practice of controlling. Dominant today are mostly mechanistic controlling systems that have a heavy focus on accounting data and the maximization or achievement of earnings data. This type of controlling, which is based on key figures, will be contrasted in the following section with a systemic and sustainable approach to controlling. Figure 9-6 describes major features of these two different approaches. In sustainable controlling the idea of comprehensive control of the system is abandoned. A company does not resemble an airplane that can be directed safely from the cockpit with all relevant information and controls at hand. We 221 Schaltegger, S. et al. (2007), p. 12 222 Müller, A. (2009), pp. 236o237 <?page no="189"?> 188 9 Controlling @ www.uvk.de Figure 9-6: Controlling based on key figures versus sustainable controlling (source: Sailer, U. (2012), p. 306, Gadatsch, A./ Mayer, E. (2006), p. 9) have seen that self-directed operative units can deliver the best results. The task of management is to enable the team. It needs to provide the personnel and put all organizational and cultural framework conditions in place, which allow the operative units to do their job. In this case the task of controlling is not to identify those that are responsible for deviations from the plan after the fact, but instead it needs to provide timely forecasts that incorporate changed environmental conditions and develop recommendations concerning the resource needs of the company. This d self-organization changes the role of all employees. A good manager is not the person who knows everything; rather he is the person who utilizes his employees in the best possible way. Controlling has to make a contribution <?page no="190"?> 9.7 Applied Sustainability Controlling 189 @ www.uvk.de towards the ability of all employees to do their job in the best possible way. For that purpose, they need to be given necessary information and resources. This is to enable employees and decentralized units to engage in “self-controlling.” Just as the personnel department is not solely responsible for personnel management, controlling does not have the sole responsibility for controlling the management. Instead all employees must be empowered to independently contribute to this management function. Employees who set their own targets and decide to implement certain measures are also able to assess their own contributions. To do so, they need suitable tools and information. Controlling takes on the role of providing information, coordinating and moderating. This implies a change in the role of the controller. The old role of specialist with accounting skills who focuses on internal aspects needs to be replaced with a new job profile of a generalist with an external orientation who considers the complete system in his work. 99..77 AApppplliieedd SSuussttaaiinnaabbiilliittyy CCoonnttrroolllliinngg In the year 2011, the WHU Otto Beisheim School of Management presented a study about the future of controlling. According to the study, 41% of all controllers expect a significant increase in the relevance of sustainability over the next years, 52% expect a moderate increase and 7% a small increase. 223 Explanatory factors for this high relevance are the massive public pressure as well as the so-called snowball effect. It means that customers also demand sustainability from their suppliers. The producer of sporting goods Puma is responsible for only about 6% of all environmental costs of his products. 94% accrue along the supply chain, especially at the suppliers. 224 Securing the ecological sustainability thus requires a perspective that extends beyond the own company. Finally comprehensive sustainability reports support a focus on sustainability goals which therefore are increasingly relevant for ratings as well. Many of the tasks needed in this context are among the core competencies of controllers: the definition, measurement and reporting of suitable target variables. But numerous controllers remain reluctant due to a lack of knowledge when it comes to target variables outside the realm of business. 225 To date this is neither part of a classical education in business nor was it demanded from controllers in the past. For that reason controllers frequently consider sustainability with a good dose 223 Weber, J./ Goretzki, L./ Meyer, T. (2012), p. 242 224 Zeitz, J. (2012), p. 21. 225 Weber, J./ Goretzki, L./ Meyer, T. (2012), p. 247 <?page no="191"?> 190 9 Controlling @ www.uvk.de of skepticism. The future targets for sustainability controlling are variables such as measurements of resource use, value added per ton of CO 2 emissions, company carbon footprint or the quantification of the value contribution for society. While in some companies these tasks are the responsibility of specifically established sustainability teams, other companies assign them to controlling. 226 The practical challenges thus are not so much related to the development of mission statements for sustainability, which are accepted by society and give the company a license to operate. Instead adequate methods and controlling systems need to be developed, which assure the implementation of sustainability at various functional areas and hierarchical levels. 227 All too frequently the focus of sustainability controlling is still on meeting diverse external and internal requirements. For that reason, the international association of controllers ICV has stressed the need to consider the opportunities arising from sustainability. Figure 9-7: 5 steps towards sustainable success (Source: following Internationaler Controllerverein, http: / / www.controllerverein.com / Green_Controlling.150142. html Accordingly controllers should also put a greater focus on realizing opportunities which arise from sustainable value chains, sustainable products or new business models. 228 226 Weber, J./ Georg, J./ Janke, R./ Mack, S. (2012), pp. 91o92 227 Georg, J./ Ströhm, C. (2012), pp. 249o250 228 A forward-looking perspective was already provided in Chapter 6, Innovation Management and Sustainability <?page no="192"?> 9.7 Applied Sustainability Controlling 191 @ www.uvk.de At a glance Sustainably managed companies require sustainability controlling. Controlling that is based on stringent causal relations, only considers quantitative information and is intent on providing specific recommendations will fail in d complex systems. In applied work the main current task is the integration of ecological and social key indicators into prevailing management systems. No mature and easily explained concepts are available for the next step, the establishment of a systemic and sustainable controlling environment. Apart from the expansion of the system of key figures, this step will continue to provide ample opportunities for improvement to managers and controllers as well as the academic community. Suggestions for further reading Accessible textbook about controlling, also from a sustainable view: Merchant, K./ Van der Stede, W. (2011): Management Control Systems o Performance Measurement, Evaluation and Incentives, Prentice Hall. An insight into problem-solving from a systemic perspective: Ninck, A./ Bürki, L./ Hungerbühler, R./ Mühlemann, H. (2014): Systemics: Viable Solutions for Complex Challenges, Heuris Publishing. Literature Gadatsch, A./ Mayer, E. (2006): Masterkurs IT-Controlling, 3 rd edition , Wiesbaden. Georg, J./ Ströhm, C. (2012): Das unternehmerische Nachhaltigkeitsleitbild und dessen Umsetzung und Steuerung in relevanten Funktionsbereichen, in: Zeitschrift für Controlling und Management, Heft 4/ 2012, 249-254. Henzler H. (1974): Der Januskopf muß weg. In: Wirtschaftswoche, 28. Jg., 1974, H. 38, 60-61. International Group of Controlling (2012), http: / / www.igc-controlling.org/ DE / _leitbild/ leitbild.php Internationaler Controllerverein, http: / / www.controllerverein.com/ Green_ Controlling. 150142.html <?page no="193"?> 192 9 Controlling Kruse, P. (2009): next practice - Erfolgreiches Management von Instabilität. Veränderung durch Vernetzung, 4 th edition , Offenbach. Losbichler, H. (2012): Das Nachhaltigkeits-Paradoxon des Shareholder Value, in: Zeitschrift für Controlling und Management, 5/ 2012, 266-270. Müller, A. (2009): Grundzüge eines ganzheitlichen Controlling, 2 nd edition , München. Sailer, U. (2012): Management. Komplexität verstehen: Systemisches Denken, Business Modeling, Handlungsfelder nachhaltigen Erfolgs, Stuttgart. Schaltegger, S. et al. (2007): Nachhaltigkeitsmanagement in Unternehmen, herausgegeben durch das Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit u.a., Berlin/ Lüneburg. Ulrich, H./ Probst, G. (1990): Anleitung zum ganzheitlichen Denken. Ein Brevier für Führungskräfte, 2 nd edition , Bern/ Stuttgart. Vester, F. (2008): Die Kunst vernetzt zu denken - Ideen und Werkzeuge für einen neuen Umgang mit Komplexität, 7 th edition , München. Weber, J. (2008): Fähigkeitsprofil von Controllern - Kann die Empirie die Notwendigkeit einer verhaltensorientierten Perspektive des Controllings stützen? , in: Zeitschrift für Controlling und Management, Sonderheft 1/ 2008 - Controlling und Verhalten, 95-103. Weber, J./ Georg, J./ Janke, R./ Mack, S. (2012): Nachhaltigkeit und Controlling, Weinheim. Weber, J./ Goretzki, L./ Meyer, T.: Nachhaltigkeit als neues Aufgabenfeld für Controller - Ergebnisse der WHU-Zukunftsstudie, Zeitschrift für Controlling und Management, Heft 4/ 2012, 242-248. Zeitz, J.: Wir brauchen Ökokalorien, Interview in der WirtschaftsWoche vom 26.11.2012 „Green Economy“, 20-21. Zünd, A. (1985): Der Controller-Bereich (Controllership). In: Probst/ Schmitz- Draeger (eds.): Controlling und Unternehmensführung. Bern/ Stuttgart, 28-29. <?page no="194"?> 1100 IInnssttrruummeennttss ffoorr IImmpplleemmeennttiinngg BBuussiinneessss SSuussttaaiinn-- šš˜˜xxiitty y by Thomas Barth and Steffen Scheurer Learning Objectives The readers ) understand that a differentiated perspective is necessary when discussing business sustainability in the context of sustainable management, ) are familiar with the main prerequisites for the successful implementation of sustainable management, ) are exposed to controlling tasks needed for implementing sustainable management, ) are familiar with a number of selected instruments that can concretely support controlling in implementing sustainable management, ) are given an initial overview of sustainability reporting. List of Key Terms ) Situational understanding of sustainable management ) Sustainability assessment ) Carbon controlling ) Sustainable scorecard ) Sustainability reporting 1100..11 IInnttrroodduuccttiioonn The aim of this contribution is to share some thoughts about the successful implementation of sustainable management in applied business practice. Especially the contribution of controlling will be considered one more time. Our considerations are tied in with lines of thought which were already presented elsewhere in this volume, especially the definition of sustainability presented by Sailer. In his definition of sustainability, Sailer draws on the broadly accepted terminology of the Brundtland Commission from 1987 and on the Triple Bottom Line approach of sustainability which was developed in 1992 at the Rio Conference. <?page no="195"?> 194 10 Instruments for Implementing Business Sustainability @ www.uvk.de According to this definition, sustainable development is characterized by an economic, a social and an ecological dimension. According to the Triple Bottom Line approach, all three dimensions should be given equal weight when implementing sustainable development. Thus Sailer argues as follows: “Ecological and social targets are not merely additional guidelines for the company, further guard rails, which reduce the scope of management even further… Not individual targets are maximized, but instead a balance of targets is sought …” (Sailer, Sustainability, p. 28) The importance of a consistent implementation of these ideas in economic life becomes evident when the increasing scarcity of resources is considered. In several cases the scarcity of certain raw materials led to extreme price increases in the market. This was observable clearly in the previous two years in the case of rare earths needed in the production of electronics. In the extreme, such increasing scarcity of raw materials can limit entire production chains (Financial Times Deutschland, Ressourcenknappheit, 2012). This typical example already demonstrates that over the long term there can be no contradiction between the economic goals of companies and the ecological and social dimensions of sustainability. Over short periods of time, however, it is possible to argue that such a contradiction can emerge. As an example, from a purely financial perspective, it might take many years before investments in environmentally friendly technologies or production processes are amortized. For that reason, the concrete implementation of business sustainability at a company is not only concerned with finding the right balance among the three aspects, but also about balancing the time horizons of the effects considered. This becomes even more important since capital markets continue to view companies from the perspective of their owners as a means to increase returns. In other words: a means to allow increased consumption. If such a perspective is taken, business sustainability is not an end in itself, but rather a means to increase the company value. This perspective cannot be ignored when discussing the successful implementation of sustainable management. At a minimum, the leadership team of publicly listed companies depends on the views of their investors and the capital provided. Sustainable management can thus only be implemented successfully if the providers of capital recognize the potential for higher returns at least in the medium term. The importance of the business sector for globally sustainable development was made clear at the most recent United Nations Conference on Sustainable Development in Rio in 2012. It assigns companies a decisive role for the successful implementation of sustainable development. For that reason, 193 countries <?page no="196"?> 10.2 Implementing Sustainable Management at the Company Level 195 @ www.uvk.de for the first time reached an agreement about the Green Economy. Sustainable consumption and production were recognized as the basis for ecological sustainability. It was furthermore agreed that sustainable production needs to be supported by economic measures with an ecological orientation. This development is currently also taken up by the Federal Government of Germany. The former Federal Minister for Education and Research Annette Schavan and Federal Minister of the Environment Peter Altmaier want to speed up the transformation of the economy towards a Green Economy with a joint initiative. In September 2012, 450 experts were invited to a two-day conference in Berlin to advance these ideas. At this conference Peter Altmaier, being aware of the mechanisms at work on capital markets, urgently stressed the economic advantages of a Green Economy: “The market opportunities are huge: energy efficiency and the careful use of raw materials are increasingly becoming competitive factors; environmental and efficiency technologies are growth drivers along the entire industrial value chain.” (Federal Ministry for Education and Research, press release 109/ 2012, Green Economy - Ein neues Wirtschaftswunder, 2012). As we take a more detailed look on the following pages at the successful implementation of sustainable management and the role of controlling, we will initially determine how the three dimensions of sustainability can be implemented in a meaningful way at all levels of management. A focal point will be to assess how the implementation can lead to a competitive advantage and thus also incorporate the perspective of investors in a meaningful way. The following considerations will be based strongly on the idea that ecological and socially responsible business models must lead to an increase of the company value at least over the medium to long term. This perspective leads to the requirements for a successful implementation of sustainable management, which are presented briefly in Chapter 10.2. In Chapter 10.3 we will look at a few examples of controlling instruments that can be used to support management in implementing business sustainability. In the following we will look at several selected examples to demonstrate how investors and other company stakeholders can be kept informed about the implementation of business sustainability. 1100. .22 IImmpplleem meen nttiinngg SSuussttaaiinnaabbllee MMaannaaggeem me en ntt aatt tthhee CCoomm- ppaannyy LLeevve ell Understanding business sustainability from an entrepreneurial perspective not as an end in itself, but realistically as a means to increase the company value, leads to the first prerequisite for successful implementation: business sustainability must <?page no="197"?> 196 10 Instruments for Implementing Business Sustainability @ www.uvk.de lead to a tangible competitive advantage for companies, ideally measurable value increases. This position should not be taken as far as some authors have, who are of the opinion that social and ecological aspects should only be considered in the activities of the company if they yield economic value added (Weber/ Georg/ Janke/ Mack, 2012, p. 17). In our considerations, we start from the Triple Bottom Line approach of sustainability but always maintain a clear focus on the economic validity of implementing business sustainability at the company level. This is also reflected in our situational understanding of business sustainability. A second prerequisite for the implementation of sustainable development is the anchoring of sustainable management at all hierarchy levels of the company. Starting with the normative level, sustainable management must be present in the formulation of sustainable competitive strategies as well as in operative management decisions concerning the concrete implementation at the divisional level. A final and third decisive prerequisite for a successful implementation of sustainable management lies in a situational understanding of sustainable management. Sustainable management is not of equal importance for all companies. Of primary importance is the context in which the company operates. Two of the previously mentioned prerequisites will be presented in greater detail in the following section, since they have important implications for the controlling tasks in the context of a successful implementation of sustainable management. We do not review the economic dimension, since controlling has always been concerned with the measurement of targets and results. 1100..3 3 TThhee SSiittuuaattiioonnaall AApppprro oaacchh ttoo SSuussttaaiinnaabbllee MMaannaaggeemmeenntt Sustainable management cannot be implemented uniformly by all companies. Instead the successful realization of business sustainability depends primarily on the situational context at the company. The characteristics of different context factors allow a derivation of the relative importance of sustainable management for each individual company. Both internal and external context factors and actors relevant for the company can play a role in this regard. As we map out the situational approach to sustainable management, we draw primarily on the considerations of Weber/ Georg/ Janke/ Mack, who in 2012 presented the most comprehensive approach to date (Weber/ Georg/ Janke/ Mack, 2012, pp. 18 following). The authors propose the following explanatory model for the implementation of business sustainability: <?page no="198"?> 10.3 The Situational Approach to Sustainable Management 197 @ www.uvk.de Figure 10-1: Explanatory model for the implementation of business sustainability (Weber/ Georg/ Janke/ Mack, 2012, p. 32). Figure 10-2: Key questions and criteria concerning the importance of sustainability (Weber/ Georg/ Janke/ Mack, 2012, p. 34). <?page no="199"?> 198 10 Instruments for Implementing Business Sustainability @ www.uvk.de According to the authors, a specific business environment with the corresponding demands on the industry calls for a certain degree of implementation of a sustainable business strategy. These demands can be driven by the interests of very different stakeholders such as environmental organizations or providers of capital, but also by rules imposed by politicians or regulators. The demands which originate in the business environment are further separated by the authors into relevance of sustainability for the market potential and relevance of sustainability for the production processes of the company (Weber/ Georg/ Janke/ Mack, 2012, p. 33). The relevance of sustainability is derived from the combination of opportunities and threats for the market potential or the production processes of the company. The authors suggest a matrix for this analysis: Figure 10-3: Matrix of opportunities and threats of business sustainability (Weber/ Georg/ Janke/ Mack, 2012, p. 36) Since the combinations of opportunities and threats within an industry will likely be related for all companies, the approach so far would suggest a similar exposure to questions of business sustainability and thus an industry-wide norm for the implementation of sustainability strategies. <?page no="200"?> 10.4 Implementation in the Context of Integrated Management 199 @ www.uvk.de Nonetheless, significantly different degrees of implementation can be observed within a single industry. In the opinion of the authors, this can be explained with reference to a second set of explanations provided by the model: the actual degree of implementation of business sustainability strategies additionally depends on the influence of internal contextual factors and internal actors at the company. Hence the internal importance of the topic of business sustainability can be above or below the relevance which would be expected based on external expectations. Of particular importance in this regard is the influence of employees, but especially the role of the CEO as supporter of business sustainability (Weber/ Georg/ Janke/ Mack, 2012, pp. 41 following). In summary it can be stated that a situational approach must be the starting point for sustainable management. Depending on external and internal context factors at a company, the degree of implementation of a business sustainability strategy can be more or less appropriate. For that reason, degrees of implementation will vary greatly in practice. This in turn implies that it cannot be assumed that successful implementation of sustainable management is accomplished by following a “standardized norm for business sustainability.” The implementation of sustainable management is successful only if the degree of implementation is aligned with both the external and internal situation of the company. Before tackling the implementation of sustainable management, an analysis of the s ituation should be conducte d. I t se rv e s to c lar if y th e ro le o f sust ain abl e management for the company in question and the extent to which various divisions are affected. 110 0..44 IImmp pl leem me en ntta atti ioon n i inn t th he e C Coon ntte ex xt t o off I Inntteeggr raatte ed d MMaan naagge e- mme enntt In addition to a situational understanding of sustainability, considering all relevant management levels plays an important role for the successful implementation of business sustainability. To clarify this point, we refer to the concept of integrated management of the St. Gallen-School. It is based on the systems approach of Hans Ulrich, the founder of the St. Gallen-School. A company should be seen as an open system, which constantly interacts with its surroundings. Further development needs to take into consideration all internal systems levels. The company must thus be developed in the context of a comprehensive, or in the words of Bleicher, an integrated management concept (Bleicher, 2004, pp. 80 following). Bleicher distinguishes three management dimensions which are connected via con- <?page no="201"?> 200 10 Instruments for Implementing Business Sustainability @ www.uvk.de stant feedback. These management dimensions are briefly sketched out following Bleicher in the next paragraphs (Bleicher, 2004, pp. 80 following): Normative Management This management level is concerned with the general aims of the company. Key task is the determination of fundamental principles, norms and values of the company. The values of a company find their expression in the corporate culture, the principles and norms are defined in the corporate constitution. Strategic Management This management level deals with the development, maintenance and use of potential sources of success for the company. At stake are the systematic orientation of the company along promising product and market combinations and the provision of the needed resources. The normative and strategic levels of the company jointly assure an efficient positioning of the company. Operative Management This management level accomplishes the transfer of ideas from normative and strategic management into concrete operative processes and their financing. The linkages between normative, strategic and operative management are shown in Figure 10-4. This figure once again clarifies that the implementation of sustainable management can only be successful if the spirit of business sustainability is firmly anchored at all management levels. The anchoring of business sustainability within the system of corporate norms and values must be the starting point. Unless business sustainability is rooted in the corporate culture, other management levels will be unable to steer the company in the desired direction. The effect unfolds implicitly once basic assumptions about business sustainability and its relevance for the development of the corporation are shared widely by all employees. A culture of business sustainability at the company level can manifest itself explicitly in numerous ways. Possibilities include a socially responsible way of communication and interaction between hierarchy levels at the corporation, an authentic consideration of worklife balance, the introduction of a corporate health management program or the active pursuit of diversity. These are only a few examples for giving visibility to the social dimension of sustainability. And for the ecological dimension it is also easy to find visible examples, such as the general use of environmentally friendly technologies and production processes <?page no="202"?> 10.4 Implementation in the Context of Integrated Management 201 @ www.uvk.de Figure 10-4: Integrated management concept following Bleicher (Bleicher, 2011, p. 96) The values which define business sustainability must furthermore be included in the corporate vision and also in the concrete strategies of the company. Business sustainability must thus be consistently integrated in the analysis, formulation and implementation of strategy. Important support in this regard can be provided by the previously discussed assessment of the effects of sustainable strategies on the market potential and the production processes of the company. If the economic Triple Bottom Line approach is pursued, combinations of products, markets or resources need to be identified, which fulfill sustainability criteria and at the same time promise the realization of a competitive advantage over other market participants. Weber/ Georg/ Janke/ Mack talk about the identification of strategic focus areas in this context (Weber/ Georg/ Janke/ Mack, 2012, pp. 53 following). The focus areas serve to clearly delineate the business <?page no="203"?> 202 10 Instruments for Implementing Business Sustainability @ www.uvk.de sustainability topics that are important for the corporation and hold a corresponding potential for return. The focus areas can have an orientation on both product and process. The strategic focus areas also serve as the starting point for the formulation of concrete measures at the operative level. These measures assure that the sustainable strategies can be implemented adequately in the various production processes of the numerous corporate divisions. This also requires the formulation of clear business sustainability targets and of indicators for measuring the target achievement. Once again it should be very obvious that the successful implementation of business sustainability in the management context can never rely on a set of general standards. Instead the internal and external contextual factors of the company must be analyzed in detail in order to initially assess the relevance of implementing business sustainability in the unique corporate context. Aspects of sustainability furthermore need to be accepted among all management levels in the company. This is a time consuming process, which must be checked regularly for its general validity, but also for its implementability. The anchoring of business sustainability cannot be considered independently of other corporate development activities, but needs to be an integral part of these processes. 1100. .55 CCoonnttrroolllliinngg TTaasskkss iinn tthhee CCoonntte exxt t ooff SSu ucccceessssffu ullllyy IImm- pplleemmeen ntteed d SSuussttaaiinnaabbllee MMaannaaggeemmeenntt A successful implementation of all aspects of sustainability in the context of corporate development poses numerous new challenges for management and thus also for controlling: sustainability in all its facets needs to be integrated into the existing processes and routines of the company. Management will demand even more information from the available controlling tools and methods of business planning need to be enhanced to also capture aspects of business sustainability. This is true for both for planning and controlling systems. Meaningful indicators need to be defined in order to measure progress with regard to business sustainability. All sustainability reporting must be in line with international standards. This guarantees that reporting about the progress of all internal implementation activities is understood globally. Furthermore, the constant evaluation of the relevance and extent of a chosen business sustainability strategy and its concrete implementation in a given context is needed. The above mentioned challenges essentially describe a large number of tasks that are typically associated with the area of controlling (Barth/ Barth, 2008, pp. 16-18; Weber/ Schäffer, 2008, pp. 20-26): provide information to management <?page no="204"?> 10.6 Assessment of the General Implementation of Sustainable Management 203 @ www.uvk.de and stakeholders of the company, assure that the system of goals is accomplished, provide methodologies required for business management, specify planning and controlling systems in a way that meets the requirements of business sustainability and is helpful in assuring that the chosen path concerning sustainability is followed in a rational manner. This again makes it clear that controlling is of major importance in the successful implementation of sustainable management. It is impossible to consider all of these tasks in detail in this contribution. Instead we want to focus on three responsibilities in order to give a first impression of the ways in which controlling can contribute to the successful implementation of sustainable management. Second, we want to illustrate with the help of two examples how controlling can fulfil the new demands and make concrete contributions by providing additional information about business sustainability and adjusting known tools of business management to fit the new requirements. To illustrate this point, we will take a closer look at Carbon Controlling and the Sustainable Scorecard. In closing we will provide a few examples that illustrate sustainability reporting to external stakeholders of the company. 110 0..66 AAsss sees sssmme en ntt ooff t thhe e GGe en neer raall IImmp plleemme en ntta atti ioon n ooff SSu us s-tta aiinnaabbl lee MMaannaag geemme enntt A fundamental task of controlling is to assure that rational approaches are taken by management (Weber/ Schäffer, 2008, pp. 33-50). In the case of sustainable management, controlling should contribute towards an appropriate use of business sustainability, which considers the specific situation of the company and is implemented at all management levels by establishing the necessary competencies. Whether the different fields of action concerning sustainable management are in fact adequate for the individual situation of the company in its specific environment can only be assessed with the help of a comprehensive set of analytical tools. We propose the use of a systematic business d sustainability assessment. 1100..66..11 FFeea attuurre ess ooff aa SSu ussttaaiinnaabbiilliitty y AAsssse esss smmeen ntt Such a d sustainability assessment needs to fulfill the following requirements in our opinion (following Scheurer, Ribeiro, 2009, p. 286): <?page no="205"?> 204 10 Instruments for Implementing Business Sustainability @ www.uvk.de ) The assessment model should be suitable for verifying a situational approach to sustainability management. ) The assessment model should provide sufficient insights concerning situational and strategic strengths and weaknesses of sustainability management at all mana gement levels of the co mpany. ) The assessment model should take into consideration the three major dimensions of sustainability in line with the Triple Bottom Line model. ) The assessment model must serve as the foundation for improvements of sustainability management that are relevant in practice and adequate for the situa tion and thus provide value added to the company. ) The implementation of the assessment must be possible with a reasonabl e balance of costs and bene fits. ) The assessment model should involve the top management in addition to the manag ement at the strategic and operative level as well as the subject matter experts on sustainability. ) The as sessment model should serve at the same time as a shared platform fo r discussions between management and the sustainability experts. This allows the joint analysis of the company situation in light of the appropriateness of sustainable management and its degree of implementation. Thus a deliberate decision is made to refrain from a generalized standard of implementing business sustainability which can be used to check every company in an identical fashion. Assessment with a benchmark orientation must be replaced in our opinion with an evaluation that deals explicitly with the specific situation and concrete strategic requirements of the company. The assessment must be structured in a way that reflects all important dimensions of sustainability at all levels of the company. 1100. .66..22 OOv veerrvviie eww ooff tthhe e AAsss seesss smme ennt t PPrro occeesss s The Sustainability Quick Check is purposefully designed as a rather general assessment and it can only be sketched out roughly in this context. The initial aim of the assessment is to efficiently zero in on key aspects and thus to provide timely insights for the derivation of concrete improvements on those sustainability topics that are truly important for the company. Once the components of sustainability that are most relevant for the current company situation have been identified, a more thorough analysis can be conducted in a second step if necessary. A brief overview of the 5 steps in the assessment process is provided below. <?page no="206"?> 10.6 Assessment of the General Implementation of Sustainable Management 205 @ www.uvk.de Involved in the assessment process are the top management as well as the subject matter experts on sustainability at the different levels of the organization. The broad participation of both management and subject matter experts is mandatory, if a serious effort of implementing sustainability at all levels of the company is to be made. Figure 10-5 shows the five steps in the process from bottom to top. Figure 10-5: Steps in the assessment process Step 1 In a first step, the focus is on external and internal contextual factors relevant for the company. This assessment follows the methodology proposed by Weber/ Georg/ Janke/ Mack. Given the assessment of the situation, an evaluation is conducted jointly with the top management and the importance of business sustainability for the competitive strategy is determined. This also leads to a rough specification of the degree of implementation of business sustainability that is advisable for the company from a strategic perspective. Step 2 The analysis of the situation and the review of the strategic importance concerning the competitive position of the company can also be used to derive insights about the dimensions of business sustainability and the underlying competencies that are likely to make a particularly important contribution to the company strategy. By assigning weights, the top management determines in a second step <?page no="207"?> 206 10 Instruments for Implementing Business Sustainability @ www.uvk.de the importance for the company of the various dimensions of sustainability and the related specific competencies. The assignment of weights serves to further sharpen the match between company strategy and needed competencies in the field of business sustainability in the given situation and from a management perspective. Prioritizing areas of competency in cooperation with the top management is an essential feature of the assessment model. It assures that the direction of the further assessment steps is indeed aligned with the needs and the specific situation of the company under review. In this way, a company-specific profile of weights is generated. Figure 10-6: Providing weights to the ecological dimension (excerpt with detailed presentation of the operative management level) <?page no="208"?> 10.6 Assessment of the General Implementation of Sustainable Management 207 @ www.uvk.de Step 3 Figure 10-7: Assessing the degree of implementation (excerpt with detailed presentation of two areas of competency in sustainability at the operative management level)) <?page no="209"?> 208 10 Instruments for Implementing Business Sustainability @ www.uvk.de The assessment of the degree of implementation needed for each of the three dimensions of sustainability is done in cooperation with the sustainability experts at all levels of the company with reference to concrete individual items. We suggest an orientation along the three levels of the integrated management model following Bleicher. It suggests an analysis of the degree of implementation of the three dimensions of sustainability at the normative, strategic and operative level of the company. The assessment can be structured to allow the identification of existing sustainability competencies including their practical implementation. The assessment of documented processes and methods of sustainability at the different company levels is done under the heading “Existent.” At the same time the practical use in processes and project of the company is captured under the category “Applied.” The category “Existent” documents the degree to which competencies in sustainability are established at the company. The category “Applied” assesses to what degree these sustainability competencies are already contributing to concrete business activities. Step 4 The results are evaluated and analyzed jointly with the sustainability experts at the company. Fields of action are identified and an approach for the improved implementation of business sustainability is developed. In our opinion it is only the correlation between assigned weight and determined degree of proficiency of the analyzed fields of competency in sustainability that allows a clear statement about the concrete need for improvements at the company. In the context of the assessment with the help of the Sustainability Quick Check, this information is assembled in activity portfolios for the ecological, social and economic dimension of sustainability. An individual activity portfolio will be set up for the categories “Existent” and “Applied” at the normative, strategic and operative management level. Figure 10-8 shows an excerpt from an exemplary activity portfolio for the ecological dimension at the operative management level (“Existent”). Each of the 9 cells of the activity portfolio is assigned one of the traffic light colors green (G), yellow (Y) and red (R). The various operative areas of sustainability competencies are entered as dots in the matrix. In the example, the areas of competency 2, 4 and 8 only show an average degree of implementation. This insight alone is not sufficient to motivate any action. Only the correlation with the weights, which reveal the importance for the company as determined by the top management, provides evidence about a possible need for action. <?page no="210"?> 10.6 Assessment of the General Implementation of Sustainable Management 209 @ www.uvk.de Figure 10-8: Activity portfolio (excerpt with detailed presentation of two areas of competency at the operative management level) Fields of competency in sustainability that end up in a green cell of the activity portfolio during the assessment are either sufficiently under control or are of lower importance for the company as assessed by the top management. In this case, there is no need for further improvement. In the example given, this would be the case in area of competency 1. Different cases are the areas of competency that end up in red cells of the activity portfolio. These are areas of competency which from the perspective of the management are of high importance for the company, but are only insufficiently developed and mastered. In our example, these are the areas of competency 2 and 8. From the perspective of the company management, there is an urgent need to act. For all areas of competency which end up in a yellow cell of the activity portfolio, it needs to be checked individually whether there is indeed a need to improve. In the example, this is the case for area of competency 4. A thorough analysis of all areas of competency with an urgent need for improvement is conducted in a next step. This starts directly at the level of the individual sustainability competencies of the area of competency in question and the degree of mastery. The analysis serves as point of departure for an intense discussion between sustainability experts and top management aimed at deriving concrete programs of action. Obviously the derivation of concrete programs of action is important for the improvements of business sustainability competencies at the company. But the true value of the assessment phase lies in the intense discussions needed. <?page no="211"?> 210 10 Instruments for Implementing Business Sustainability @ www.uvk.de Step 5 The results of the assessment and the suggestions for improvement are discussed jointly by top management and the sustainability experts. This approach once again intensifies the direct communication between top management and sustainability experts on all implementation issues at the company level. Such a discussion contributes critically towards determining whether, and if yes, to what degree, aspects of sustainability can enhance the competitive positioning of the company. 110 0..77 EExxaam mpplle ess o off C Co onnc cr re ettee I In ns sttrru ummeennttss f foorr S Suus sttaai in na ab blle e MMaannaag ge emmeennt t While the previous two sections served to contemplate the ability of controlling to contribute towards an assessment of the fundamental appropriateness of sustainable management and its concrete implications with the help of a Sustainability Quick Check, two concrete examples will illustrate in the following two sections how controlling, drawing on new or adapted instruments and methodologies, can support the implementation of business sustainability at the strategic and operative management level. We will first present the Sustainable Scorecard and show how existing instruments can be amended to meet the new challenges of sustainable management at the strategic level. Next we look at carbon controlling, a newly developed controlling instrument at the operative management level, which was introduced in reaction to political guidelines. 1100..77..11 TThhee SSuussttaaiinnaabbllee BBaallaanncceedd SSccoorreeccaarrdd aass aann IInnssttrruummeenntt ffoorr SSuussttaaiinnaabbllee MMaannaaggeemmeenntt aatt tthhee SSttrraatteeggiicc LLeevveell The Balanced Scorecard (BSC) was developed at the beginning of the nineties by Robert S. Kaplan and David P. Norton at the Harvard Business School. Their basic idea was to allow top management to recognize the corporate strategy and to run their business with the help of a few balanced indicators. These indicators are derived by compiling strategic aims and figures and assessing hypotheses about the linkages among the various goals and individual perspectives as well as causal relationships. For the most part, the conventional BSC reflects the economic environment and market conditions. The d Sustainability Balanced Scorecard (SBSC) is a concept of strategic sustainability management with a value orientation. The conventional BSC is expanded and becomes the SBSC by integrating environmental and social aspects (in other words non-market features). The aim of the SBSC is the determination, systematic analysis and controlling of the most important strategic eco- <?page no="212"?> 10.7 Examples of Concrete Instruments for Sustainable Management 211 @ www.uvk.de nomic, ecological and social targets (Pufé, I.; Kamiske, G. F., 2012, pp. 48-49). The SBSC enables companies to manage strategically important business sustainability targets with the classical Balanced Scorecard and to provide a direct link to their strategic business orientation. This integrative approach reduces complexity and allows the harmonization of interests within the organization instead of establishing a separate management system. In the literature and in applied work, the following two possibilities for implementing SBSC are considered: Figure 10-9: Possible options for converting a BSC into a SBSC (Source: Following Grothe, A.: Nachhaltiges Wirtschaften für KMU: Ansätze zur Implementierung von Nachhaltigkeitsaspekten, München 2012, p. 108) Figure 10-10: Integrative Sustainability Balanced Scorecard (Source: Grothe, 2012, p. 107) <?page no="213"?> 212 10 Instruments for Implementing Business Sustainability @ www.uvk.de We think it is difficult to treat business sustainability as a fifth perspective (for example social perspective) in the context of the BSC as recommended by the additive option. Instead the societal demands on a company can and should be treated in the other “classical” perspectives. Against this backdrop, the integrative method is preferred (Figure 10-10). (Burschel, Losen, Wiendl, 2004, pp. 342-343) With the help of the SBSC, environmental and social management of a company contributes to a successful implementation of the strategy, which can benefit from potential linkages between economic, ecological and social aims. The d Sustainability Balanced Scorecard assures this by considering the following aspects (Pufé, I.; Kamiske, G. F., 2012, p. 49): ) Identify environmental and social aspects that are relevant for success, ) Establish causal linkages between environmental and social aspects on the one hand and company success on the other, ) Demonstrate the strategic relevance of all environmental and social aspects to management, ) Develop relevant indicators and measures, ) Integrate environmental and social aspects into management with a conventional economic focus. The SBSC thus allows the integration of soft and non-market aspects when planning and implementing company strategies. The procedure of implementing SBSC is similar to the “conventional” BSC. The fact th at ecological an d so cial asp ec ts ar e integ ra l elem en ts of the in tegr ated approach is the only difference. Starting points for the implementation of a SBSC are a vision and a strategy that focuses on business sustainability. Bussiness sustainability provides a mission, a vision and a clear statement about the strengths and opportunities of sustainable development. Initially the strategic business units as well as their business sustainability strategies need to be defined. In addition the environmental and social aspects for these strategic business units need to be identified and ranked by their strategic relevance. A differentiation is made between those environmental and social aspects that constitute strategic core elements and those that are only drivers to accomplish the three dimensions of business sustainability. The first category consists of figures with direct relevance for the result, such as market share in an ecological market segment. A possible performance driver is increased productivity from improved energy efficiency. This must be distinguished from hygiene factors, which do not constitute competitive advantages and are therefore basically without strategic relevance. Examples are regulations <?page no="214"?> 10.7 Examples of Concrete Instruments for Sustainable Management 213 @ www.uvk.de in environmental law or employment law, which lead to disadvantages if ignored. These hygiene factors are monitored outside the BSC (Hahn, Wagner, Figge, Schaltegger, 2002, pp. 68-72). For each perspective, the company-specific strategic direction needs to be determined in line with the observed attributes. Strategic directions can for example relate to growth, quality, client orientation or innovative power. Following the basic idea of the BSC, qualitative and quantitative goals and key figures must be derived from the vision and the strategy of the company in order to improve the focus and concreteness of the strategy. As a basic principle, no more than a maximum of five strategic goals should be defined for each perspective. This facilitates both the communication of the main goals as well as the orientation of the employees. For the SBSC, the environmental and social aspects of the individual business units are checked for their strategic relevance. In a next step, the strategic goals within and between the perspectives must be connected with the help of causal relations. For the SBSC, the employee perspective is of particular relevance, since meeting business sustainability targets usually originates there. The consideration of the social and ecological aspects in the causality analysis can be assured via the participation of the employees responsible for environmental issues or the personnel department. It will frequently be the case that causal relations between social and environmental goals and economic goals are discussed and need to be made transparent. Since the financial perspective tends to dominate in any causal analysis, it is recommended to include it together with the other two dimensions of business sustainability. This has the advantage of revealing the possible divergence of goals between the dimensions of business sustainability at the top level. Strategic aims concerning business sustainability from the client perspective can be for example image/ reputation, product differentiation with a focus on business sustainability (for example via environmental labels) or customer retention. For the financial perspective, cost efficiency via energy efficiency to raise productivity can be a factor. The calculation and assignment of key figures for the individual targets is the next step. In the context of the SBSC, this needs to be in the dimensions economic, ecological and social. In the following, the concrete target values need to be set. These target values help to formulate intermediate goals on the way towards strategies with a business sustainability focus. Finally, strategic measures which support the achievement of the assigned target values need to be defined. Here again the balanced scorecard requires that all dimensions of business sustainability are considered when defining the measures. <?page no="215"?> 214 10 Instruments for Implementing Business Sustainability @ www.uvk.de In summary, it can be stated that the basic setup of the BSC is maintained when moving to the integrated SBSC. In addition to the economic focus, the two other dimensions of business sustainability (ecological, social) need to be considered as well at every step in the project and their strategic relevance must be pointed out. Furthermore, the causality analysis as part of the SBSC clarifies the influences which warrant inclusion of the environmental and social aspects in the relevant perspectives. The SBSC thus constitutes a suitable instrument for the integration of business sustainability (especially of the ecological and social aspects) into company management. 1100. .77..22 CCa arrbbo onn CCo onnttr roolllliinngg aass aann IInnsst tr ruumme en ntt ffoor r S Suusst ta aiinnaabbllee MMaann-aagge em me en nt t aatt tth he e OOppe er ra atti iv ve e LLe ev ve ell The direct contribution of controlling in implementing business sustainability can be illustrated nicely with reference to the allocation of emissions to products in the context of cost accounting. Under the heading of d carbon accounting and controlling, this is particularly relevant for companies with high greenhouse gas emissions. The societal and political interest in climate change resulting from greenhouse gas emissions has increased significantly in recent years. The reduction of greenhouse gas emissions by the European Union of 8% by 2012 compared to the base year 1990, which was agreed as part of the Kyoto protocol shows the relevance of the topic. For Germany a reduction by 21% for all relevant sectors (private households, trade, industry and energy sector) was agreed. To reach the emissions targets, the EU introduced a European emissions trading system. Emissions certificates need to be in place for emissions (CO 2 and NO 2 ) generated by certain industries. This includes European companies and industrial sites with a total capacity greater than 20 megawatt as well as air travel. With the introduction of the European emissions trading scheme, these companies are required to account for their CO 2 emissions and to establish a clearing system. At the moment, the price of one ton of CO 2 is about €7. However, a fourfold increase is expected by the year 2020. In addition to the legal costs for certificates, the companies are also pressured by consumers. Thanks to the high prominence of the topic of climate change, an increasing number of customers are concerned about emissions and also willing to pay higher prices. The transparent reporting about emissions also enables companies to improve their image and thus to obtain a better competitive position in the future. Carbon accounting includes the registration and valuation of emissions (greenhouse gases, starting in 2013 additional greenhouse gases besides CO 2 are included in <?page no="216"?> 10.7 Examples of Concrete Instruments for Sustainable Management 215 @ www.uvk.de emission trading) of a company. This is needed first for the external accounting of emissions permits and second for the reporting on emissions. Comprehensive information is needed for carbon accounting, which depends on the type of enterprise. To determine the amount of information needed, five dimensions are distinguished in the literature. Of immediate relevance is the issue of sources covered, in other words the question whether only direct emissions, emissions from energy obtained or other emissions need to be considered. Also important for the information needs is the product life span, which determines the relevant phases of the product life cycle. The third factor is defining the types of emissions considered. Should carbon accounting only deal with CO 2 or also include other greenhouse gases? The fourth dimension deals with the breadth of the analysis. Should emissions be assessed at the company level or possibly at the level of process, product or even employee? The final dimension deals with covering the supply chain and defines the depth and scope of the analysis for all parties involved. (Botta; Freigang; Hufschlag; Spittler, Weber; 2012, pp. 27-28) Carbon controlling provides the valuation (monetary and/ or non-monetary) of emissions for the purposes of management and decision making (Günther; Stechemesser, 2010; p. 63). The immediate effects of the regulatory demands on the balance sheet and the profit and loss statement necessitate the identification of processes and segments that generate significant emissions and the provision of relevant information to the decision makers. The aim is to include the information about emissions in the management process. Thus the primary goal of carbon controlling is the management of emissions. The state of development of carbon controlling and the degree of sophistication in applied work depend on the ability to capture emissions within a classical controlling framework. According to a study by the Center for Controlling & Management (CCM), the following criteria determine the extent of carbon controlling (Botta; Freigang; Hufschlag; Spittler, Weber; 2012, p. 35): ) Existence of reduction targets ) Definition of strategic focus areas for the reduction of emissions ) Management incentives ) Linking of emissions figures to the financial controlling system Following Günter and Stechemesser, the following features need to be stressed concerning the establishment of carbon controlling (Günther; Stechemesser, 2010; p. 65): ) Calculation of key figures for comparisons across time ) Determination of main drivers ) Establishment of reduction targets to allow target/ actual comparisons <?page no="217"?> 216 10 Instruments for Implementing Business Sustainability @ www.uvk.de ) Reporting ) External verification It is recognized that the information about emissions obtained via carbon accounting needs to be used as part of the regular management process (information-planning-management-control). An additional criterion for the structure and the scope of carbon controlling is the degree to which the companies directly generate emissions during the production process. As an example, a producer of aluminum will have a high volume of direct emissions compared to an insurance company. It is also important to determine the degree of control that companies have over emission levels and thus their ability to affect reductions. In order to concretely plan and manage emissions targets, the attribution of the emission values to the individual planning objects must be as precise as possible. In principle, existing cost accounting systems can be used as the starting point for this allocation. Following the partitioning of cost accounting in type of cost accounting, cost center accounting and cost unit accounting, carbon controlling could be structured in a similar fashion. Whether these approaches from cost accounting can be transferred to the treatment of emissions will be discussed briefly in the following sections (Eitelwein; Goretzki, 2010, pp. 28-31) Type of cost accounting/ capturing emissions In the context of cost accounting, costs are determined either with reference to external invoices or measurable value reductions. In the context of measuring emissions, the above mentioned five dimensions are initially relevant. Should only the direct internal emissions be included or also emissions from energy purchased or even emissions caused by suppliers? Internal emissions can either be obtained directly via measurement or indirectly by assessing the use of energy, for example from figures about average fuel consumption per vehicle. If the aim is to capture all sources of emissions, suppliers also need to be included. Similar considerations apply to the product life cycle considered. Obtaining the information needed to assess emissions in after-sales activities is rather difficult. The same is true for the types of emissions. If the aim is to capture other greenhouse gases such as methane in addition to CO 2 , normally appliances for the direct measurement or indicators for the derivation from consumption data are needed and are unlikely to be available in all cases. <?page no="218"?> 10.7 Examples of Concrete Instruments for Sustainable Management 217 @ www.uvk.de The breadth of the analysis in turn raises issues concerning the second level, cost center accounting, namely the distribution of emissions among various units. The supply chain coverage depends on the provision of information from companies that provide inputs or continue to work with the outputs produced. This problem is particularly obvious when considering a logistics company, for example. Significantly more than half of the value added will usually be provided by suppliers. In this case the company would either have to rely on emissions numbers provided by the suppliers or on reliable general standards for the assessment of emissions. When capturing emissions data, the direct and the indirect method can be distinguished. The direct method measures the actual use either with the help of instruments (for example fuel use of a truck or energy use of a machine via meter) or from the costs (for example fuel use from the type of cost accounting) and the associated prices per unit (€/ liter of fuel). The indirect measures are based on an estimate of the emissions with the help of various methods. An example is The Network for Transport and Environment (NTM) which provides a common base of comparable measurement standards for calculating the environmental impact of various means of transportation. For the emissions caused by third party transports it is possible for example to derive from empirical data the percentage of fuel costs in overall transportation costs. From fuel costs the fuel use can be calculated. Cost center accounting/ allocation to points of emission The allocation of the costs to the various cost centers, for example with the help of an expense distribution sheet, is usually accomplished with the help of direct or indirect reference values and based on the principle of causation. For reasons of cost effectiveness, estimates are frequently used. The points were the emissions are caused and allocated can for the most part be taken from cost accounting. The criteria for defining cost centers (standardized reference value, decision authority) are identical. The internal cost allocation is significantly more difficult in the case of emissions, since it is harder to identify the reference values for the distribution of the emissions to other cost centers or processes. The information needed for the allocation of the emissions increases with the degree of detail required within the dimensions listed above. Cost unit accounting/ allocation to processes / products/ services The allocation of costs per product/ service via direct charges or based on process utilization is far advanced in the field of cost accounting. In the context of allocating emissions, the previously mentioned problems, especially the scarcity of directly available reference values (for example with the <?page no="219"?> 218 10 Instruments for Implementing Business Sustainability @ www.uvk.de help of measuring instruments) or the lack of standards and averages, become relevant. This is due mostly to the high degree of complexity and the associated costs of gathering relevant information. In summary it can be stated that - with the exception of measuring emissions - the additional areas are not yet fully functional. Decision support for management across all dimensions cannot be realized at present. 1100..88 EExxtteerrnnaall RReeppoorrttiinngg oonn SSuussttaaiinnaabbllee MMaannaaggeemmeenntt There are numerous reasons for a company to invest in business sustainability management. The resulting need to support the systematic management of business sustainability can certainly be considered a core task of controlling. However, this fact alone is not sufficient, since investors and consumers increasingly base their investment and consumption decisions on business sustainability activities of the companies. For that reason, it is increasingly important to present the activities in the area of business sustainability management to the external stakeholders. This implies an additional task for controlling, namely the external reporting about business sustainability. In the following sections, we will provide an overview of a few examples of measuring and reporting business sustainability. 1100..88..11 AApppprrooaacchheess ttoo MMeeaassuurree SSuussttaaiinnaabbiilliittyy DJSI Since the year 1999, the Dow Jones Sustainability Index (DJSI) provides information about the global leaders in each industry in the area of sustainability. In line with the best-in-class principle, only 10% of all companies in each industry with the best record on sustainability are considered for the index. In order to assess the sustainability activities, economic, ecological and social criteria are used. These criteria for the assessment of the sustainability efforts come from the fields of management systems, company leadership, codes of conduct, environmental reporting, personnel development, work practices, corporate citizenship etc. (http: / / www.nachhaltigkeit.info/ artikel/ dow_jones_sustainability_index_ djsi_1598.html, accessed on 3.3.2013). Assessed are both industry-specific criteria as well as features that are relevant across industries. Following the theme “do good and make it known,” companies in addition to implementing sustainability management also have to report on their activities in this regard. <?page no="220"?> 10.8 External Reporting on Sustainable Management 219 @ www.uvk.de WBCSD The standard of the World Business Council for Sustainable Development (WBCSD) draws on general and specific indicators for economic and ecological sustainability. The WBCSD was created as an initiative of about 200 companies who set themselves the task to analyze the topic “economy and sustainable development.” It is run by company leaders and offers for the involved companies a special forum for process improvement regarding ecological efficiency (http: / / www.wbcsd.org/ about/ overview.aspx, accessed on 3.3.2013). The WB- CSD is thus not a reporting standard but a forum for the exchange of ideas and experiences concerning sustainability. In addition to developing avenues for improvement concerning sustainability for companies, the focus of the WBCSD is on formulating joint positions regarding sustainability and the introduction of these ideas into the political process. ISO 14031 The norm 14031 of the International Standard Organization (ISO) measures the environmental performance. The norm 14031 defines economic performance as „results that follow from an organization’s management of its environmental aspects” (DIN EN ISO 14031: 2000-02 (D/ E) p. 4). The focus is on improving environmental efficiency. The assessment of the environmental performance relies on a process model (DIN EN ISO 14031: 2000-02 (D/ E) pp. 6-8). Basically two categories of indicators are used for the assessment of the environmental efficiency. The variables in the first category target environmental conditions. The second category consists of environmental performance indicators. These are broken down into management performance indicators and operational performance indicators. Management performance indicators provide information about management efforts to influence the environmental performance of the organization, for example by adherence to legal standards. The operational performance indicators are related to operative achievements of the company such as energy use or emissions. IFAC Reporting on sustainable management has also been the subject of intense debate at the International Federation of Accountants (IFAC). The Sustainability Framework 2.0 of the IFAC contains a large number of suggestions for measuring and reporting sustainability (http: / / viewer.zmags.com/ publication/ 052263e2#/ 052 263e2/ 1, accessed on 3.03.13). In particular the IFAC provides recommendations for the measurement and incorporation of sustainability aspects into the strategic and operative management of a company. <?page no="221"?> 220 10 Instruments for Implementing Business Sustainability @ www.uvk.de 1100..88..22 RReeppoorrttiinngg oonn BBuussiinneessss ssuussttaaiinnaabbiilliittyy bbaasseedd oonn tthhee GGlloobbaall RReeppoorrttiinngg IInniittiiaattiivvee ((GGRRII)) Many companies follow the concept of the Global Reporting Initiative (GRI) in their reporting on sustainable management. The GRI is a non-profit organization which was founded in the year 1997 jointly by CERES und the environmental program of the United Nations (UNEP) in the United States. The aim of the Global Reporting Initiative is the support of business sustainability reporting by all organizations. The GRI has developed a comprehensive framework for business sustainability reporting which proposes principles and indicators for measuring the economic, ecological and social contributions of organizations. In addition to the framework, the GRI has developed a reporting handbook, which is available for use by all organizations. According to the Status Quo Report Germany from 2007, German sustainability reporting is focused strongly on the environmental aspect. According to the report, two thirds of all companies that provide business sustainability reports have previously issued environmental reports or EMAS environmental declarations. In 2007, the share of companies which applied the GRI in their business sustainability reporting amounted to 46 % in Germany (Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit (BMU): Nachhaltigkeitsberichterstattung von Unternehmen Status Quo Report Deutschland 2007, Berlin 2007; p. 28). These are for the most part major companies that completely follow the comprehensive set of GRI criteria (10 out of a total of 48 companies. To date there is no legal obligation in Germany or in other countries to publish business sustainability reports. Despite this, almost all Dax 30 companies have published such a report. All of them follow the GRI. The business sustainability reports are available online as pdf-documents or as hard copies. The business sustainability report is published in addition to the annual report. In a few cases, the business sustainability report is integrated into the annual report (Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit (BMU): Nachhaltigkeitsberichterstattung von Unternehmen Status Quo Report Deutschland 2007, Berlin 2007; p. 31). Normally the reporting is done annually in line with the financial reporting, but there is no mandatory reporting cycle. The following Figure 10-11 provides an overview of the Business sustainability Reporting Guidelines Vol. 3 of the GRI. Der GRI manual covers the reporting principles and guidance as well as the standard disclosures. <?page no="222"?> 10.8 External Reporting on Sustainable Management 221 @ www.uvk.de Figure 10-11: Options for reporting (taken from: Global Reporting Initiative: RG Sustainability Reporting Guidelines, Amsterdam 2006, p. 4) In the context of reporting principles and guidance, the principles of ) materiality, ) stakeholder inclusiveness, ) sustainability context and ) completeness <?page no="223"?> 222 10 Instruments for Implementing Business Sustainability @ www.uvk.de are determined. From the principles follow the topics and indicators, which need to be included in the report. The quality of the contents is assured with the help of the principles of ) balance, ) comparability, ) accuracy, ) timeliness, ) reliability and ) clarity (Global Reporting Initiative: RG Sustainability Reporting Guidelines, Amsterdam 2006, p. 4). ccording to the GRI guidelines, the three categories of standard disclosure ) strategy and profile, ) management approach and ) performance indicators must be included in the business sustainability report. As part of the information in Strategy and Profile the understanding of business sustainability of the organization is considered at a strategic level. In the context of the Management Approach statements about the methods to implement the contributions of the organization in specific areas are expected. The Performance Indicators are supposed to provide comparable information on the economic, environmental and social performance of the organization (Global Reporting Initiative: RG Sustainability Reporting Guidelines, Amsterdam 2006, p. 19). The Economic Indicators cover economic performance, market presence and indirect economic impact. Several indicators for the various aspects are presented in the GRI manual. For example the indicator “financial implications and other risks and opportunities for the organization’s activities due to climate change” (EC 2) is used to assess the economic performance. For the market presence the indicator “range of ratios of standard entry wage level by gender compared to local minimum wage at significant locations of operations” (EC 5) is used. The indirect economic impact is assessed with the help of the indicator “development and impact of infrastructure investments and services provided primarily for public benefit through commercial, inkind, or probono engagement” (EC 8). In this category the company Axel Springer Verlag mentioned its involvement in the charity “Ein Herz für Kinder.”. <?page no="224"?> 10.8 External Reporting on Sustainable Management 223 @ www.uvk.de The Environmental Indicators cover the aspects materials, energy, water, biodiversity, emissions, effluents and waste, products and services, compliance, transport and overall expenditures and investments for the environment. For materials, for example, the indicator “percentage of materials used that are recycled input materials” (EN 2) is listed. For the aspect waste, the indicator EN 22 “total weight of waste by type and disposal method” is calculated. The Social Indicators are broken down into the areas of labor practices, human rights, society and product responsibility. Key indicators for the following aspects are compiled: employment, labor/ management relations, occupational health and safety, training and education, diversity and equal opportunity, equal remuneration for women and men, investment and procurement practices, nondiscrimination, freedom of association and collective bargaining, child labor, prevention of forced and compulsory labor, security practices, indigenous rights, assessment, remediation, local communities, corruption, public policy, anticompetitive behavior, labeling of products and services, and so forth (Global Reporting Initiative: RG Sustainability Reporting Guidelines, Amsterdam 2006, pp. 20-36). The above mentioned contents should be checked constantly via internal control mechanisms for all management and reporting processes. To improve the credibility of the reports, the GRI recommends additional verification of the business sustainability reporting by external parties. Professional providers such as audit firms, stakeholder panels or other external groups or persons can be used for the external verification (Global Reporting Initiative: RG Sustainability Reporting Guidelines, Amsterdam 2006, p. 38). The voluntary auditing of business sustainability reports can provide the following advantages: ) Increased credibility of business sustainability reports, ) Increased reliability of the information provided, ) Improved communication of the company with external stakeholders, ) Possibility of benchmarking concerning completeness and relevance of the information provided, ) Simplified communication of business sustainability topics and their relevance in the organization. The most frequently used auditing standards are: ) ISAE 3000 (International Standard on Assurance Engagements) of the International Federation of Accountants, ) AA1000 Assurance Standard (AA1000AS) by Account Ability and ) IDW PS 821 by Institut der Wirtschaftsprüfer. <?page no="225"?> 224 10 Instruments for Implementing Business Sustainability @ www.uvk.de The certification according to ISAE 3000 and IDW PS 821 mostly concerns the correctness and completeness of the information provided in the report. Sustainability reporting according to GRI provides in addition to the Key Performance Indicators for Environmental, Social and Governance Issues (KPIs for ESG) of EFFAS/ DVFA also the major foundations for the German Sustainability Code. It was recommended for implementation in 2011 by the Federal Government’s Council for Sustainable Development. One aim of the German Business sustainability Code is to publish all business sustainability efforts of companies in a database in order to provide transparency and comparability at a higher level of commitment. The Business sustainability Code addresses companies of every size and legal form (http: / / www.na chhaltigkeitsrat.de/ deutscher-nachhaltigkeitskodex, accessed on 3.03.13). 1100..99 SSuummmmaarryy Questions of sustainability are likely to increasingly shape future societal and economic discussions. For that reason, companies are forced to deal with the issue of sustainable management. They need to realize, however, that a standardized sustainability management which is appropriate for all companies cannot exist. Instead the situational approach to sustainable management needs to be employed. Degree and direction of the implementation of business sustainability will for logical reasons differ from company to company. Hence the successful implementation of sustainable management also requires a differentiated approach. This in turn provides controlling with an important mandate in the implementation process. Controlling should maintain a rational approach and initially support management in the general assessment of the importance of business sustainability for the individual company. On this basis, the concrete competencies in sustainability which are of strategic importance in the given competitive situation of the firm need to be identified. Only at this point does it make sense to begin with an analysis of the current situation concerning the competencies in sustainability of the company. This will help to identify the concrete fields of action for the implementation of sustainable management. In this contribution, we have proposed a Sustainability Quick Check for these activities. Once the concrete fields of action have been determined at the normative, strategic and operative management level, controlling can contribute in several ways to the successful implementation of sustainable management. The most important task is the company-specific development and provision of the needed <?page no="226"?> 10.9 Summary 225 @ www.uvk.de management instruments. Using the Sustainable Scorecard, we have provided examples of how to adapt existing controlling tools or, as in the case of carbon controlling, how to develop completely new instruments. Just as important as the management support is the controlling task of objectively measuring the results obtained in implementing sustainable management and of publishing these results in line with internationally accepted standards for the review by external stakeholders. With regard to both the development of appropriate management tools and the reporting of the results, a lot more work needs to be done by practitioners and researchers. This is particularly true with regard to the ecological and social dimension of sustainability, despite the significant progress that has recently been made in this area by the scientific community (Gleich/ Bartels/ Breisig, 2012). Suggestions for further reading A solid overview on the link between controlling and sustainability and on the situational approach to sustainability is provided here: Weber, J.; Georg, J.; Janke, R.; Mack, S.: Nachhaltigkeit und Controlling, Weinheim 2012. Globally dominant approach for measuring sustainability and on sustainability reporting: GRI: Global Reporting Initiative: RG Leitfaden zur Nachhaltigkeitsberichterstattung, Amsterdam 2006 https: / / www.globalreporting.org/ resourcelibrary/ G3.1-Guidelines-Incl- Technical-Protocol.pdf Literature Barth, T.; Barth, D.: Controlling, 2 nd edition , München, 2008. Botta; J.; Freigang, S.; Hufschlag, K.; Spittler, S.; Weber, J.: Carbon Acccounting und Controlling, Weinheim, 2012. Bleicher, K.: Das Konzept Integriertes Management, 7 th edition , Frankfurt am Main, 2004. <?page no="227"?> 226 10 Instruments for Implementing Business Sustainability @ www.uvk.de Bleicher, K.: Das Konzept Integriertes Management. 8 th edition , Frankfurt am Main, 2011. Bundesministerium für Bildung und Forschung: Presse Release 109/ 2012 Green Economy - Ein neues Wirtschaftswunder, http: / / www.bmbf.de/ press/ 3336.php, accessed on 5.10.12. Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit (BMU): Nachhaltigkeitsberichterstattung von Unternehmen Status Quo Report Deutschland 2007, Berlin, 2007. Burschel, C.J.; Losen, D.; Wiendl, A.: Betriebswirtschaftslehre der Nachhaltigen Unternehmung, München, 2004. Deutscher Nachhaltigkeitskodex: http: / / www.nachhaltigkeitsrat.de/ deutschernachhaltigkeitskodex, accessed on 3.3.13. DIN EN ISO 14031: 2000-02: http: / / www.umweltmanagement-normen.de/ cmd%3Bjsessionid=246AD9CED655BBA76FF153D2AA6CA214.4? workflowna me=infoInstantdownload&docname=8840613&contextid=umweltm&serviceref name=umweltm&ixos=toc, accessed on 17.3.2013. DJSI: http: / / www.nachhaltigkeit.info/ artikel/ dow_jones_sustainability_index _djsi_1598.html, accessed on 3.3.2013. Eitelwein, O.; Goretzki, L.: Carbon Controlling und Accounting erfolgreich implementieren - Status Quo und Ausblick, in: ZfCM, Vol. 54 No. 1 (2010), 23-31 Financial Times Deutschland, Ressourcenknappheit: http: / / www.ftd.de/ unternehmen/ industrie/ : forschung-zur-rohstoffeffizienzressourcenknappheit-zwingt-zu-innovationen/ 70019170.html? page=2, accessed on 5.10.12. Gleich, R.; Bartels, P.; Breisig, V. (Hrsg.): Nachhaltigkeitscontrolling, Konzepte, Instrumente und Fallbeispiele für die Umsetzung. Freiburg, München, 2012. Google, Nachhaltigkeit: https: / / www.google.de/ search? q=nachhaltigkeit&ie=utf- 8&oe=utf-8&aq=t&rls=org.mozilla: de: official&client=firefox-a, accessed on 29.9.2012. GRI: Global Reporting Initiative: RG Leitfaden zur Nachhaltigkeitsberichterstattung, Amsterdam 2006: https: / / www.globalreporting.org/ resourcelibrary/ German-G3-Reporting- Guidelines.pdf, accessed on 17.3.13. Grothe, A.: Nachhaltiges Wirtschaften für KMU: Ansätze zur Implementierung von Nachhaltigkeitsaspekten, München, 2012. Günther, E.; Stechemesser, K.: Carbon Controlling; in: ZfCM, Vol. 54 No. 1 (2010), 62 - 65. <?page no="228"?> OxZ|]šZX]| 227 Hahn, T; Wagner, M.; Figge, F.; Schaltegger, S.: Wertorientiertes Nachhaltigkeitsmanagement mit der Sustainability Balanced Scorecard, in: Schaltegger, S.; Dyllick, T. (eds.): Nachhaltig managen mit der Balanced Scorecard, Wiesbaden, 2002, 43 - 94. IFAC: International Federation of Accountants (IFAC): Sustainability Framework 2.0: http: / / www.ifac.org/ publications-resources/ ifac-sustainability-framework- 20, accessed on 17.3.13. Lexikon der Nachhaltigkeit, Definition: http: / / www.nachhaltigkeit.info/ artikel/ brundtland_report_1987_728.htm, accessed on 4.10.12. Pufé, I.; Kamiske, G. F.: Nachhaltigkeitsmanagement, München, 2012. RNE, Der Rat: http: / / www.nachhaltigkeitsrat.de/ der-rat/ , accessed on 5.10.12. RNE, Deutscher Nachhaltigkeitskodex: http: / / www.nachhaltigkeitsrat.de/ deutscher-nachhaltigkeitskodex, accessed on 5.10.12. Sailer, U.: Nachhaltigkeit - eine Einführung. In: Ernst, D.; Sailer, U. (Hrsg.): Nachhaltige Betriebswirtschaft, München, 2013. Scheurer, S.; Ribeiro, M.: Die neue Rolle des Projektmanagements - mit dem richtigen Projektmanagement-Assessment zu Wettbewerbsvorteilen. In Zeitschrift: Gruppendynamik und Organisationsberatung, VS Verlag für Sozialwissenschaften. Online Published online: 15. September 2009, also H3/ 2009, 279 following. Weber, J.; Georg, J.; Janke, R.; Mack, S.: Nachhaltigkeit und Controlling, Weinheim, 2012. Weber, J.; Schäffer, U.: Einführung in das Controlling, Stuttgart, 2008. WBCSD: World Business Council for Sustainable Development http: / / www.wbcsd.org/ about/ overview.aspx, ac cessed on 3.3.2013. WWF, Living Planet Report, 2012: http: / / www.wwf.de/ themenprojekte/ biologische-vielfalt/ reichtum-der-natur/ der-living-planet-report, accessed on 5.10.12. <?page no="230"?> 1111 LLeeg ga all IImmpplliiccaatti ioonnss ooff BBu ussi innees ss s SSu usst ta aiinnaabbiilliitty y by Katja Gabius Learning Objectives The readers ) know the legal basis for business sustainability, especially with regard to corporate law, and key terms, ) can differentiate the areas of corporate social responsibility from those of corporate governance and corporate compliance, ) recognize the challenges arising from this for companies and entrepreneurs in a national as well as an international context. List of Key Terms ) Corporate social responsibility (CSR) ) Corporate governance ) Corporate compliance ) Green Book of the European Union ) Action Plan of the European Commission ) Shareholder ) Stakeholder ) Complyor-explain principle 1111..11 PPrriinncciipplleess ooff BBuussiinneessss SSuussttaaiinnaabbiilliittyy What is the influence of the sustainability debate on the legal science, which tends to be rather conservative? It is significant, as a look at the current literature - both national as well as European - reveals. Especially considering the aspect of sustainability, major challenges and changes need to be addressed simultaneously. The issue of business sustainability is relevant for the legal field first of all in public law, especially in environmental law and related subjects. 229 In addition it plays a major role in corporate law, as comprehensive demands are made for increased transparency and responsible economic behavior. This immediately affects the way corporations present themselves to the outside world and organ- 229 As well as building law, regional planning law, agricultural legislation, traffic law and so forth through to international environmental law <?page no="231"?> 230 11 Legal Implications of Business Sustainability @ www.uvk.de ize themselves internally. Numerous corporate crises with significant repercussions for both individuals and the global economy in addition to the financial market crises in the years 2008 until 2010 have revealed that responsibility and sustainable management are indispensable elements of corporate structures and leadership. Based on the insight that fair and sustainable economic behavior will positively influence company valuations, 230 numerous small and medium sized enterprises as well as publicly listed major corporations assume social responsibility. This also involves a close bilateral relationship between companies and the society of which they are a part. In order to maintain the social balance, every society needs solid economic foundations and at the same time, companies cannot exist without a stable social environment. 231 As companies increase their transparency and global activities, the demands and expectations of society are increasing. Companies are increasingly subject to critical questions about the social and ecological quality of their entrepreneurial activities as well as their global responsibility for the economy as a whole. Meanwhile stock market indexes are available which assess the CSR performance of globally active companies. 232 The following contribution will give an overview of concrete guidelines provided by (corporate) law for the implementation - and if necessary the sanctioning of violations - of corporate responsibility in support of economic sustainability. The legally relevant aspects of responsible economic behavior affect many levels and are defined with reference to a number of terms which cannot always be clearly delineated. Especially the two major areas of corporate social responsibility (CSR) and corporate governance (CG) need to be distinguished. The differentiation is not obvious, since the fields of application are interrelated and no legal definition exists. Both areas represent systems for good company leadership and are closely linked. The difference comes from the fact that corporate governance deals primarily with the - internal and external - structuring of corporate management, while the CSR initiatives focus on responsible and morally correct behavior of the economic decision makers in an international context. 233 230 Raupp/ Jarolimek/ Schultz, Handbuch CSR, p. 520 231 Hecker, D. CSR und die möglichen Auswirkungen auf den Unternehmenswert, p. 1 232 Fuchs-Gamböck, pp. 7o8 233 Pliakos, N.: Herausforderungen der Corporate Governance im Lichte der Finanzmarktkrise, p. 5 <?page no="232"?> 11.2 Corporate Social Responsibility 231 @ www.uvk.de 1111..22 CCoorrppoorraattee SSoocciiaall RReessppoonnssiibbiilliittyy 1111..22..11 TTeerrmmiinnoollooggyy Business ethics or d corporate social responsibility (CSR) has its constitutional roots 234 in the social obligation that ownership brings and serves as the umbrella term for various fields of engagement for companies in the social sphere. It is based on the principle of d sustainable development and includes various aspects such as economy, ecology and social considerations. Against this backdrop it is justifiable to start from the notion of corporate responsibility, since the attribute “social” implies a reduction that is not justified, given the overall breadth of the fields of action. d Stakeholders such as employees, suppliers, customers, society, government and shareholders, who are associated with the companies (that have a capital market orientation) and therefore influence their societal involvement, increasingly demand that corporations assume responsibility and show a greater degree of ethical behavior. This attitude has concrete business implications, since the company behind the product is increasingly important for the buying decision, and ultimately for product success. 235 Thus there also exists a tight link between corporate responsibility vis-à-vis the stakeholders, the personality of the entrepreneur and ultimately the economic success of the company. The terms corporate responsibility or corporate social responsibility (CSR) stand for numerous activities of companies aimed at unifying economic, social and ecological aspects of the business activity. 236 At stake in CSR is not only the responsibility for corporate activities. In addition to the economic and legal implications, aspects of ethics and philanthropy also play a role. 237 The definition of the European Commission 238 includes social and environmental aspects as two decisive issues for CSR. Expanding this definition to also capture economic considerations leads to the three dimensions of sustainability. 234 Michalski, GmbHG Section 43, Recital 49 235 Köppl/ Neureiter: CSR - Leitlinien und Konzepte im Management der gesellschaftlichen Verantwortung von Unternehmen, pp. 13o14 236 So called Triple-bottom-line; see Blowfield/ Murray: Corporate Responsibility, Oxford 2008; Göbel, Unternehmensethik, 2nd edition (2010) 237 Lattermann, C.: Corporate Governance im globalisierten Informationszeitalter, p. 187 238 Grünbuch Europäische Rahmenbedingungen für die soziale Verantwortung von Unternehmen, pp. 2o9 <?page no="233"?> 232 11 Legal Implications of Business Sustainability @ www.uvk.de 1111..22..22 HHiissttoorriiccaall RRoooottss The historical roots of business ethics can be traced back to the Medieval Ages, where the “honorable merchant” already appeared in the days of mercantilism. During the industrialization, companies assumed social responsibility for the first time, for example in questions concerning work place and worker safety. In the year 1992 the United Nations Conference on Environment and Development took place in Rio de Janeiro. A point of intense debate was the question whether the overall economic development could be based exclusively on key figures of companies or whether social and ecological responsibility of companies also contributes to success. 239 In Europe CSR was finally discussed at the EU summit in Lisbon in the year 2000. The participating governments agreed that the EU should develop into an economic region that combines global dynamics, competitiveness and continued economic growth with improved working conditions and higher social standards. 240 In the year 2002 the World Summit on Sustainable Development (WSSD) met in Johannesburg. 241 In the final declaration, the global implementation of sustainability targets was agreed, such as the reduction of poverty, the minimization of adverse effects to health and the environment in production and the use of chemicals, as well as a slowing of the decline in biodiversity. Finally the European Commission issued the Green Book “European Framework Conditions for the Social Responsibility of Enterprises” and significantly advanced the debate about CSR in Western Europe by demanding an increased corporate commitment to CSR. 242 1111..22..33 LLeeggaall IImmpplliiccaattiioonnss ooff CCSSRR At the moment, unified and especially concrete legal guidelines are still lacking. For that reason, companies have mostly agreed on voluntary codes of conduct for the implementation of their activities. These include the OECD guidelines for multinational companies, 243 the UN Global Compact of the United Nations with its German Global Compact Network, the officially mandated national network of the GC in Germany, 244 the Global Reporting Initiative 245 as well as the CSR Standards. 246 239 www.worldsummit2002.org 240 Wieser, C.: CSR, pp. 32o33 241 http: / / www.bmu.de/ files/ pdfs/ allgemein/ application/ pdf/ johannesburg_declaration. pdf 242 Raupp/ Jarolimek/ Schultz, Handbuch CSR, p. 12 243 http: / / www.oecd.org/ dataoecd/ 56/ 40/ 1922480.pdf 244 www.globalcompact.de <?page no="234"?> 11.3 Corporate Governance 233 @ www.uvk.de Bedeutung und Einfluss der CSR auf den wirtschaftlichen Erfolg des Unternehmens bedeuten gleichzeitig auch einen unmittelbaren Einfluss auf die Reputation des Unternehmens, denn langfristiger wirtschaftlicher Erfolg und das „moralische“ Ansehen eines Unternehmens sind untrennbar miteinander verbunden. Da aber im deutschen Recht konkrete gesetzliche Vorgaben fehlen, wird vermehrt zur freiwilligen Selbstverpflichtung gegriffen, indem sich die Unternehmen innerbetriebliche Regelwerke geben, sog. Codes of Conduct. 1111..22..44 DDiiffffeerreennttiiaattiioonn CSR thus relates to an entire system of corporate activities aimed at strengthening sustainability, which far exceed the legal requirements and for the most part are voluntary. If one focuses on the aspect of voluntary self-commitment of the corporations with the help of in-house regulations, the question about the difference between CSR and Corporate Governance arises. In addition to the type of social and ecological economic behavior that characterizes corporate social responsibility, there also exist a large number of rules which deal with the implementation of responsible management and controlling of companies. This aim is served by corporate governance. It primarily targets the internal (administrative) units of the company and has the huge advantage that regulations about corporate ethics have already been spelled out in the German Corporate Governance Code. Note: Corporate Social Responsibility (CSR) is a system that allows responsible and sustainable value creation with a stakeholder-orientation. A binding legal framework does not (yet) exist in German law. 1111..33 CCoorrppoorraattee GGoovve errnnaannccee 1111..33..11 TTeerrmmiinnoollooggyy Corporate governance describes the system of internal and external structures for decision making, influencing and control of a corporation. This includes relations of the company with the most important interest groups as well as the setting of related targets. It aims to provide rules for the responsible management of companies in order to increase the trust of shareholders, other provid- 245 www.globalreporting.org 246 www.sa-intl.org <?page no="235"?> 234 11 Legal Implications of Business Sustainability @ www.uvk.de ers of capital and the capital markets, employees, business partners as well as the national and international public. Corporate governance is inconceivable without corporate compliance, the system which assures and monitors rules-consistent behavior in the company. Corporate governance thus defines the legal and factual framework conditions for the management of a company both with respect to internal links (roles, competencies, cooperation of the various bodies of the corporation) and external links (shareholder, stakeholder). The increase of the company value as a consequence of responsible corporate organization and control is a fully intended effect of corporate governance. 247 With its applied strong corporate management and responsible corporate control it also intends to reach long-term corporate goals while considering the interests of all stakeholders of the company. 1111..33..22 HHiissttoorriiccaall RRoooottss Numerous corporate crises and bankruptcies with drastic repercussions both at the level of the company and the overall economy have forced a reconsideration of previously established practices. In Europe - as well as in the Anglo-Saxon legal area - the corresponding loss of trust on the capital markets was a main reason to attempt the establishment of codes of conduct for companies. The accounting scandals of publicly listed companies such as ENRON, Worldcom, Philipp Holzmann or Balsam had revealed substantial shortcomings in corporate governance. In addition, the German capital market was confronted with increasingly fierce international competition. The attractiveness of the financial center Germany must increasingly be measured relative to international standards. Against this backdrop it became necessary to increase the transparency of German corporate law on the one hand and to achieve greater international comparability and convergence with regard to corporate governance on the other hand. aa) ) PPrriin nc ciippaall- -aag geennt t mmood deell While the wish for increased corporate transparency and international comparability of capital market standards was the trigger for the increased focus on corporate governance, an inherent fundamental conflict has always been present in the industrial age. This conflict, which is known as the principal-agent prob- 247 Strenger, Chr.: Einfluß von Corporate Governance auf Unternehmenswertsteigerung im ‚alten Europa‘- eine nutzenorientierte Analyse, www.capital-governance-advisory.com <?page no="236"?> 11.3 Corporate Governance 235 @ www.uvk.de lem, is considered to be the main reason why corporate governance principles are needed. The initial problem, which causes the calls for sustainable and responsible corporate organization, lies in a separation of capital or ownership of the company on the one hand and control on the other. 248 This can potentially lead to a conflict, since both individuals possess different information and their actions are based on different motives. In corporate law this is evident in the situation of the shareholder (provider of capital and principal), who has delegated business operations and thus the competency to make decisions to the management board. His “only” role is that of capital provider. This can lead to information asymmetries, since the management regularly has more information about the company than the owners. On the other hand it needs to be assured that management is acting in the interest of the principal, namely the shareholder. Consequently, a framework of rules is needed, which prevents or alleviates the conflict of interest between management and providers of capital. The discussed solutions for the conflict between principal and agent all center around the idea of good corporate governance (increased disclosure requirements, equity option programs, securing the independence of the auditors and the establishment of internal risk management systems). 249 bb)) CCoommppaannyy ggooaallss aanndd ccoorrppoorraattee ggoovveerrnnaannccee: : ssttaak keehho olldde err vveer rssuuss sshha arre ehhool ldde err aapppprrooaacchh The measuring rod for the achievement of the company values are the company’s targets. 250 The efficiency of the company can only be assessed if it reaches its self-established targets. It remains questionable, however, which criteria serve to define these targets and which stakeholders are most relevant in the process. In order to answer these questions, two different theories were developed: the stakeholder approach on the one hand and the shareholder value concept on the other hand. 248 This was already pointed out by Adam Smith in the year 1776 („The Wealth of nations“); Jensen, M. / Meckling, W.: Theory of the firm: Managerial Behaviour, Agency Cost and Ownership Structure, in: Journal of Financial Economics, 1976, pp. 305o360 249 Lessing, J.: The Checks and balances of Good Corporate Governance, in Corporate Governance ejournal Bond University Faculty of Law, 2009 p. 2; Burkhard, S.: Corporate Governance in den USA und in Deutschland, pp. 7o8 250 Wöhe, G./ Döring, U.: Einführung in die Allgemeine Betriebswirtschaftslehre, p. 74 <?page no="237"?> 236 11 Legal Implications of Business Sustainability @ www.uvk.de cc)) SShhaarreehhoollddeerr vvaalluuee ccoonncceepptt A company that primarily acts in the interest of its shareholders follows the principle of shareholder value in defining its corporate goals. Ahead of all other possible interests is the achievement of a maximum return for the owners and providers of capital. All other parties involved can only expect to receive the legally required minimum level of attention. The aim of good corporate governance in a pure shareholder value approach would be to discipline management in such a way that it exclusively acts in the interests of shareholders and avoids company crises or even insolvency. 251 The disadvantage of a pure shareholder orientation in company management is rooted in the already described asymmetries of interests of the principal-agent conflict. The management which has been put in charge of running the company may have motivations that differ from those of the owners, who entrusted them with that responsibility. dd)) SSttaakkeehhoollddeerr aapppprrooaacchh Stakeholders are those groups which have an interest in the actions of the company. The stakeholder approach includes interests of employees, managers, customers, suppliers, the public as well as the government. All of them are directly or indirectly affected by the company activities. It is the task of the company to assure an appropriate participation of all stakeholders in its success and to consider all individual interests equally. Ideally, the definition of the corporate goals and values appropriately reflects the interests of all stakeholders involved. If all interested parties are given adequate weight - and this certainly includes a significant consideration of the shareholders who provide the capital - the resulting corporate governance model supports a sustainable increase of the company value. Against this background an effective corporate governance is thus characterized by the creation of a favorable investment and working climate, appropriate incentive and support mechanisms as well as a balanced distribution of power, which prevents asymmetric interests and guarantees sustainable company success. 1111..33..33 LLeeggaall FFoouunnddaattiioonnss ooff CCo orrppoorraattee GGoovveerrnnaannccee Since 1990 a large number of codes, principles, rules and guidelines dealing with proper corporate governance were created in the American area of justice. 252 In 251 Wentges, P.: Corporate Governance und Stakeholder-Ansatz, pp. 83o84 252 Ringleb/ v.Werder: DCGK, RNr. 6 <?page no="238"?> 11.3 Corporate Governance 237 @ www.uvk.de 2002 the US Congress finally reacted to a number of corporate bankruptcies, fraud scandals and a severe loss of trust in listed companies with the passing of the Sarbanes Oaxley Act (SOA). Its regulations are aimed at improving the reliability of corporate accounting and reporting of these companies. 253 Germany was relatively late in developing codes for corporate conduct. Relying on the d OECD Principles and the Combined Code it was initially possible to draw on German legislation to draft a code, namely KonTraG and TransPUG. The German Law on Corporate Control and Transparency, KontraG, came into effect in the year 1988 and was included as an omnibus law in the stock corporation act (AktG), commercial code (HGB) and the law on limited liability companies (GmbHG). Its aim was to optimize administrative and control mechanisms at companies by intensifying the cooperation between supervisory board and auditors, by increasing the transparency of annual financial statements and by improving the quality of audits. 254 In 2002, the Transparency and Disclosure Act, TransPUG, provided the legal framework for the German Corporate Governance Code. The omnibus law - in addition to other regulations - in accordance with Section 161 of the Stock Corporation Act obligates members of the management board and of the supervisory board of publicly listed companies to report to the shareholders’ meeting in an annual declaration of conformity to what extent the corporation is compliant with the German Corporate Governance Code. In the year 2000, Gerhard Schröder, who was chancellor at the time, founded the Baums-Commission, named for its chairman, Professor Dr. Theodor Baums. Its task was the development of reform proposals for the improvement of corporate management, control and transparency. The final version of the German Corporate Governance Code was presented to the public on February 26, 2002 by the Cromme-Commission, which had continued the task. It is also translated into English, French, Spanish and Italian. The code continues to be reviewed annually and revised if necessary. The latest revision is from the year 2012. 253 www.sec.gov/ about/ laws/ soa2002.pdf 254 Wolf, K./ Runzheimer, B.: Risikomanagement und KonTraG, pp. 20o26 <?page no="239"?> 238 11 Legal Implications of Business Sustainability @ www.uvk.de 1111..44 TThhee GGeerrmmaann CCoorrppoorraattee GGoovveerrnnaannccee CCooddee 1111..44..11 TTeerrmm aanndd EEsssseennccee Since 2002 the German legal system has codified proper corporate management. The German Corporate Governance Code is more than a law, but at the same time also less. It constitutes a set of rules created with the idea of improving the attractiveness of Germany as a financial center while at the same time preventing future crisis and insolvencies caused by mismanagement. It formulates rules for the management and surveillance of companies and primarily targets publicly listed companies. The German Corporate Governance Code directly deals with the corporate constitution and codifies the principles of good and responsible corporate management. The code is not a law. Instead it supplements already existing regulations in corporate law by initially restating norms found in the stock corporation act and the commercial code, which are expanded to provide recommendations and suggestions. The German Corporate Governance Code has two functions: communication and regulation. The communication function is supposed to strengthen the trust of capital markets, stakeholders, customers and employees by presenting corporate governance in a comprehensible and transparent manner. In that sense, communication also has a dual function. In addition to intensifying and improving the dialogue among the various governing bodies at the company, the comprehensive information of the supervisory body is aimed at minimizing risk. Concerning the regulatory function, the code aims at strengthening corporate management and improving the efficiency of cooperation among supervisory board and management board with respect to performance and supervision. The intention is to detect risks early and thus to assure sustainable business success. The applicability of the German Corporate Governance Code is de jure limited to listed companies. With the adoption of the SE Implementation Act on December 22, 2004, publicly listed companies in Germany can also opt for the European Company (SE) as the legal form. Since the Code covers all publicly listed companies in Germany, publicly listed SEs are also covered. 255 As stated in the preamble, the Code should also be taken into consideration by companies that are not listed. 255 Ringleb et al.: DCGK RNr. 89a. <?page no="240"?> 11.4 The German Corporate Governance Code 239 @ www.uvk.de 1111..44..22 FFoorrmmaall SSttrruuccttuurree ooff tthhee GGeerrmmaann CCoorrppoorraattee GGoovveerrnnaannccee CCooddee The German Corporate Governance Code is made up of three parts which are occasionally intertwined but can clearly be distinguished with regard to their legal relevance. The Code consists of a preamble and six topical areas, which deal with the international criticism of the German corporate law and the German corporate constitution. Of particular relevance are the dual system of separation of management board and supervisory board, the desire to focus more strongly on shareholder interests, increased transparency and the lack of independence of supervisory board members and auditors. 256 1111..44..33 MMaatteerriiaall CCoonntteexxtt: : TThhee NNoorrmmaattiivvee SSttrruuccttuurree ooff tthhee GGeerrmmaann CCoorrppoorraattee GGoovveerrnnaannccee CCooddee Unlike legislation that was developed in a proper parliamentary process, the Code does not have the nature of a norm. It is neither law, nor ordinance, nor official general ruling, but rather a set of rules that was drafted by a government appointed and independent commission, which does not trigger any legal requirement to follow the specified rules. Legally binding is only Section 161 of the Stock Corporation Act with the obligation of management board and supervisory board to submit the declaration of conformity and the corresponding accounting regulations (see below). The Code contains internationally and nationally acknowledged standards for good and responsible corporate governance. With regard to its structure, the Code consists of three different categories: mandatory regulations, recommendations and suggestions. 111 1. .4 4. .3 3. .1 1 MMa annd da atto or ry y RReeggu ul la at ti io on nss The part which deals with mandatory regulations provides a fragmentary overview of applicable legislation mostly from the stock corporation act and the commercial code, but also capital market regulations. Compliance with those provisions is mandatory for the companies. This does not follow from the Code, however, but rather from the existing legal situation: the German Corporate Governance Code mainly refers to the relevant passages for good corporate governance from corporate law, commercial code, codetermination legislation and capital market law. 256 Pfizer, N./ Oder,P./ Orth, C.: Deutscher Corporate Governance Kodex. Ein Handbuch für Entscheidungsträger, p. 32 <?page no="241"?> 240 11 Legal Implications of Business Sustainability @ www.uvk.de 1111..44..33..22 RReeccoommmmeennddaattiioonnss aanndd SSuuggggeessttiioonnss Significantly more interesting in their legal relevance are recommendations, which are marked by the word “shall” as well as suggestions, marked by the word “should.” Both the recommendations and the suggestions are intended to lead to a critical analysis of possible applicability in the specific situation of individual companies and should leave room for company-specific modifications. 257 Thea are not immediately legally binding. However, the recommendations of the Code lead to certain obligations for publicly listed companies: following the revised version of Section 161 of the Stock Corporation Act, German publicly listed companies are required once a year to inform the annual shareholders’ meeting whether and to what extent the recommendations of the Code are being implemented. Deviations from the applicable Corporate Governance Code have to be justified as part of the corporate governance declaration. This is aptly named the comply-or-explain principle. However, the company remains free to completely ignore the Code with its recommendations and suggestions (opting out). In this case, the company has the obligation to explain its decisions to the owners, namely the shareholders and the capital market participants. Indirectly there can still be sanctions for companies that deviate from the Code: the publicly stated non-conformity with the suggestions of the German Corporate Governance Code demonstrates that the company does not apply the international standards of good corporate management. This can lead to negative reactions of the public and in the following to pressure from the capital markets on the corporate management, even though there may be justifiable explanations for these entrepreneurial decisions. 111 1. .4 4. .3 3. .3 3 DDe ec clla ar raat tiio on n ooff CCo onnffo orrm mi it tyy PPuurrssu uaanntt ttoo SSe ec ct tiio onn 116 61 1 oof f tthhee SStto oc ck k CCoor rp po or ra at ti ioon n AAc ct t Section 161 of the Stock Corporation Act in its current version was implemented in the year 2006. The provision clarifies the obligation of the management board and the supervisory board to explain to shareholders whether the Code was applied at all and to state the extent of deviations from the guidelines. It stipulates that once a year the management board and the supervisory board issue a statement on the observance of the recommendations of the Government Commission German Corporate Governance Code and explain deviations. The declaration must be permanently available to shareholders. 257 Baums, Bericht RNr. 8; RegEntwurf pp. 49, 50 <?page no="242"?> 11.4 The German Corporate Governance Code 241 @ www.uvk.de The submission of an incorrect declaration of conformity can be a reason to contest the discharge resolutions of the annual shareholders’ meeting and possibly also the election of a supervisory board member. 258 1111..44..44 CCuurrrreenntt DDeevveelloop pmmeennttss CCoonncceerrnniinngg tthhee GGeerrmmaann CCoorrppoorraattee GGoovveerrnnaannccee CCooddee Since the code does not constitute a law, it can be changed and adjusted without a lengthy legislative process. 259 For that reason, the code is reviewed annually for its appropriateness and possible adjustments. On May 15, 2012, the Governmental Commission German Corporate Governance Code has published the annual changes to the German Corporate Governance Code. They specifically relate to the supervisory board. The new version includes an altered understanding of independence of the supervisory board members and a revised recommendation on the remuneration structure. 260 aa)) DDi ivveerrssiittyy Diversity relates to the professional composition of corporate leadership at all levels. At the moment only approximately 3% of all CEOs are female and a higher share of females is targeted. In additional the share of employees with an international background should be increased. Against this backdrop, the code recommends in No. 4.1.5 that diversity is increased for leadership positions and the supervisory board. The supervisory board is asked to provide concrete targets for its composition, which take into consideration the specific situation as well as the international activities of the company, potential conflicts of interest, the setting of an age limit for the members of the supervisory board and diversity. These concrete targets should specifically assure an adequate participation of females. 261 bb) ) EExxeeccuuttiivvee BBooaarrdd R Reemmuunneerraattiioonn One insight from the financial crisis in the years 2008 and 2009 was the realization that a determining factor for the sustainable development of a company is the remuneration system of the management board and the top management. Against this backdrop, the corporate government commission had already in- 258 OLG Frankfurt ZIP 2011, 1613; OLG Frankfurt ZIP 2011, 24f; BGH NZG 2010, 1618o1621 259 Ringleb/ v.Werder: DCGK RNr. 86 260 Rubner/ Fischer NJW Spezial 2012, 399o400 261 Code No. 5.4.1 <?page no="243"?> 242 11 Legal Implications of Business Sustainability @ www.uvk.de cluded the changes triggered by the Act on the Appropriateness of Management Remuneration (VorstAG) in the modifications of the Code for the year 2009. The management board remuneration must now be broken down into a fixed and a variable component. It is assessed relative to the horizontal comparable environment and the general pay structure of the company. According to Standard 2.2.1, the annual shareholders’ meeting has the fundamental competence to resolve on the authorization of the remuneration system. 262 cc)) DDiisscclluussuurree The company must publish the invitation to its annual shareholders’ meeting with all required documents such as the annual report on the company’s internet site. 263 This information should also be translated into the English language. All this serves to prevent informational asymmetries between management board and shareholders. No. 3.10 of the German Corporate Governance Code has recently added the recommendation to publish a corporate governance report. Compared with previous versions of the Code, this was reduced from a binding requirement to a suggestion, since the company is already required to submit a Declaration of Conformity pursuant to Section 161 of the Stock Corporation Act. dd)) SSeellff--iimmpprroovveemmeenntt aanndd CCoonncceennttrraattiioonn ooff tth hee SSu uppeerrvviisso orryy BBooaarrdd The desire to enhance the professional standing of the supervisory board follows from No. 5.4.1 and No. 5.4.5 of the Code. One measure is the requirement to continuously engage in training and education measures. Additionally the members of the supervisory board should not be active on too many different boards. 264 Members of the management board of publicly listed companies should not hold more than three supervisory board mandates in non-group listed companies or in supervisory bodies of non-group companies which make similar requirements. ee)) IInnddeeppeennddeennccee ooff SSu uppeerrvviissoorryy BBooaarrdd MMeemmb beerrss Following the changed recommendation of No. 5.4.2 of the German Corporate Governance Code, the supervisory board shall include “what it considers an adequate number of independent members.” The recommendation also ex- 262 Ringleb/ v.Werder: DCGK RNr. 162; Weber, M.: Die Entwicklung des Kapitalmarktrechts im Jahr 2010, NJW 2011, pp. 273o283 263 Code No. 2.3.1 264 Code No. 4.5.4 <?page no="244"?> @ ww w.uvk.de plains that a supervisory board member is not to be considered independent if he has personal or business relations with the company, its executive bodies, a controlling shareholder or an enterprise associated with the latter, which may cause a substantial and not merely temporal conflict of interest. ff)) NNuummbbeerr ooff IInnd deeppeennddeenntt MMeemmbbeerrss The demand for independent members of the supervisory board directly implies that every representative of a controlling shareholder is not considered to be independent. However, each supervisory board should consist of “what it considers an adequate number” of independent members. This imprecise regulation is made more specific by stating that the determination of an adequate number is made by the supervisory board. 265 Legally required is a minimum of one independent member (Section 107 IV, 110 V of the Stock Corporation Act). gg)) PPeerrffoorrmmaannccee--bbaasseedd CCoommppeennssa attiioonn ooff SSuuppeerrvviissoorryy BBooaarrdd MMeemmbbeerrss Auch die Mitglieder des Aufsichtsrates können erfolgsorientierte Vergütungsbestandteile erhalten. Falls diese zugesagt wurden, sollen sie auf eine nachhaltige Unternehmensentwicklung ausgerichtet sein (Ziff. 5.4.6 II DCGK). 1111. .55 GGrreee en n BBooookk ooff tthhe e EEuurrooppeea ann CCoommmmiissssiioonn ooff AApprriill 55" 22001111: : EEuurrooppe eaann CCoorrppo orraat te e GGo ov ve errnnaannc cee FFr raamme ew wo orrk k ((2 200111 1)) On April 5, 2011, the European Commission issued a Green Book on the “European Corporate Governance Framework.” It primarily deals with the d corporate governance of publicly listed companies. It poses 25 questions concerning supervisory board, shareholders and declaration of conformity. 266 In the context of this - third - Green Book, the Commission identifies problems with regard to the supervisory board (diversity, quality, remuneration and risk management), the shareholders (institutional investors, proxy advisors, protection of minorities) and in the application of the Code (comply or explain). 267 Following the assessment of the answers received in response to the Green Book, the Commission will determine whether additional regulatory measures are needed. 265 Lieder, NZG 2005, 569o575 266 Rubner/ Leuering NJW-Spezial 2011, p. 591 267 Hopt, Klaus J., EuZW 2011, p. 609 11.5 Q]||` m__u _{ Zy| RX]_^|š` l_aax\\x_` _{ n^]xs ‘+ ’(““ 243 <?page no="245"?> 244 11 Legal Implications of Business Sustainability @ www.uvk.de 1111..66 AAccttiioonn PPllaann CCoorrppoorraattee GGoovveerrnnaannccee ooff tthhee EEUU The European Commission has accepted an action plan which outlines future initiatives in the field of corporate law and in corporate governance. Core components of the action plan are an increased transparency between the company and its shareholders, support of the long-term engagement of shareholders as well as support for European companies aimed at fostering growth and competitiveness. 268 Note: Corporate governance represents a system of responsible corporate management based on transparency and control. It aims to create trust - especially of the financial markets, but also of all other d stakeholders - in a responsible corporate management. Legal standards in the German law are found mainly in the German Corporate Governance Code as well as under company law and commercial law. 111 1..77 CCoorrppo orraatte e C Co ommp plliia annccee 1111. .77..11 TTeer rmmiinnoollooggyy In the context of corporate responsibility and corporate governance, the question about the adherence to norms, laws and self-imposed standards arises. Corporate compliance, or compliance for short, is the established term in this context. 269 It is an internal system of controls, which is supposed to assure the adherence to all legal and self-imposed regulations. Compliance is the attempt to avoid all economic risks or criminal implications associated with a breach of the rules by implementing a preventive organizational structure. 270 It is one of the responsibilities of the management board pursu- 268 Also see action plan: http: / / ec.europa.eu/ internal_market/ company/ docs/ modern/ 121212_company-law-corporate-governance-action-plan_de.pdf 269 Schneider, U./ Schneider, S.: Konzern-Compliance als Aufgabe der Konzernleitung, ZIP 2007, pp. 2061 following; Schneider ZIP 2003, p. 646; Bachmann in VGR [Hrsg] Gesellschaftsrecht in der Diskussion 2007, 2008, p. 65; Hauschka,: Chr.: Corporate Compliance, Handbuch der Haftungsvermeidung; Fleischer CCZ 2008, 1; Kort NZG 2008, p. 81; Reichert/ Ott ZIP 2009, p. 2173; Schneider/ Schneider ZIP 2007, p. 2061; M. Winter FS Hüffer, 2010, p. 1103 270 Hauschka, Chr. : Corporate Compliance; Handbuch der Haftungsvermeidung, Section 1, Recital 4 <?page no="246"?> 11.7 Corporate Compliance 245 @ www.uvk.de ant to Section 76 of the Stock Corporation Act and is thus subject to oversight by the supervisory board pursuant to Section 111 of the Stock Corporation Act. But there is an additional aspect of compliance which supports the notion of sustainability. In a comparison across companies it leads to an increase in competitiveness and thus to an improved corporate rating. Thus compliance as a holistic organizational model that includes processes and systems, which assure the adherence to legal requirements, internal standards and the satisfaction of main demands of the stakeholders, makes a substantial contribution towards improved sustainability, public reputation and financial situation of the company. 1111..77..22 LLeeggaall IImmpplliiccaattiioonnss Pursuant to Section 91 II of the Stock Corporation Act, the management board of a publicly listed company has the legal obligation to implement a controlling system aimed at early detection of any risks that could threaten the continued existence of the corporation. For individual industries that face higher risks on occasion, legal compliance rules were standardized: Credit and financial services institutions pursuant to Section 25a para. I, sentence 1 of the German Banking Act (KWG), investment services companies pursuant to Section 33 para. I sentences 1, 2 of the German Securities Trading Law (WpHG) and insurance companies pursuant to Section 64a para. I sentence 1 of the Insurance Supervisory Act (VAG) are required to establish a proper business organization which assures compliance with legal requirements. The above listed companies are required to establish and maintain an independent, continuing and effective compliance function. For the insurance sector, the Solvency II Directive 271 introduces advisory and monitoring functions and defines the obligation to assess compliance risk. 1111..77..33 PPrriinncciipplleess ooff aa CCo orrppoorraattee CCo ommpplliiaannccee OOrrggaanniizzaattiioonn aatt tthhee CCo om mppa annyy Against this backdrop, considerations of liability alone are sufficient to justify the implementation of an effective compliance organization at the company. The establishment of such as structure is usually done in different stages and in different areas. Initially the compliance organization should be separated from the internal revision and the risk management department. The compliance department can be assigned to one member of the management board, but the management task concerning the compliance system remains the responsibility of the entire 271 Hartmann NZG 2010, pp. 211o216 <?page no="247"?> 246 11 Legal Implications of Business Sustainability @ www.uvk.de board. 272 The management board is free to establish one or several persons that are responsible for compliance. Main points of interest in corporate compliance are usually capital market criminal law, antitrust criminal law, corruption criminal law, environmental law, product liability law, protection against discrimination and sexual harassment at the workplace. At a glance Over the previous years, the demands on responsible - and therefore sustainable - corporate organization and leadership have increased significantly for companies (with a capital market focus). In addition to the large area of corporate social responsibility which needs to be implemented in the core business, the field of corporate governance also presents numerous challenges. Minimizing risk, assuring control and transparency as well as an efficient compliance structure are supposed to secure sustainable, successful and efficient corporate activities in a national and international context. Note: Corporate compliance is the total set of preventive measures at a company aimed at assuring that all laws, rules and practices are followed and that conflicts of interest are avoided. Suggestions for further reading Very relevant for practitioners: Corporate Compliance: Handbuch der Haftungsvermeidung im Unternehmen von Christoph E. Hauschka, C.H. Beck Verlag, 9. Juni 2010. Applied focus: Corporate-Governance-Management. Theorie und Praxis der guten Unternehmensführung von Martin Welge und Marc Eulerich., Verlag Gabler, 2012. The standard text on the Code: Kommentar zum Deutschen Corporate Governance Kodex von Henrik- Michael Ringleb, Thomas Kremer, Marcus Lutter, Axel von Werder, C.H. Beck Verlag, 2010. 272 Hölters, Kommentar zum AktG, Recital 98 <?page no="248"?> OxZ|]šZX]| 247 @ www.uvk.de Further reading and insight: Corporate Social Responsibility und nachhaltige Entwicklung: Einführung, Strategie und Glossar von Jan Jonker, Wolfgang Stark und Stefan Tewes; Verlag Springer, 2011. Literature Bachmann, G.: Compliance o Rechtsgrundlagen und offene Fragen, in: Gesellschaftsrechtliche Vereinigung (ed.), Gesellschaftsrecht in der Diskussion 2007; Jahrestagung der gesellschaftsrechtlichen Vereinigung (VGR), 2008, 65 - 101. Baums, Th.: Bericht der Regierungskommission Corporate Governance, 2001. Blowfield, M./ Murray, A. (2008): Corporate Responsibility, Oxford. Burkhard, S.: Corporate Governance in den USA und in Deutschland. Fleischer, H.: Corporate Governance im aktienrechtlichen Unternehmensverbund, CCZ 2008, 1. Fuchs-Gamböck, K (2006): Corporate Social Responsibility im Mittelstand: Wie Ihr Unternehmen durch gesellschaftliches Engagement gewinnt. Göbel, E.(2010): Unternehmensethik, 2 nd edition. Grünbuch Europäische Rahmenbedingungen für die soziale Verantwortung von Unternehmen, 29 following. www.worldsummit2002.org Hartmann, J.: Die Krise und ihre Auswirkungen auf das Gesellschafts-, Steuer- und Insolvenzrecht, NZG 2010, 211 following. Hauschka, Chr.(2010) : Corporate Compliance; Handbuch der Haftungsvermeidung, München. Hecker, D.(2010). CSR und die möglichen Auswirkungen auf den Unternehmenswert, Stuttgart. Hölters, W.(2011): Kommentar zum Aktiengesetz, München. Hopt, K. J.: Ein drittes Grünbuch: Europäischer Corporate Governance Rahmen? EuZW 2011, 609. Jensen, M. / Meckling, W.: Theory of the firm: Managerial Behaviour, Agency Cost and Ownership Structure, in: Journal of Financial Economics, 1976. Köppl, P./ Neureiter, M. (2004): CSR - Leitlinien und Konzepte, Wien. Kort, M.: Verhaltensstandardisierung durch Corporate Compliance NZG 2008, 81 following. Lattermann, Chr. (2010): Corporate Governance im globalisierten Informationszeitalter, München. <?page no="249"?> 248 11 Legal Implications of Business Sustainability Lessing, J. (2009): The Checks and balances of Good Corporate Governance in Cor po ra te Gover na nce ejour na l Bon d U ni versi ty Faculty of Law, L ondo n. Lieder, J.: Das unabhängige Aufsichtsratsmitglied… NZG 2005, 569 following. Michalski, L. (2010).: Kommentar zum GmbHG, München. Pfizer, N./ Oder, P./ Orth, Chr. (2005): Deutscher Corporate Governance Kodex. Ein Handbuch für Entscheidungsträger. Pliakos, N.(2010): Herausforderungen für die Corporate Governance im Lichte der Finanzmarktkrise, Nürtingen. Raupp, J./ Jarolimek, S./ Schultz, F.(2010): Handbuch CSR. Reichert, J. / Ott, N.: Non-Compliance in der AG, ZIP 2009, 2173. Ringleb, H.-M.(2010): Kommentar zum Deutschen Corporate Governance Kodex: Kodex-Kommentar von Henrik-Michael Ringleb, Thomas Kremer, Marcus Lutter und Axel von Werder, München. Rubner, D./ Fischer: Unabhängigkeit des Aufsichtsrats o Corporate Governance Kodex NJW-Spezial 2012, 399. Rubner, D. / Leuering, D.: Grünbuch Corporate Governance, NJW-Spezial 2011, 591. Schneider, U./ Schneider, S.: Konzern-Compliance als Aufgabe der Konzernleitung, ZIP 2007, 2061 following. Schneider, U.: Compliance als Aufgabe der Unternehmensleitung, ZIP 2003, 646. Smith, A.: The Wealth of nations, 1776. Strenger, Chr. Einfluß von Corporate Governance auf Unternehmenswertsteigerung im ‚alten Europa‘- eine nutzenorientierte Analyse in: www.capital-governanceadvisory.com Weber, M.: Die Entwicklung des Kapitalmarktrechts im Jahr 2010 NJW 2011, 273 following Wentges, P.: Corporate Governance und Stakeholder-Ansatz. Wieser, C.: CSR- Ethik, Kosmetik oder Strategie? Über die Relevanz der sozialen Verantwortung in der strategischen Unternehmensführung, 2005. Winter, M.: Die Verantwortlichkeit des Aufsichtsrats für Corporate Compliance, FS Hüffer, 2010, 1103. Wöhe, G./ Döring, U. (2010): Einführung in die Allgemeine Betriebswirtschaftslehre, 24 th edition, München. Wolf, K./ Runzheimer, B.: Risikomanagement und KontraG, 4 th edition, 2003. <?page no="250"?> 1122 SShhaappiinngg tth hee VVaalluuee CChhaaiinn by Monika Reintjes Learning Objectives The readers ) understand how the sustainability discussion has shaped the value creation in companies, ) know how to shape systems, processes and technologies in order to add value, ) comprehend the multi-layered consequences that follow from these options, ) are aware of the fact that multi-dimensional target systems are characterized both by conflicts and harmony among targets, ) know the contributions made by procurement, production, distribution and logistics to sustainable development in companies. List of Key Terms ) Procurement ) Production ) Distribution ) Logistics ) Value creation ) Just-in-time procurement ) Vendor-managed inventory ) City logistics ) Global sourcing 1122..11 FFuunnddaammeennttaallss 1122..11..11 VVaalluuee CCrreeaattiioonn The following considerations deal with the functional sub-systems d procurement, d production, (physical) d distribution and d logistics. The functional sub-system marketing is not considered, since it is treated separately elsewhere in this volume. Within these sub-systems, d value creation triggers transformation processes which create a value increase by combining input factors. The task of procurement is the systematic and goal-oriented provision of all needed input factors that are not produced in-house from procurement markets in order to sustain operational processes. Production meanwhile refers to the <?page no="251"?> 250 12 Shaping the Value Chain @ www.uvk.de transformation of input factors into marketable products, services or intermediary goods, which become input factors at a later production stage. 273 Distribution assures that the customer has access to the products or services in the appropriate quantity, at the desired time and in the desired location. 274 Logistics refers to the planning, management, implementation and control of material flows and all associated flows of value and information within the company, but also between the company and its clients or suppliers. Objects of logistics are raw materials, auxiliary supplies, operating materials, as well as intermediate and final products, but also merchandise, recycling and waste materials. 275 Logistics systems and processes thus overlay the value chain within and between companies. With reference to the flow of materials, value and information within the sub-systems procurement, production and distribution, the terms procurement (inbound) logistics, production logistics and distribution (outbound) logistics are used. 1122..11..22 PPrreessssuurree ttoo AAddaapptt Decisions concerning the structure of processes and systems in operations are traditionally based on requirements of economic d sustainability. A decision to move to Just-In-Time (JIT) logistics between automotive supplier and producer that does not require any inventory is rational, since it aims at achieving and balancing the goals of efficiency and service. If corporate target systems are expanded to include ecological and social sustainability, additional assessment standards such as environmental achievements are introduced. The consideration of environmental targets adds new conflicts to the already existing conflicts among economic targets, such as “immediate availability of parts” versus “low capital commitment.” Example A conflict exists between the low cost of capital commitment of a JIT delivery and the CO 2 emissions of a truck per unit delivered. The latter value tends to go up as the frequency of deliveries is increased and the truck is not fully loaded compared to transports where truck capacity is fully utilized and shipments are combined, but exceed the needs at the time of de- 273 Gössinger, R. (2008), pp. 445.446 274 Wöhe, G. (2010), pp. 499o500 as well as the differentiation from other related terms such as sales or marketing on pp. 381o382 275 Schulte, C. (2009), pp. 1o2 <?page no="252"?> 12.1 Fundamentals 251 @ www.uvk.de livery. Balancing the opposing aims of “low capital commitment” and “low CO 2 emissions per unit delivered” may lead to a delivery volume which differs from the optimum if purely economic goals are considered A number of additional economic, ecological and societal developments require the adjustment of processes and structures in procurement, production and distribution: the increasing transport intensity of doing business, logistics as a causal factor of the greenhouse effect, a general rise in transportation costs, the limited availability of a traffic infrastructure and the societal pressure on those active in politics and business, while simultaneously consumers demand increased individuality and maximum service. 276 1122..11..33 EEccoollooggiiccaall SSuussttaaiinnaabbiilliittyy aanndd VVaalluuee CCrreeaattiioonn Value creation affects the environment in numerous ways. If it is assumed that economic activity which is successful in the long term requires an efficient international division of locations and labor, it follows immediately that procurement and distribution lead to physical transportation, storage and handling of materials. In addition to the soil sealing for buildings, distribution points and transportation routes, this mainly causes gaseous emissions into the air, noise emissions, vibrations, traffic jams and accidents. 277 Industrial production requires environmental goods such as energy, raw materials or space and emits pollutants into soil, air and water. 278 The organization of value creation that is both economic and ecological is oriented along an expanded system of formal targets to fulfil the obligations outlined in Section 12.1. In addition to the long-term goals of making profit and keeping customers satisfied, companies now also need to consider the careful use of natural resources and the avoidance of environmental emissions. These targets partially conflict with each other (investments aimed at protecting the environment are costly) or they are in harmony (positive image of sustainable management, avoidance of negative repercussions from violating environmental standards) or they show a neutral relationship. Additionally, the importance of environmental protection as an economic factor is growing. The German Report on the Environmental Economy for example makes it clear that climate protection, an increase in resource efficiency and the 276 Bretzke, W.-R./ Barkawi, K. (2010), pp. 27o28 277 McKinnon, A.et al. (2010), pp. 31o32 278 Umweltbundesamt (2012a) online <?page no="253"?> 252 12 Shaping the Value Chain @ www.uvk.de export of environmentally friendly and efficient technologies hold substantial growth potential. But what is the concrete contribution of procurement, production, distribution and logistics in the context of the target system described? If it is assumed that material wellbeing requires a growing economy, which in turn depends on mobility, increases in traffic and the known ecological consequences appear unavoidable. Meanwhile traffic growth slows down the economic and sustainable development of companies because of the costs of traffic jams and obstacles to mobility. Their economic survival ultimately depends on the willingness to make a contribution towards maintaining mobility. 279 As an example, the decoupling of economic growth and traffic growth is not only a task of politicians, who try to accomplish this goal by supporting regional producers. Corporations also pursue decoupling strategies, by assessing the sustainability effects of the strongly centralized structures of distribution systems and by occasionally adjusting their distribution strategies. An example is the adjustment of transportation planning, which attempts to combine shipments in order to avoid unnecessary empty runs. Such a reassessment of known structures and concepts in procurement, production, distribution and logistics combined with an analysis of existing processes can ultimately make a contribution towards the sustainability of operations. Innovative technologies complement the fields of action for the sustainable value creation, as shown in Figure 12-1. Figure 12-1: Fields of action for the sustainable value creation The following sections illustrate selected examples for these fields of action, without claiming to be exhaustive. 279 Bretzke, W.-R./ Barkawi, K. (2010), p. 52 <?page no="254"?> 12.2 Procurement and Procurement Logistics 253 @ www.uvk.de 1122..22 PPrrooccuurreemmeenntt aanndd PPrrooccuurreemmeenntt LLooggiissttiiccss 1122..22..11 RReeaasssseessssmmeenntt ooff KKnnoowwnn CCoonncceeppttss Out of the large number of available concepts we will take a closer look at two types of just-in time procurement. The concept of global sourcing will be discussed later in the context of global production networks. Compared to an order-to-stock strategy, d just-in-time procurement for the most part does not hold any inventory. Only the concrete demand in the production process triggers a delivery on the date the item is needed. Delivery volume and date are synchronized with the production needs. Several different concepts are subsumed under the heading of just-in-time procurement. Among them are the extreme forms of just-in-time delivery by suppliers in the vicinity of the production site and vendor-managed inventory (VMI). 280 The just-in-time delivery by suppliers in the vicinity of the production facility of an automotive manufacturer, for example, assures that the dashboard is delivered exactly in the moment it is needed at the assembly line. The economic effects of this tight synchronization are manifold: the processing time of orders goes down, the capital commitment period is shorter and the fact that no inventory must be stored further reduces the average committed capital. The short delivery time enables the automotive manufacturer at the same time to reduce the entire order processing time. Additionally, the flexibility of the suppliers which are situated in close proximity allows the alteration of the order of production and of product attributes even a few days before production commences. This service is seen by the end customer as benefit and value increase. The consideration of the ecological effects meanwhile cannot be reduced to the high frequency of deliveries per type of material and day. The conclusion that frequently the transport vehicles are only moderately utilized and thus CO 2 emissions per unit are high must be put into perspective. First of all, the deliveries only travel short distances, since the suppliers are usually situated within a radius of 10 km or are even located on the production site of the customer. Second, regional forwarding concepts counter the separation of transport units. The customer gives an order to the freight forwarder to collect materials from several suppliers close to the production site and in this way combines transport volumes. The ability of the freight forwarder to manage this issue is limited by the fact that suppliers receive the final order from the automotive manufacturer concerning type and version, quantity and date a few days ahead of the delivery date. The inventory of transport orders used by the freight forwarder to opti- 280 Schulte, C. (2009), pp. 296o297 <?page no="255"?> 254 12 Shaping the Value Chain @ www.uvk.de mize his shipping space is thus limited. Fixing production plans over a longer time period would enable the transportation planner to combine transportation units. 281 This approach requires the customer’s willingness to abandon, at least partially, the desire to have the biggest possible flexibility in planning versions and production sequences. d Vendor-managed inventory (VMI) allows for a buffer stock between supplier and customer, which is used by the customer to obtain the needed materials as they are needed in production. It is restocked by the supplier in line with the consumption and the stipulated upper and lower inventory levels. Physical storage of the inventory should be where the delivery times to the customer are shortest. If inventories are held at the location of the supplier, combining several transports across customers is possible. In practice, the responsible freight forwarders frequently store the goods at their own locations and fulfil additional tasks such as receiving goods, commissioning, delivery of the ordered quantities and the provision of data about stocks and delivery dates for the customer and the supplier. Vendor-managed inventory achieves a service improvement due to the short reaction times of the suppliers to the customer. Compared to just-in-time production and delivery by suppliers close to the production facility, vendormanaged inventory enlarges the number of suppliers that can possibly deliver inputs as needed. Suppliers in more distant locations can also deliver in a synchronized fashion. The same is true for suppliers that are unable to produce small volumes in a synchronous fashion due to their production structures, technologies or setup expenses. The buffer stocks allow call-offs in any desired quantity, while the suppliers can still optimize production lot sizes at their facilities. The production of lot sizes at minimal cost while maintaining delivery which is synchronized with the customer needs is one of the major economic effects of vendor-managed inventory in favor of the supplier. In exchange, the supplier retains ownership of the produced and stored goods until they are consumed. The customer meanwhile benefits from considerably reduced capital commitment, and he can practice the same approach with a large number of suppliers from near and far. If the transport volume and the resulting CO 2 emissions are considered from an ecological perspective, several, partly contradictory effects are observable. If the stocks are held at the site of the supplier, each call-off, as in the case of justin-time delivery, triggers a transport. Thus the corresponding arguments about 281 Bretzke, W.-R./ Barkawi, K. (2010), p. 142 <?page no="256"?> 12.2 Procurement and Procurement Logistics 255 @ www.uvk.de just-in-time delivery are again applicable to vendor-managed inventory systems. A more differentiated picture emerges if the goods are stored with the freight forwarder. The transport from supplier to customer is interrupted in this case. The main run from supplier to the storage facility of the freight forwarder can be done in a combined fashion. Unutilized transport capacities can be avoided on this segment. Deliveries by the supplier can be combined until the maximum utilization of the means of transportation is reached. If needed, the timing of the delivery can be adjusted, since the inventory held by the freight forwarder allows such a delay. The frequency of deliveries from the forwarding warehouse to the customer continues to be aligned with the consumption. More frequent transports in lower volumes not only produce increased CO 2 emissions, but also less favorable freight rates. Whether the bundling of the initial delivery can compensate the unfavorable delivery structure on the second leg can only be assessed on a case by case base. Important is the insight that abandoning the extreme form of just-in-time delivery in favor of the use of buffer stocks implies significant aggregation effects in production and transport, which are in harmony with the goal of reducing CO 2 emissions. 1122..22..22 EExxtteennddiinngg EExxiissttiinngg PPrroocceesssseess In addition to the logistics processes described above, procurement involves additional tasks, among them for example ordering raw materials and intermediate goods, order handling, assessment of demand, order and inventory planning or management of external suppliers. Each of these procurement processes in turn consists of several sub-processes. 282 Supplier management offers numerous starting points for sustainable process management which include searching, assessing, selecting and developing suppliers. While the traditional aims of supplier management are securing a competitive advantage, increasing the quality of delivery, reducing procurement costs and increasing supply security, most companies meanwhile also actively demand sustainable development from their suppliers. This does not only serve to ensure a functioning procurement process, but also helps to support compliance with environmental and social standards. And finally sustainable development can serve as a success factor which achieves differentiation against competitors as evidenced by sustainability indexes (for example Dow Jones Sustainability Index, Carbon Performance Leadership Index), sustainability funds or sustainability rankings (for example WeGreen, Companize, brandoscope). 282 Kummer, S./ Grün, O./ Jammernegg, W. (2009), pp. 93o94 <?page no="257"?> 256 12 Shaping the Value Chain @ www.uvk.de The sustainability reporting of corporations regularly contains the following elements concerning sustainable supplier relations: 283 ) Defining the requirements concerning sustainable development of the suppliers in regulations or codes, ) informing suppliers actively about the requirements, ) committing suppliers to adhere to the requirements, ) implementing the regulations with the help of training sessions for the buyers and the suppliers, ) controlling whether the regulations are followed, ) developing systems for the early detection of negative behavior, ) rewarding cooperative behavior, sanctions in case of violations of sustainability regulations. In defining supplier regulations or codes of conduct, many companies rely on already existing norms and standards such as the ten principles of the UN Global Compact, the social standards SA 8000 of the NGO Social Accountability International (SAI), environmental standards such as DIN: ISO 14001 or the Eco-Management and Audit Scheme EMAS, a joint system of the European Union for environmental management and audits. The requirements mostly stress environmental standards and ethical principles (such as prohibiting corruption or discrimination) as well as working conditions (for example no child labor, remuneration, working hours, health, safety). In addition to formulating the requirements, these standards are also used in self-assessments of suppliers, as supplementary criteria for assessing new and existing suppliers, in check-lists for site visits and supplier audits. Additionally they are contained in the general terms and conditions and in supply agreements. Since auditing suppliers concerning the adherence to the sustainability requirements is time consuming, the companies frequently focus on business partners in so-called high-risk countries or on individual suppliers that are identified as risky. Examples for high-risk countries are countries that possess raw materials and are known for human rights violations in the process of exploitation. Risky suppliers include companies that have previously violated sustainability standards. The early detection of potential risks is the responsibility of expert teams, which specialize on market monitoring as well as external service providers, which regularly check selected countries for environmental risks (for example Business Environment Risk Intelligence S.A., www.beri.com). 283 Daimler AG (2012), online, Bayer AG (2010), online, Henkel AG & Co. KGaA (2011), online, Volkswagen AG (2012), online <?page no="258"?> 12.3 Production und Production Logistics 257 @ www.uvk.de The actual audit of the sustainability performance of suppliers takes place annually during a site visit. Frequently procurement departments are required to accept certain audit volumes (for example a minimum of 20% of the risky suppliers must be audited annually). The assessment of the sustainability performance can result in the termination of a supplier agreement if, for example, the supplier is unable to meet certain social standards. In case of an outstanding sustainability performance the supplier profits from an increased business volume or the invitation to attractive training and qualification measures. 112 2..33 PPrrooddu ucctti ioon n uun ndd PPrrood duucct tiio onn L Loog giis stti iccss 1122. .33..11 RRe ea asss seessssm me en ntt oof f KKn noow wnn CCo on ncce eppt ts s Sustainable business management is not only searching for completely new solutions. Instead it is also important to critically assess all those structures and concepts that are current business practice. This holds for the global division of labor and production sites as well as elements of lean production, which include among others the pull principle. Any reassessment of global production networks from a sustainability perspective is incomplete if merely the transport intensity of internationally distributed economic activities and the resulting CO 2 emissions are considered. Nonetheless it is clear that the peeling in Morocco or Belarus of North Sea shrimps that are sold in Germany is a negative development from an ecological perspective. The same is true for the “37,000 km shirt” with the cotton production in the US, the manufacturing in Bangladesh and the sale in Germany. 284 Instead sustainable production networks first of all need to give an answer to the question whether the increasing international division of labor and the extensive segmentation of production steps can be sustainable in the long run. Second, it needs to be assessed whether local production can be favorable, given wage increases in current low-wage countries, increasing transportation costs, regional demand shifts and changing customer needs. No clear conclusion can be drawn from current business practice. German automotive manufacturers for example are expanding production capacities overseas, while companies in the chemical industries have repatriated foreign capacities years ago. If it is assumed that over a period of 15 to 20 years the current advantage in wage costs of emerging markets becomes smaller and that transportation costs will increase (as a consequence of increasing fuel costs and the internalization of environmental costs) the global spread of production is likely to lose attractiveness, at least for certain products or industries. 284 N.N. (2011), p. 19 <?page no="259"?> 258 12 Shaping the Value Chain @ www.uvk.de Example A study about the future of globalization ties the long-run competitiveness of low-wage production to factors such as the value density and durability of a product, the contribution of wages to total production costs and the typical delivery times demanded by customers in a certain industry. In the case of high-quality, labor intensive products with a moderate response time, production in China would only lose its advantage compared to production in Eastern Europe in 18 years and at an oil price of US$ 350 per barrel. If this is compared to the manufacturing of personal computers (medium life time, medium share of wages in production costs, high value density, expectation of short delivery times), Europe as a regional economic area can offer a competitive advantage relative to production in the Far East already today. 285 The pull principle means that production is triggered only if a customer order is placed. The manufacturing of DELL computers follows this principle. This is contrasted with the push principle, where production is based on sales planning and forecasts. Economic advantages of the pull principle relate to the consistent customer orientation, since only those products are produced, which the customer has already ordered or already used up. Excess production and storage of final products is avoided. The short processing time of small lots that are made to order allows a flexible reaction to customer demands, since the facilities are never occupied for extended periods of time by large production runs. But the production of small lots is only economical if the setup times are short and setup costs are sufficiently small respectively if the storage costs and the capital commitment for the production of large lots is correspondingly high. If this is the case, it must be determined whether the economic consequences of small production lots have been captured adequately. In addition it must be assessed whether small production lots have adverse ecological consequences that partially or completely reverse this advantage. Further economic and ecological effects of the pull principle are relevant for distribution logistics, namely the transport of the final products. As in the case of just-in-time delivery, transportation is arranged as soon as the product is completed. If a company wants to avoid waiting times, idle periods and intermediate storage at this stage of the delivery chain, small production lots also result in small transportation orders, which lead to an underutilization of vehi- 285 Bretzke, W.-R. (2010), pp. 223o224 <?page no="260"?> 12.3 Production und Production Logistics 259 @ www.uvk.de cles and thus to a waste of transportation capacity. What is more, the daily fluctuations of incoming orders will directly affect the utilization of production and transport capacities, if the principle is applied consistently. Even if vehicles in the appropriate dimensions are available for smaller transportation orders, the entire production volume is still broken down into a large number of transportation units. More frequent transports of smaller units increase the total volume of CO 2 emissions as well as the number of vehicles used within a certain time period. This in turn increases the traffic density and thus the probability of traffic jams as well as the CO 2 emissions per unit transported. Furthermore, fluctuations in capacity utilization can lead to production interruptions, if for example personnel resources are lacking to cover periods of peak capacity utilization. To offset production downtimes caused by interruptions, expensive express deliveries are frequently needed. A possible solution to this dilemma is offered by the “lean” philosophy and the Toyota production system with the principle of load levelling (synonym: Heijunka), which was already described extensively in the business literature. 286 The following section discusses a different measure for the improvement of the utilization rate of transport capacity. The aims are to lower transportation costs and to reduce CO 2 emissions. This suggestion starts with the organization of operations planning and processes. 1122..33..22 EExxt te ennddiinngg EExxiisstti inngg PPr rooc ceesssseess In practice, an additional cause of unsatisfactory utilization of transportation space is the fact that different departments at the company plan in isolation, even though their plans are mutually dependent and influence each other. The examples of lot size planning, order volume planning and route scheduling are used to illustrate this issue. The production department plans the size of the production lots. The more units of the same product are manufactured in one production run, the longer the lot occupies the production line and the longer it takes before the machines and facilities can be prepared for the next product type. During retooling, the machines are usually idle and no production takes place on that line. If a production line is converted only infrequently, for example in mass production, shutdowns as a consequence of retooling are less frequent and the associated costs are lower compared to smaller lots and more frequent retooling. Depending on industry, production technology and organization of the change over process, it can take only several minutes in some cases, but many hours in oth- 286 Ohno, T. (1988), pp. 17o18 <?page no="261"?> 260 12 Shaping the Value Chain @ www.uvk.de ers. Storage costs develop in the opposite direction of change over costs. If a production lot covers for example the demand for an entire month, a part of the production must be stored initially and it may take weeks before it is sold. These stored quantities incur costs during the storage period, which go up as the production lots are increased in size. The optimal lot size y is equal to the quantity of goods which minimizes the sum of change over costs K U and storage costs K L . 287 Figure 12-2 displays the opposing cost effects graphically. Figure 12-2: Lot size planning Route scheduling deals with the transport of the finished goods to the customer, to a central storage facility or a central distribution warehouse close to the customer and plans the means of transportation needed, the size of the transport containers, the packaging, transport routes and order. From an organizational perspective, route planning is the responsibility of the shipping department or an independent logistics department. The logistics department targets maximum client service (on time delivery, flexibility of delivery, delivery quality, delivery times and so forth) and logistics costs that are as low as possible (transport cost, inventory cost, handling cost, warehouse cost and so forth). If both departments are planning independently and sequentially, the transport disposition department receives the daily customer demands and the available product quantities as an input for the subsequent transport planning. 287 Kummer, S. (Hrsg.)/ Grün, O./ Jammernegg, W. (2009), p. 140 <?page no="262"?> 12.3 Production und Production Logistics 261 @ www.uvk.de In the least favorable case the logistic group plans with small quantities as desired by the customers with poor utilization. Since the poor utilization of the transports drives up transport costs, the question needs to be raised whether the inclusion of the transport costs in the planning of lot sizes can lead to different lot sizes and an improvement of the overall cost situation. To this effect, the linear model of lot size planning is enhanced to also include transportation costs. Assuming that transportation costs are degressive, since freight costs go down as the transport volume increases, transportation costs per unit will go down as the lot size increases. Compared to the classical model of optimal lot size, the incorporation of transportation costs leads to an increase of the lot size that achieves the minimum cost. The overall costs across departments could thus be reduced if production and shipping or logistics department were to coordinate their production and transportation orders. These considerations assume that all produced quantities are transported immediately and no interim storage is required. From a practical perspective it is possible that the demands of the customer make such an approach difficult, especially if the customer refuses delivery ahead of the time or quantities that exceed the current demand. In order to still realize large lots that are shipped together, warehousing between production facility and customer is needed. At least the shipments between production site and warehouse can be combined in this way. If cost considerations rule out such intermediate storage, the remaining option is to negotiate more flexible delivery times with the customer. In this scenario the customer would agree that the delivery can be up to x days early or transported in a unit that otherwise would be half empty, in order to better utilize unused transportation capacities. This flexibility would allow a certain combination of orders, even though no buffer stock is added between production site and customer. In principle, the customer receives deliveries when needed, but accepts a certain degree of flexibility with regard to timing and quantity. The same idea can be transferred to procurement, where classical models of order volume search for the balance of fixed costs per order and storage costs. Based on this approach, warehouse management systems in companies automatically generate an order if inventory levels fall below a defined minimum level. The actual order of the material triggers a delivery from the supplier to the ordering company. If the supplier had the option to start delivery even before the minimum level was reached at the ordering company in order to optimize the utilization of the transport vehicle, a reduction of harmful emissions would also be possible in procurement. 288 Both in planning order volumes 288 Bretzke, W.-R./ Brakawi, K. (2010), pp. 142o143 <?page no="263"?> 262 12 Shaping the Value Chain @ www.uvk.de and order dates as well as in planning production lot sizes, pooling effects can only be identified and realized if quantities and dates are coordinated with transport planning. Helpful in this regard would be the organizational integration of these three planning stages. 1122..33..33 UUssee ooff IInnnnoovvaattiivvee TTeecchhnnoollooggiieess In contrast to the conceptual or procedural fields of activity described so far, production technologies that are environmentally friendly mostly rely on technological innovations. Their contributions to environmental protection mostly relate to ) the energy efficiency of industrial sites, ) the resource efficiency of industrial sites and production processes, ) the safety of the plant, ) the operation of machines and equipment that is low in emissions, ) the manufacturing or use of products that are environmentally compatible or of substitutes that are environmentally friendly. The Federal Environmental Agency in Germany supports numerous innovation projects of private companies, which for the first time realize these types of production or process technologies or process combinations, as long as these innovations make a contribution towards the avoidance or reduction of environmental burdens. 289 The Federal Environmental Agency also supports the transfer of environmental technologies via the internet portal “Cleaner Production Germany,” which offers examples of applications and product descriptions in addition to information about environmental technologies and services. 290 Case examples Beiersdorf AG for example developed a process for the production of technical adhesive tapes for the company tesa which does not require the use of solvents. Previously the use of a gasoline-ethanol mixture had been necessary to prepare the tapes for the application of the rubber adhesive. In the process, the solvent was emitted into the wastewater and the air. A new technology which relies on a thermal and mechanical treatment now replaces this step and no longer requires the solvent. 289 Umweltbundesamt (1997), p. 1 290 Umweltbundesamt (2012b) online <?page no="264"?> 12.4 Distribution and Distribution Logistics 263 @ www.uvk.de In a different project, BBS Kraftfahrzeugtechnik AG implemented a new procedure for the coating of aluminum wheel rims which works without the previously used toxic hexavalent chromium. E-Plus-Mobilfunk GmbH & Co. KG operates mobile phone base stations in Germany, which occasionally require air conditioning. The previously used air conditioning units were characterized by high energy consumption and also utilize fluorinated greenhouse gases for cooling. New ventilators which are powered by wind energy and require no coolants are expected to save 3,600 tons of CO 2 emissions annually. Investments in these technologies are initially costly. But these costs must be judged in the context of possible environmental charges and sanctions as well as of subsidies which support innovative technology projects. 1122. .44 DDiissttrriibbuutti ioonn aanndd DDiissttrriibbuuttiioonn LLooggiissttiiccss 1122..44..11 RRe eaasss se esss sm me enntt ooff KKn no owwnn CCo onncceeppttss Very different environmental aspects need to be considered when reassessing distribution systems for cities and distribution systems that span large distances between producer and buyer (consumer, retailer, industrial company). Both problems have in common that measures to support the environment depend predominantly on the ability to pool deliveries. d City logistics deals with the complete system of supply and waste disposal for urban retail operations. City deliveries are complicated by limited delivery times, limitations of vehicle size, narrow streets, lack of parking space and the flowing and standing car traffic. At the same time, the delivery activities are a significant burden for the inner cities and their residents due to noise and exhaust gas emissions. A single department store receives up to 200 deliveries per week. City logistics thus aims at providing the required transportation services while reducing the needed traffic performance. 291 This is facilitated by the geographical bundling of commodity flows, which is organized collectively and involves the establishment of so-called hubs situated on the outskirts of town. Several freight forwarders and producers deliver the goods that need to be taken to the city center, but only a single city logistics company plans and conducts the delivery to the individual downtown business- 291 Pfohl, H.-C. (2010), pp. 275o276 <?page no="265"?> 264 12 Shaping the Value Chain @ www.uvk.de es. Frequently the hub is operated by several freight forwarders. Ecological effects of this solution are reached by bundling deliveries, since more shipments per customer or per stop can be unloaded in comparison to individual deliveries. This also implies that a city logistics company achieves greater density per trip, since the number of stops is increased. Overall fewer delivery trucks are on the road. In the city of Regensburg, for example, which has a downtown that extends over less than one square kilometer, the city logistics concept achieved savings of 4,300 truck kilometers per annum and thus a significantly reduced exposure to noise and pollution. 292 The economic effects of these cooperative solutions differ for the involved parties. The city logistics company benefits from the consolidated order volume over a number of years and the opportunity of planning tours in a cost efficient manner. The manufacturers and freight haulers that deliver to the distribution hub are freed from the delivery to individual clients in the city center, which is often unattractive from an economic perspective. This possibly allows them to improve their earnings situation and their image as environmentally aware companies. But in comparison to individual deliveries, additional distribution costs at the hub can possibly offset the aforementioned cost advantage. Operating the distribution hub leads to additional costs which must be shared by the cooperation partners. Finally there is the cost of distributing the goods in the city center by the city logistics company. Advantages for the retailers include the storage space offered by the distribution center, the positive image effect and reduced waiting times at the loading docks of the warehouse. The communities also use the positive image effect of environmentally friendly deliveries in the downtown area. In this way the city logistics concept supports cities in their competition with shopping centers in the vicinity. Nonetheless, numerous problems have limited or prevented the success of many city logistics activities, such as ) an insufficient business volume for the city logistics company, ) the uneven distribution of the advantages of the cooperation, ) high costs of coordination and information (transaction costs), ) overall higher costs of the combined city logistics. The combined delivery volume depends largely on the willingness of the involved retailers to cooperate. The majority of retail outlets in downtown locations is owned by retail groups, which already possess their own distribution hubs and for that reason are not too interested in cooperative city logistics. A 292 Pfohl, H.-C. (2010), pp. 276o277 <?page no="266"?> 12.4 Distribution and Distribution Logistics 265 @ www.uvk.de further large share of the delivery volume in downtown locations is related to courier services, express service providers and parcel services, which are also unlikely to show much interest in such a cooperation. Their unique selling proposition is exactly the individual delivery and pickup of small quantities on short notice and at the desired time. For the transport management of the city logistics company it would frequently be required of the courier services, express service providers and parcel services to subordinate their service goals to collective considerations. For producers of perishable goods (such as frozen foods) meanwhile, the needed transfer of goods via the distribution hub excludes the participation in the cooperation, since these goods normally need to be transported without interruption. The participation in a city logistics cooperation is additionally limited by fixed delivery times (for example baked goods before 7am). Freight forwarders frequently oppose the cooperation because of the additional cost mentioned above. For that reason, the advantage of cooperation for the participating freight forwarders depends mostly on the pricing model of the city logistics company. Potentially suitable freight forwarders which could operate as city logistics companies are frequently reluctant because of the high costs of initiating and implementing the cooperation (transaction costs). Costs for initiating the model arise for example for developing the pricing model, the choice of reliable cooperation partners, negotiating a cooperation agreement or establishing a distribution center. Implementation costs result from the processing and communication of information concerning delivery volumes, dates and terms. The control costs arise for example from the need to assure the adherence to cooperation agreements. 293 Cities and communities together with advisors and researchers as well as freight forwarding companies are working to solve these significant problems. Positive examples demonstrate that many obstacles can be overcome. So far, no alternatives to the city logistics approach have been presented. Without the bundling of transport volumes, the only possible relief of downtown areas from delivery traffic, noise and pollution lies in regulations that limit mobility (such as a city toll). This in turn would lead to a loss of attractiveness of the downtown locations relative to greenfield shopping malls. Concerning the distribution systems to overcome major distances between producer and consumer, the dominant feature for several decades has been the trend towards centralized distribution systems. Be it Philips, Apple, Fresenius, Nike or Coop: industrial and retail companies reduce the number of regional warehouses in favor of large central locations, especially in smaller economic 293 Deutscher Städtetag (2003), pp.13o14 <?page no="267"?> 266 12 Shaping the Value Chain @ www.uvk.de areas such as Europe. The fact that national markets can easily be reached overland favors such a centralized storage concept. Positive economic effects are based mainly on the large size of a central storage facility. A smaller number of larger storage units leads to lower fixed costs compared to many small units in decentralized distribution networks. This is true for personnel and administrative costs, for building maintenance as well as for storage costs, which go down due to the need for lower buffer stocks. Write-offs of positions as a result of spoilage, overaging or damage to the goods are avoided or reduced due to the improved ability to plan with centralized inventories. Large central storage facilities additionally allow investments in automation technology for storage, order picking and delivery systems as well as the standardization of tasks. Speeding up the storage process reduces order processing times, which increases customer satisfaction and reduces process costs. A smaller number of receivings may speed up the processing of orders compared to a multi-layered and decentralized storage system. Negative economic effects are the result of long transportation routes between central storage facility and point of use. This implies longer transport times and reaction times with regard to short-term demands and comparably high transportation costs. As a result of traffic jams, transportation times over longer distances can vary considerably for a given route, which makes transportation planning more difficult and negatively influences the on-time delivery. In some cases processing costs are higher compared to small, decentralized storage units due to increased commissioning times in central storage facilities with a large number of goods, but also due to the more cumbersome central administration. 294 Nonetheless the economic advantages of central storage units tend to dominate, especially in comparably small economic areas such as Western Europe. However, distribution systems with only one central storage facility limit the opportunities for bundling in transportation management or the effects of bundling. Consequently this concept, despite its economic superiority, must be subjected to a critical assessment of the ecological effects. The lack of buffer stocks between the point of use and the central storage facility implies a tight link between customer demand and transport concerning both timing and quantity. The goods are scheduled in line with the demand and transported to the ordering location as specified. The temporal aggregation of orders with differing times of use is generally not possible. Volatile orders that are scheduled and transported immediately produce comparably frequent and poorly utilized trips with relatively high CO 2 emissions per order. Fluctuations in incoming orders further complicate the provision of transportation equipment of adequate di- 294 Stölzle, W. et al. (2004), p. 14 <?page no="268"?> 12.4 Distribution and Distribution Logistics 267 @ www.uvk.de mensions and may lead to the use of oversized vehicles with correspondingly weak CO 2 efficiency. If these avoidable CO 2 emissions were charged as costs to the operators of central distribution systems, their economic advantage might vanish. As the minimum of inventory costs, handling costs, storage costs, transport costs and environmental costs is moved, decentralized distribution structures might have an advantage over centralized setups. Hybrid structures are widespread in practice. They are based on central distribution systems and transshipment points. These transshipment points hold no inventories and are located in close proximity to the customer. 1122..44..22 EExxtteennddiinngg EExxiissttiinngg PPrroocceesssseess Existing processes of planning and managing transportation capacity offer numerous starting points for the sustainable development of distribution logistics. Among the large number of possible measures to achieve sustainable capacity management, the following examples stand out: ) electronic freight exchanges, ) horizontal cooperation in transport, ) pre-bundling of shipments. Electronic freight exchanges are electronic market places which bring together supply and demand for freight capacities. Examples are TimoCom (www.timocom.de) or Teleroute Freight Exchange (http: / / corporate.teleroute. com). A difference must be made between market places with and without the ability to determine prices. During so-called “reverse auctions,” the supplier of freight space that makes the lowest offer receives the bid for a delivery. In contrast, price negotiations are left to the market partners who meet on electronic market places that only have a matching function. Here only suitable offerings of freight capacities are presented to an interested sender. Both types have in common that they attempt to improve capacity utilization and try to avoid empty runs. This has positive economic and ecological effects for sustainability: the reduced number of vehicles used can lower both transportation costs per shipment as well as CO 2 emissions and help to reduce the formation of traffic jams. Therefore it will be very interesting to see the results of future studies dealing with the medium-term effects of these freight exchanges on the aggregated transportation capacity and the overall traffic volume. Over the short term, it must be feared that only individual companies can benefit from increased efficiency as a result of freight exchanges, while the capacity of the entire system remains unchanged. 295 295 Bretzke, R.-W./ Barkawi, K. (2010), pp. 183o184 <?page no="269"?> 268 12 Shaping the Value Chain @ www.uvk.de Horizontal cooperation attempts to combine partial deliveries of two freight forwarders in such a way that the order-related traffic for both partners is significantly reduced. Mars and Ferrero for example are two companies on the same stage of value creation. Traditionally, they individually served the same stores of Aldi, Rewe or Lidl. Not infrequently, expensive single dispatch orders were required, if one store ordered only small quantities of one product. Today the competitors jointly order transportation services and thus enable the bundling of store-specific goods at one transshipment point and the joint transport to that store. Traffic in the target area is reduced; both partners protect the environment and profit from lower freight rates. This experiment is even more remarkable as classical obstacles in horizontal cooperation are overcome: transport volumes and conditions are revealed and mutual dependence is created. The jointly negotiated freight rates can only be realized if the planned volumes can be provided by the two partners. The risk of one-sided demand fluctuations and the resulting imbalance in the benefits of the cooperation ultimately limit the economic and ecological effects. The cooperation between Mars and Ferrero is also only effective for the distribution to the retailers and not for the transport from the production site to the transshipment point of the transportation service provider. 296 Independent brokers can also contribute towards sustainable capacity management. If upcoming shipments from several companies could already be consolidated and combined into tours prior to offering them to a freight forwarder or exchange, additional bundling effects could be realized. So-called fourth party logistics providers (4PL service providers) could achieve such a bundling of shipments, as long as a sufficient number of companies with regular shipments are interested. 297 As independent transportation brokers, 4PL service providers do not possess their own distribution centers or vehicles. They combine the resources and competencies of other service providers to achieve a unified solution for their customers. Their core competencies are the management of logistics networks across companies and the integration of heterogeneous data processing systems 298 . At present however, such a comprehensive management of transport routes across companies is still in its infancy. 1122..44..33 UUssee ooff IInnnnoovvaattiivvee TTeecchhnnoollooggiieess In contrast to the changes in distribution structures and operative transportation structures, new technologies do not aim at decoupling traffic and transport 296 Höhmann, I. (2009) online 297 Bretzke, R.-W./ Barkawi, K. (2010), pp. 183o184 298 Zadek, H. (2004), pp. 23o24 <?page no="270"?> 12.4 Distribution and Distribution Logistics 269 @ www.uvk.de volumes via bundling. Innovative drive technologies for example primarily target a reduction of fuel consumption of all means of transport. Numerous studies highlight the importance of measures to increase energy efficiency in goods transportation. The main insights of the trend study “Delivering Tomorrow” by Deutsche Post DHL on this aspect are summarized in the following paragraphs. 299 The test use of hybrid vehicles confirms the efficiency gain of up to 25% compared to conventional combustion engines for small trucks, which are used primarily in city logistics as well as for delivering letters and express mail. For smaller deliver vehicles it is more likely that electric drives will dominate hybrid solutions. First of all, the efficiency gain of hybrid drives is not significant for small vehicles that do not drive long distances. Second, the noise pollution from electronic vehicles is even smaller. This opens up possibilities for downtown deliveries during the night. The economic benefit of these vehicles is currently still limited by the high purchase and maintenance cost, an insufficient charging infrastructure and a low range. From an ecological perspective, the extend of CO 2 reduction is limited to a maximum of 30% compared to standard drives due to the fact that electric power is mostly generated conventionally. Fuel cell powered vehicles meanwhile cannot be expected in the near future. The technological and commercial market maturity is not expected before the year 2030. But for conventional vehicle drives such as diesel engines for light trucks, increases in energy efficiency of up to 50% can be expected over the next 25 years. This is even more important as many problematic areas remain in the development of alternative fossil or regenerative fuels. These include the high purchase price or conversion costs, high fuel prices or the use of large agricultural areas for the production of certain regenerative fuels. Despite all these hindrances, the partial replacement of fossil fuels by biogas appears attractive for city logistics applications in the light of promised reductions of CO 2 emissions of up to 80%. The use of overlong trucks on long distances could soon be an option in Germany as well. Since vehicles with a length of up to 25.25 m were admitted on a limited road network in January 2012, the field study shows significantly reduced CO 2 emissions per unit transported. In the areas of container ships, air traffic and rail traffic, the development of energy efficient means of propulsion is also advancing, but cannot be fully covered in the framework of this chapter. Already in use are for example automated towing kite systems for cargo ships, which use wind power in addition to the conventional engine and can significantly lower fuel consumption. 300 299 Deutsche Post AG (Eds.) (2010), pp. 109o110 300 Skysails (2012) online <?page no="271"?> 270 12 Shaping the Value Chain @ www.uvk.de A significant share of all CO 2 emissions (371 mega-tons or 13%) caused by the freight traffic industry has its origins in real estate used for logistics purposes. Numerous studies support achievable reductions of energy used to generate electrical power and heating of logistics buildings of 10 to 15 percent. 301 Air conditioning and ventilation systems generate the bulk of the electrical power use. Additionally, electrical power is used in lighting, the operation of doors, gates, conveyor systems, order picking systems and computer systems. Correspondingly a large number of individual measures are available to increase the energy efficiency of logistics buildings. Some of them are summarized in Table 12-1. The result of studies which show that investments of companies in resource efficient technologies are mostly found in the area of logistics real estate is thus unsurprising. Measurement systems to capture the environmental effects of logistics buildings are offered by certification systems such as the British “BREEAM.” The organization evaluates buildings based on energy use, the use of space and water, materials used and other factors. According to their data, the “greenest logistics center on earth,” the “G. Park Blue Planet” is located in Staffordshire in Western England. 302 Electrical power consumption Resource-efficient technology Functioning Air conditioning units Insulation materials Prevent that heat vanishes, thus reducing the need for heating Energy efficient air conditioning systems Reduce electrical power consumption Ventilation systems Cross-flow heat exchanger Recapturing of thermal energy from exhaust air Doors, gates Insulated high-speed doors Insulation prevents that heat escapes or intrudes Efficient door management reduces the duration of door openings Conveyor technology, Order picking systems Lift motors that recapture kinetic energy Propulsion systems of shelf lifts recapture energy when breaking following downward moves 301 World Economic Forum (2009), p. 20 302 N.N. (2009) online <?page no="272"?> 12.4 Distribution and Distribution Logistics 271 @ www.uvk.de Alternative electrical power generation Photovoltaic systems Generates electrical power from solar energy Geothermal power Generates electrical power from the heat that is stored in the earth crust Kinetic floor plates Recapturing the braking energy of vehicles Other uses of energy Heating system Dark radiator Transforms solar energy into electrical energy Heat generation from burning a mixture of oxygen and gas in closed burners with steel pipes that reflect the heat Wood chip facility Uses regenerative raw materials for heating Biomass block heating power system Combined heat and power production: electrical power is generated from mechanical energy and useful heat is supplied Table 12-1: Building blocks for resource efficient technologies to run logistics centers (Own presentation, based on N.N. (2010) pp. 18 - 19) At a glance Value creation processes influence economic, social and ecological targets of the company in numerous ways. The fields of action for the sustainable management of value creation in companies are broad and multilayered. Innovative technologies are frequently most prominent in the public debate. But especially the structures of logistics systems and logistics processes are responsible for major environmental effects and can <?page no="273"?> 272 12 Shaping the Value Chain @ www.uvk.de make a big contribution towards the protection of resources and the environment. In an extreme case, the assessment of these systems and structures with an extended target system can lead to the rejection of known and trusted concepts. The coexistence of economic and ecological aims in logistics does not always lead to conflict, as the example of lower transportation costs and reduction of CO 2 emissions demonstrated on several occasions. Correspondingly high is the motivation of companies to become active in shaping the sustainable development of logistics as long as economic and ecological goals are in harmony. Additional pressure to adjust will be caused in the future especially by the increasing internalization of environmental costs and the price increase of non-regenerative resources. Suggestions for further reading Textbook on sustainable logistics: McKinnon, A./ Cullinane, S./ Browne, M./ Whiteing, A. (eds.) (2010): Green Logistics, London. Literature Bayer AG (2010): Bayer-Nachhaltigkeitsbericht 2010, www.nachhaltigkeit2010.bayer.de, accessed on 1. October 2012. Bretzke, W.-R. (2010): Die Zukunft der Globalisierung: die Veränderung von Wertschöpfungsnetzwerken in Zeiten des Klimawandels, steigender Energiekosten und knapper Verkehrsinfrastrukturkapazitäten, Hamburg. Bretzke, W.-R./ Barkawi, K. (2010): Nachhaltige Logistik. Antworten auf eine globale Herausforderung, Berlin. Daimler AG (2011): Daimler Nachhaltigkeitsbericht 2011, www.nachhaltigkeit.daimler.com, accessed on 1. October 2012. Deutsche Post AG (eds.) (2010): Delivering Tomorrow. Zukunftstrend Nachhaltige Logistik, Deutsche Post AG, Bonn. Deutscher Städtetag (eds.) (2003): Leitfaden City-Logistik. Erfahrungen mit Aufbau und Betrieb von Speditionskooperationen, Berlin. <?page no="274"?> OxZ|]šZX]| 273 @ www.uvk.de Gössinger, R. (2008): Produktion und Logistik, in: Betriebswirtschaftslehre Band 1, edited by Corsten, H./ Reiß, M., München. Henkel AG & Co. KGaA (2011): Nachhaltigkeitsbericht 2011, http: / / nachhaltigkeitsbericht.henkel.de, accessed on 1. October 2012. Höhmann, I. (2009): Die Kooperation endet erst im Regal, in: Handelsblatt from 28.10.2009, www.handelsblatt.com Kummer, S. (ed.)/ Grün, O./ Jammernegg, W. (2009): Grundzüge der Beschaffung, Produktion und Logistik, München. McKinnon, A./ Cullinane, S./ Browne, M./ Whiteing, A. (eds.) (2010): Green Logistics, London. N.N. (2009): Die grünste Logistik-Immobilie der Welt, http: / / www.detail.de/ architektur/ themen/ die-gruenste-logistik-immobilieder-welt-001149.html, accessed on 01.10.2012. N.N. (2010): Viele kleine Bausteine, in: LOG.Kompass, H. 11/ 2010, 18f. N.N. (2011): Das 37.000-km-Shirt, in: LOG.Kompass, H. 4/ 2011, 19. Ohno, T. (1988): Toyota Production System: Beyond Large Scale Production, Portland. Pfohl, H.-C. (2010): Logistiksysteme, 7 th edition, Berlin. Schulte, C. (2009): Logistik, München. Skysails (2012): SkySails-Antrieb für Frachtschiffe, http: / / www.skysails.info/ skysails-marine/ skysails-antrieb-fuer-frachtschiffe/ , accessed on 11. 05.2012. Stölzle, W./ Heusler, K. F./ Karrer, M. (2004): Erfolgsfaktor Bestandsmanagement. Konzept, Anwendung, Perspektiven, Zürich. Umweltbundesamt (1997): Richtlinie des Bundesministeriums für Umwelt, Naturschutz und Reaktorsicherheit zur Förderung von Investitionen mit Demonstrationscharakter zur Verminderung von Umweltbelastungen vom 04. Februar 1997. Umweltbundesamt (2012a): Nachhaltige Produktion, http: / / www.umweltbundes-amt.de/ nachhaltige-produktionanlagensicherheit/ index.htm, accessed on 02.02.2012. Umweltbundesamt (2012b): cleaner production germany, www.cleanerproduction.de, , accessed on 1. October 2012. Volkswagen AG (2012): Nachhaltigkeit und Verantwortung, http: / / www.volkswagenag.com/ content/ vwcorp/ content/ de/ sustainability_ and_responsibility.html, , accessed on 1. October 2012. <?page no="275"?> 274 12 Shaping the Value Chain Wöhe, G. (2010): Einführung in die allgemeine Betriebswirtschaftslehre, München. World Economic Forum (2009): Supply Chain Decarbonization. The Role of Logistics and Transport in Reducing Supply Chain Carbon Emissions, Genf. Zadek, H. (2004): Der Logistik-Dienstleistungsmarkt, in: Supply Chain Steuerung und Services, eds. V. Baumgarten, H. u.a., Berlin, 15-28. <?page no="276"?> 1133 MMaarrkkeettiinngg by Iris Ramme Learning Objectives The readers ) learn how the 4 P‘s of Marketing can be structured with regard to sustainability, ) recognize the social or ecological consequences of marketing measures, ) can critically assess possible effects on the economic situation of the company if social and ecological aims are included into marketing measures, ) learn that market segmentation importantly hinges on attitudes towards sustainability aspects in addition to willingness to pay, ) recognize situations where sustainable marketing is a balancing act between competing social, ecological and economic aims and situations where social, ecological and economic aims are complementary, ) learn that increasingly more factors need to be considered in a market and environmental analysis, which are mutually dependent and which frequently only have a long-term effect. List of Key Terms ) Product policy ) Pricing policy ) Distribution policy ) Communication policy ) Marketing strategy ) Marketing concept ) Marketing controlling ) Corporate social responsibility ) Brand ) Innovation ) Obsolescence ) Packaging ) Trust in pricing ) Captive pricing ) Indebtedness ) Sales triathlon ) Greenwashing ) Trust <?page no="277"?> 276 13 Marketing @ www.uvk.de 1133..11 MMaarrkkeettiinngg aanndd SSuussttaaiinnaabbiilliittyy 1133..11..11 MMaarrkkeettiinngg Marketing means to “bring a product to the market” and many definitions of the term marketing exist. 303 Most frequently quoted is the American Marketing Association (AMA) with their definition of marketing. The first definition is from the year 1935. Updates were issued in 1948, 1960, 1985 and 2004. 304 The newest explanation from the year 2007 is as follows: Definition „Marketing is the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.“ 305 The four marketing instruments product, price, place and promotion 306 have lost in importance, while the client orientation and the consideration of society at large gain relevance. 1133..11..22 SSuussttaaiinnaabbiilliittyy One of the oldest definitions of the term sustainability comes from the Brundtland Commission. Sustainability is understood as the necessity to meet current needs without compromising the ability of future generations to meet their own needs. 307 Thus sustainability specifically aims at long-term orientation and meeting of needs. An extremely important concern, which was already formulated in the Brundtland Report in 1987, is the careful use of resources in order to assure the long-term survival of mankind. 308 1133. .11..33 DDeef fiinniitti ioon n ooff SSu usstta aiinnaabbllee MMaarrkke ettiinngg In order to define sustainable marketing, it is initially required to discuss various philosophies of market development. In general, five different philosophies of 303 Ramme, I. (2009), p. 2 and the literature cited 304 Vaaland, T.I./ Heide, M./ Grønhaug, K. (2008), p. 929 305 Lotti, M./ Lehmann, D. (2007), o.S. 306 Ramme, I. (2009), p. 2 307 Brundtland, G. H. (1987), p. 24 308 Ramme, I. (2009), p. 2 <?page no="278"?> 13.1 Marketing and Sustainability 277 @ www.uvk.de market development are distinguished, which reflect the different perspectives of companies: 309 1. Production concept The company stresses its high efficiency in production, which leads to low costs. These are passed along to the consumer in the form of low prices. 2. Product concept The supplier focuses on consistently high quality and further product improvements. Starting point is the idea that outstanding products will always have a market. 3. Sales concept It is based on the consideration that market demand is initially insufficient and for that reason an aggressive sales approach is needed. Not the buyer of the product with his or her preferences is the center of attention, but rather the product that must be sold. 4. Marketing concept The marketing concept focuses on the needs and wants of the target market. They need to be determined and the offering must be adjusted in a way that satisfies the preferences of the potential buyers and allows for profitable production. The basics of this approach are a focus on the market, customer orientation, holistic marketing as well as profitability derived from satisfied customers. 5. Societal marketing concept This philosophy of market development constitutes an expansion of the marketing concept. In addition the quality of life of society is considered. Table 13-1: Philosophies of market development All philosophies of market development are represented in actual business practice, but production and product concepts have become less popular and are being surpassed by the marketing concept, which focuses on the customer. The societal marketing concept was already described in the year 1972 by Philip Kotler. 310 The critical view of marketing from a societal position includes the media overload caused by marketing, the excessive weight given to consumption compared to other societal values, manipulative intentions of the companies engaged in advertising, replacement purchases that are purposefully accelerated 309 Ramme, I. (2009), pp. 6o8 and the literature cited 310 Kotler, P. (1972), p. 54 and also Elliott (1990), p. 20 as well as Crane (2002), p. 549 <?page no="279"?> 278 13 Marketing @ www.uvk.de (planned obsolescence), tough sales approaches, excessive margins for branded products, poor service for socially disadvantaged consumers, waste of materials and energy and thus the impairment of our entire ecosystem. 311 It still needs to be discussed whether a corporation considers the societal impact of its business activities in order to secure the long-term viability of our living conditions, or whether this is a derived goal. In a society with strong environmental awareness such as the Federal Republic of Germany, only those products are accepted by consumers that fulfil certain ecological minimum standards. 312 Sustainability, compatibility with the environment or justice have become hygiene factors. 313 Twenty years ago, such a focus on the environment would not have boosted the image of companies. Depending on the target group, the importance of an environmental orientation can vary. Customers of Weleda AG, for example, have a strong interest in environmental issues. For that reason it is absolutely required - and not only corporate philosophy - that the manufacturing of medications and body care products only uses raw materials that have been cultivated according to bio-dynamic principles, works only with essential oils and avoids animal testing. According to Kotler, it is not the task of companies to satisfy the short-term needs of consumers (such as a large and exclusive car, tasty sweets, tobacco and alcohol or non-reusable packaging), but instead to consider the long-term effects of our consumption on health and environment and to communicate accordingly. 314 The question whether sustainability is a target in its own right or merely an instrument is discussed intensively in the contribution by Ginter. Definition Following Balderjahn, sustainable marketing is defined as a concept for the market-oriented management of a company, which assures that the consumers’ needs are satisfied, corporate targets are achieved and at the same time, the requirements of the market participants, society and the natural environment are taken into consideration. 315 311 Schmidt-Riediger, B. (2008), p. 10 and the literature cited as well as Armstrong, Kotler (2013), pp. 482o484 312 Also see the results of Brigitte Kommunikationsanalyse (2012) 313 Schneider, G. (2012), p. 42 314 Kotler, P. (1972), p. 54 315 Balderjahn, I. (2004), p. 1. Additional definitions can be found in Schmidt-Riediger, B. (2008), p. 23 <?page no="280"?> 13.1 Marketing and Sustainability 279 @ www.uvk.de This includes social, ecological and economic targets. This approach, which is also called “Triple P” (profit-people-planet), 316 implies an orientation on customers, corporate targets, long-term orientation and resource conservation. The entire marketing process must follow these principles and move away from a pure focus on brand management and customer orientation. 317 1133..11..44 DDeevveellooppmmeenntt ooff SSuussttaaiinnaabbllee MMaarrkkeettiinngg Sustainable marketing had its origins in eco-marketing and was developed over the past 40 years. Schmidt-Riediger summarizes this development as follows: 318 Stage Time period Idea 1 Seventies Ecological aspects need to be incorporated in marketing 2 Eighties/ early nineties Environmental legislation, environmental awareness of consumers, technologies provide environmentally sound solutions 3 Nineties Credibility problems due to increased costs and resistance to change, while at the same time the stakeholder approach is advancing 4 21 st century In addition to ecological components also social elements d sustainable marketing Table 13-2: Development of sustainable marketing Marketing and management theories developed over the past years increasingly assume that companies also have an ethical and moral obligation. The social component, expressed as corporate social responsibility, gains in importance. 319 316 The Triple-P-Approach was developed in the mid-nineties by Elkington for the measurement of corporate success. Slaper, T.F./ Hall, T.J. (2011), p. 1 and comprehensively Elkington, J. (1997). 317 Elliott (1990), p. 29 318 Schmidt-Riediger, B. (2008), pp. 12o14 319 Daub, C.H./ Ergenzinger, R. (2005), p. 998 <?page no="281"?> 280 13 Marketing @ www.uvk.de 1133..22 SSuussttaaiinnaabbiilliittyy iinn tthhee MMaarrkkeettiinngg PPrroocceessss 1133..22..11 TThhee MMaarrkkeettiinngg PPrroocceessss Marketing goals are derived from corporate goals and must be measurable. This is important because employees need to be clear about the direction the company is taking. Additionally, measurability is a prerequisite for evaluating performance. Only if the target is clearly formulated and measurable the result can be compared with the defined objective. An important classification of the targets distinguishes between strategic and operative (tactical) goals. Strategic marketing goals relate to the company philosophy. Answered are questions such as which market segments to target, which competitors are considered to be particularly relevant or which pricing strategy to pursue. Operative marketing is concerned with the use of marketing instruments such as pricing policy, product policy, communication policy and distribution policy. 320 The following Figure 13-1 clari- Figure 13-1: Marketing process 320 Ramme, I. (2009), pp. 8o9 <?page no="282"?> 13.2 Sustainability in the Marketing Process 281 @ www.uvk.de fies the sequence, which Meffert et al. call marketing management process, 321 but in the following is simply called marketing process. Sustainable target formulations are characterized by their long-term perspective and the focus on sustainability. These can be environmental or social targets, which need to be aligned with the economic goals of the company - typically profit maximization. 1133..22..22 MMaarrkkeettiinngg RReesseeaarrcchh Marketing research provides instruments that support marketing management in solving the various current and future decision problems and comprises the analysis of all marketing activities and the marketing environment (micro and macro analysis). 322 Information must be provided concerning ) an analysis of the current situation, ) a forecast about the development of the marketing environment and ) an assessment of the effects of the company’s marketing activities. KPMG suggests to reconsider the current forecasting process and to replace the extrapolation of current developments with a holistic approach that includes mutually interdependent factors. 323 While this increases the complexity of planning, it also enforces more consistent action. KPMG lists ten “sustainability mega forces” which are likely to influence the business development of corporations. They are: ) Climate change and resulting interruptions in production ) Volatile energy and fuels markets ) Material resource scarcity ) Water scarcity ) Population growth ) Increasing wealth ) Urbanization ) Food scarcity ) Increasing dependence on functioning ecosystems ) Deforestation 321 Meffert, H./ Burmann, C./ Kirchgeorg, M (2011), p. 20 322 Ramme, I. (2009), p. 21 as well as p. 53 323 KPMG (2012), p. 1 <?page no="283"?> 282 13 Marketing @ www.uvk.de This also means that companies can expect to be held responsible in the future for an increasing part of the external costs which they are causing - such as water use, air pollution or waste - and which are not on the balance sheet at present. 324 1133..22..33 SSttrraatteeggiicc MMaar rkkeettiinngg Most important for the strategic planning in marketing is the achievement of the corporate goals. This includes assuring the continued viability of the company by making sustainable profits as well as meeting customer needs. When developing and implementing the strategies, a company should pay attention to the careful use of all resources. This includes open communication with employees and customers, the identification of opportunities in personnel development, job satisfaction, but also lean processes in strategic planning, so that planning does not become an end in itself. 1133..22..44 MMaarrkkeettiinngg IImmpplleemmeennttaattiioonn aanndd MMaarrkkeettiinngg CCo onnttrroolllliinngg When implementing marketing measures, namely the 4 P’s in operative marketing, internal marketing becomes important: the employees must be involved in order to accomplish the targeted implementation of all planned measures. Whether the discussed measures yield the expected effect must be assessed with key figures for the success of individual activities or entire campaigns (marketing controlling). The determination of the degree of accomplishment is only possible if the targets are measurable. 325 Performance indicators should not only relate to revenue, sales or market share, but also to issues of sustainability. This calls for the use of the Triple P approach. Examples for sustainability indicators in the context of brand management can be found in the Meaningful Brand Index Study 326 or in the ImagePower Green Brands Study. 327 324 KPMG (2012), p. 8 325 Ramme, I. (2009), p. 233 326 Warner, S./ Nice, H. (2011) 327 Longsworth, A. et al. (2011) <?page no="284"?> 13.3 Sustainable Marketing Measures 283 @ www.uvk.de 1133..33 SSuussttaaiinnaabbllee MMaarrkkeettiinngg MMeeaassuurreess 1133..33..11 PPrroodduucctt PPoolliiccyy Every buyer expects that the purchase of a good or a service satisfies his or her needs. He or she has very specific expectations concerning their utility, which are linked to the observed product features. All marketing activities that relate to variations in these product attributes belong to the field of product policy. 328 The task of product policy is not (only) the improvement of the technical features of a product. The starting point is marked by the needs, wishes and problems of the potential buyer. Product policy must make decisions about the product and the product mix. This means concretely: 329 ) Decisions about the product: - Design of product features - Design of product packaging - Decisions about branding ) Decisions about the product mix with the aim of designing the product range and the program: - Developing new products (product innovation) - Further development of products (product modification) - Termination of a product offering (product elimination) - Addition of new product lines (diversification) Regarding the design of the product, many aspects of sustainable marketing are touched. Durable materials assure the lasting use of a product. Resource-saving raw materials in production, the possibility of repairs and recycling of old products also support sustainability. The use of durable materials initially leads to a decline in sales, since replacement purchases are delayed. But with higher prices - and in the case of only moderately higher costs - also higher margins are possible, and if buyers can be convinced that longevity will be beneficial in the long run and makes a contribution to environmental conservation. Miele, for example, points out that its washing machines are targeted for a useful life of twenty years and that no other brand passes this test. 330 Sustainably designed consumer goods should also 328 Ramme, I. (2009), p. 105 329 Ramme, I. (2009), p. 105 330 Miele (2013) <?page no="285"?> 284 13 Marketing @ www.uvk.de offer the possibility of repairs and the availability of spare parts. Repairs have become increasingly uninteresting because repair services have become too expensive (wage costs), because the purchase of a new product is cheaper than the procurement of spare parts or because the product price has declined so much in the interim that repairs are out of the question. This is frequently the case with electronics products such as televisions, personal computers, mobile phones or household appliances. Each individual customer considers his or her personal utility, but a reorientation towards sustainability would be desirable. This is true for producers as well as for consumers. Examples from the consumer goods sector include lady’s handbags of the airline KLM, which are made from recycled uniforms of flight attendants or shoulder bags made from truck tarpaulins by the Swiss company Freitag. 331 The use of resource-saving raw materials and production technologies has already been discussed intensely in the context of bio or organic products. The topic already has a long tradition especially in Germany and many consumers pay attention to eco labels or choose products that promise a careful treatment of nature or that are, for example, grown without the use of pesticides. However, suppliers need to break down quality barriers, no matter whether the quality reduction is real or only perceived. This is true for example in the case of confectionery that contains less sugar, sausage that is produced without nitrite curing salt, or milk that has not been homogenized. 332 Product characteristics not only refer to aspects of production or use, but also of disposal. Products that can be disposed of in an environmentally sound manner or recycled support sustainability. With the Recycling and Waste Management Act (KrWG) which came into effect in June 2012, binding rules exist for the avoidance and recycling of waste. 333 For almost twenty years, automobile parts made by Mercedes-Benz get a second chance: a dismantling and recycling company which is part of the Daimler AG takes back old vehicles, utilizes the used parts that are still functioning and disposes of parts that can no longer be used in an environmentally friendly fashion. 334 Volkswagen, Renault and Peugeot pursue a similar business model. 335 331 Freitag (2013) as well as KLM (2013) 332 Dienel, W. (2000), p. 59 333 BMU (2013) 334 Mercedes-Benz Gebrauchsteile Center (2013) 335 Belly, C. (2012), p. 78 <?page no="286"?> 13.3 Sustainable Marketing Measures 285 @ www.uvk.de Packaging is a related topic. For physical goods, packaging is the most noticeable product feature. Packaging initially served to protect the product from damages (protective function). Standard vacuum packaging protects coffee from exposure to sun and air in order to increase shelf life. At the same time, the packaging must facilitate transport and storage (logistics function). With an increasing offering of finished goods, the acquisition function was added. The packaging served to identify a product (for example via the brand name) and to motivate the consumer to make a purchase (for example via the design of the packaging). With the introduction of materials management systems, it became necessary to mark the goods with EAN codes (materials management function). These are mostly placed on the packaging. The option to mark the good with a Green Dot frequently also requires the existence of product packaging. Important developments related to an increased environmental awareness were the introduction of the dual system in Germany which required the marking of goods, the obligation of retailers to take back packaging, detailed in the Packaging Ordinance of 1991, the increasing use of bottles with refundable deposit and deposits on disposable bottles and beverage containers. 336 As already mentioned, innovation, but also diversification and modification are instruments of product policy. New products are important for the competitiveness of a company. However, every time a functioning product is replaced, it must be disposed of. For high-end consumption goods such as automobiles, there is an attractive secondary market, but a lot of goods end up in a landfill, even though they are still in good condition. This behavior of firms, summarized by the term planned obsolescence, has been criticized for many years now. But at the same time it can also be assumed that companies in the long run will not be in a position to develop products with an intentionally short durability, since this will result in dissatisfied consumers. 337 Social organizations such as Caritas motivate consumers to donate products that are still functioning, so that socially disadvantaged citizens can acquire them inexpensively. In the US, “garage sales” are a frequent phenomenon, where used goods are sold at attractive prices. Especially clothing and household appliances are offered and new owners are found in lower social milieus. Some companies, such as WMF AG, also offer trade in opportunities. When buying a new pot, a credit of EUR 10 is given for handing in an old pot. 338 If the used good is still in satisfactory condition, it is donated to a welfare service organiza- 336 Ramme, I. (2009), pp. 106o107 and the literature cited 337 Armstrong, G./ Kotler, P. (2013), p. 485 338 WMF (2013) <?page no="287"?> 286 13 Marketing @ www.uvk.de tion. With these activities companies can increase recycling by a certain amount and pursue social aims at the same time. Nonetheless, striking an appropriate balance between innovation on the one hand and long product life cycles on the other hand remains a challenge for companies. Innovation also serves to develop new products, which improve resource utilization compared to the predecessor generation. Examples include green energy, automobiles with reduced CO 2 emissions, television sets with reduced power consumption, dishwashers with reduced water use or buildings with increased energy efficiency. Frequently, those innovative products have better market success than products which enforce the economical use of resources (curtailment). 339 Especially the manufacturers of premium automobiles rely on innovations that lower CO 2 emissions without reducing performance. 340 Branding of goods and services is a central element of product policy. Sustainability targets the core (such as resource conservation, ecological and ethical aspects) but especially the longevity of the brand. 341 A brand primarily serves to achieve differentiation from the competition. The aim is to convince the consumer to purchase exactly this brand and not a similar product. The brand furthermore facilitates communication with consumers. Recognition is achieved simply by naming a brand such as Maggi or presenting a symbol such as the Mercedes star. Brand loyalty can only develop if the customer knows how to recognize a product which he wants to purchase again after he was satisfied previously. Branding can thus achieve an increase in sales. The preference given to a brand additionally tends to open up pricing opportunities. As an example, the branded product Aspirin is significantly more expensive than the generic products offered by Ratiopharm, but not less successful. One advantage of the brand for the consumer is the reliability concerning quality and distribution coverage of the brand. The purchase becomes easy and the behavior can be standardized. 342 The example of the insolvency of the drugstore chain Schlecker shows the great importance of establishing a lasting brand. Schlecker apparently failed to invest in its brand and mostly relied on aggressive pricing, which ruined the long-term viability of the brand. In contrast to Ikea or Aldi, the brand Schlecker arouses 339 Gupta, S./ Ogden, D.T. (2009), p. 376 as well as Jansson, J./ Marell, A./ Nordlund, A. (2010), p. 366 340 Schneider, G. (2012), p. 42 341 Prax, C. (2013), p. 96 342 Ramme, I. (2009), pp. 110o111 <?page no="288"?> 13.3 Sustainable Marketing Measures 287 @ www.uvk.de antipathy. 343 According to Fassnacht, Schlecker “clearly failed because of its brand.” 344 The success of a brand is frequently measured in rankings. One of the most respected rankings is the brand value determined by Interbrand. 345 It looks at globally present brands and ranks them with regard to their brand strength and their economic success. 346 Recently rankings have been developed which go beyond economic success and also include the benefits brands bring to consumers’ lives when evaluating the success of a brand. Aspects such as the sustainability of the products, environmental problems or responsibility of the companies are also considered. 347 Consumers increasingly choose products that promise justice and a good conscience. 348 The elements with potential for sustainability in the product policy are summarized in the following Table 13-3. Product Product character Long-lived materials Resource-friendly production, Eco or bio products Repair instead of replacement and long-term availability of spare parts Packaging Resource-friendly packaging Decision about brand positioning Development of sustainable brands Product mix Product innovation, Product modification, Diversification No planned obsolescence Innovation for sustainability Product elimination Recycling of discarded products Table 13-3: Potential for a sustainable product policy 343 Campillo-Lundtbeck, S. (2012), p. 2 344 Fassnacht, M. (2012), p. 4 345 For the methodology see Interbrand (2012) 346 Reidel, M. (2011), p. 22 347 Jacob, E. (2011), p. 24 or more detailed Havas Media (2011) 348 Bezencon, V./ Blili, S. (2010), p. 1305 <?page no="289"?> 288 13 Marketing @ www.uvk.de 1133..33..22 PPrriicciinngg PPo olliiccyy The task of pricing policy is the determination of the payment required by (potential) buyers of a good or a service. This usually takes the form of money, but can also be in the form of another good or service (barter). In the context of pricing policy, decisions are needed about initial price setting, price changes or the structure of prices. Also set as part of the pricing policy are terms of delivery and payment such as currency, payment date or leasing. 349 The price is unique among the four P’s, as it is the only instrument with a direct influence on revenue, which is calculated as the product of price and quantity sold. In that sense, the price is a factor that influences the long-term viability of a company. 350 When setting prices, willingness to pay of the target group is determined and compared with the cost structure in order to maximize profits. If marginal cost equals marginal revenue, the price with the highest profit potential has been identified - under the condition that both the cost curve and the demand curve have been estimated correctly. 351 The customers’ willingness to pay is derived from the perceived utility which results from the purchase. 352 This utility depends on many factors and one of them is the concern for ethical consumption. 353 According to a study by Balderjahn and Peyer, consumers are willing to pay higher prices for products that are traded fairly in their opinion. 354 The willingness to pay only increases in line with the perceived value of the o sustainable - product. If organic vegetables, for example, are twice as expensive as conventionally farmed vegetables, the willingness to pay higher prices reaches a limit. 355 A conflict arises in the case of products that are essential for survival, but unaffordable for the customer. Typical is the case of medications which are frequently criticized for their excessive prices, especially if these are lifesaving products that are unaffordable for the patients. Ethical concerns arise for example in the case of AIDS medications for markets in developing countries. 356 349 Ramme, I. (2009), p. 125 350 Diller, H. (2008), p. 21 351 Meffert, H./ Burmann, C./ Kirchgeorg, M. (2011), p. 535 352 Armstrong, G./ Kotler, P. (2013), p. 158 353 Balderjahn, I./ Peyer, M. (2012), p. 346 354 Balderjahn,I,/ Peyer, M. (2012), p. 359 355 Dienel, W. (2000), p. 60 356 Spinello, R.A. (1992), p. 617 or Buckley, J./ Tuama, S. (2005), p. 127 <?page no="290"?> 13.3 Sustainable Marketing Measures 289 @ www.uvk.de Not infrequently, high prices are criticized as unethical per se. High communication and distribution costs and excessive profit margins are given as the causes for excessive prices. 357 But as long as the consumers perceive the convenience of goods delivery as an advantage (distribution) or benefit from the communication (brand communication) and as long as the profit margins are not the result of an unfair exploitation of market power, high prices cannot be criticized. Low price strategies need to be discussed next. These pricing strategies which at first glance appear to be to the benefit of customers are frequently not sustainable, if low prices are only possible because of wage dumping, circumvention of environmental standards or neglect of workplace safety. Thus a low price strategy should be avoided if it is possible only at the expense of posterity (sweat shops). Brands should not be caught in a morality trap. This is what happened to the textile discounter Kik, when a factory building in Bangladesh collapsed, several hundred workers were killed and it became apparent that Kik used the facilities despite insufficient safety standards, while at the same time publicly supporting fair working conditions. 358 Finally it should be mentioned that long-term price stability and transparency is unavoidable to gain and maintain the trust of customers (trust in pricing). 359 This is particularly true if observed barriers to switch are high, such as in the case of mobile phone contracts. In some cases only the fine print reveals that the price goes up after two years. Switching is inconvenient and frequently requires observation of a termination period. Pricing policy also deals with establishing the price structure in cases where entire product groups rather than individual goods need to be priced. The goal is the optimization of profit for the product group and not for the individual product. In the case of price bundling individual products are added to the product mix, but the price for the additional product is not fully reflected in the marginal price of the product bundle. 360 This can be justified as long as the additional product also provides an additional benefit to the customer. But if the only purpose is the selling of shelf warmers, the customer feels cheated. One form of a price bundle is the so-called “captive pricing.” To be able to use the product, an additional product component must be purchased. The product is inexpensive or moderately priced, but the needed product component, such as 357 Armstrong, G./ Kotler, P. (2013), p. 482 358 Campillo-Lundbeck, S. (2013), p. 17 359 Diller, H. (2008), pp. 162o164 360 Armstrong, G./ Kotler, P. (2013), p. 274 <?page no="291"?> 290 13 Marketing @ www.uvk.de the ink cartridge for an inkjet printer, is expensive. 361 If this is not transparent and realized too late by the customer, he will be unhappy and react accordingly. If it is used instead as a client retention instrument and a switchover is associated with high costs, 362 the use of this instrument is questionable from an ethical perspective. If products are offered as part of a price bundle, product destruction can be avoided or a more balanced capacity utilization can be accomplished. This saves resources since the product can be sold at the lower price. The same is true for seasonal goods or products that are sold at low prices shortly before the expiration date is reached. 363 With regard to the payment terms it must be stressed clearly that transparency and clarity of the terms are most important for the target audience. The customer must understand for example, how much he ultimately has to pay for the product, whether a down payment is required and what the conditions are that guarantee a fixed purchase price (relevant for example in the case of leasing contracts). 364 Loans frequently pose a dilemma in marketing for another reason: target groups that are easily persuaded like to purchase products and pay in “easy installments.” If they cannot afford the purchases they fall into the indebtedness trap. 365 Marketing has the responsibility in this case to check whether the customer is able to consistently make his payments. If this is not assured, the sale should not take place. From the perspective of sustainability, this is the better solution - not only because possible legal battles are costly, but also because the image might suffer. Price setting Orientation on customer utility and costs No abuse of high willingness to pay for eco products without value added Consideration of social aspects Price differentiation for essential products based on social criteria High price policy No exclusion of consumers with low income Low price policy No low prices at the expense of social or environmental standards 361 Armstrong, G./ Kotler, P. (2013), p. 273 362 Wildemann, H. (2005), pp. 15o16 363 Diller, H. (2008), pp. 251o252 or Armstrong, G./ Kotler, P. (2013), p. 276 364 Armstrong, G./ Kotler, P. (2013), p. 285 365 Bundeszentrale für politische Bildung (2013) <?page no="292"?> 13.3 Sustainable Marketing Measures 291 @ www.uvk.de Price changes Price stability and trust in stable prices Avoidance of unexpected price increases and/ or honest communication Price structure Price bundles Avoidance of unattractive elements in bundles Captive pricing Clear communication of follow-up charges Terms of delivery and payment Loans and leasing Avoidance of indebtedness trap for specific target groups Table 13-4: Potential for a sustainable pricing policy 1133..33..33 DDiissttrriibbuuttiioonn PPoolliiccyy The need for distribution follows from the fact that under normal circumstances time or location of production and consumption do not coincide. The distribution policy comprises the management and the determination of all marketing activities that aim at transporting an output from the production location to the consumer. A company needs to determine its location, establish distribution channels and organize physical delivery to the buyer. 366 The location policy determines the production site as well as the branch locations. Transport distances need to be minimized in order to avoid or reduce traffic. Also important are environmental or social considerations, especially if the relocation of production into another country is only motivated by lower environmental or social standards. Not only the pure distribution costs, but ecological and social costs as well must be considered. The same is true for the choice of branch locations. The comprehensive provision with foodstuff in rural areas of Germany has ceased to exist quite a while ago. 367 Particularly affected are older and poorer population groups in rural regions that do not possess an automobile for cost or age reasons. The costs of obtaining the goods must also remain reasonable from the perspective of the consumer. This is particularly true for the purchase of sustainably produced goods. If a consumer is unable to use his usual shopping locations for sustainably produced products, 366 Ramme, I. (2009), p. 147 367 Lerchenmüller, M. (2003), p. 529 <?page no="293"?> 292 13 Marketing @ www.uvk.de both transaction costs in the form of increased search activities as well as transfer costs result. 368 Distribution policy is also concerned with distribution channels: direct or indirect. Direct distribution means that a product can be sold to the end consumer without an intermediary. Distribution is frequently the responsibility of independent salesmen, who generate sales commissions for themselves. This reveals a conflict: short-term sales success leads to high commission income, which increases the motivation of the sales force. In the long term this is not always beneficial for customers. It must be avoided that “scorched earth” is left behind, which means that a sales representative accomplishes a demanding sales target, but then switches jobs and is no longer able or willing to serve the customer. The so-called sales triathlon consisting of “contacting,” “selling” and “disappearing” is neither in the interest of the customer nor an indication of sustainable marketing. Sales commissions models that do not only focus on short-term sales targets can make a contribution in this regard. Landesbausparkasse for example has introduced a model which pays an additional bonus on top of the sales commission for a building savings contract if regular payments are made on the contract. The reduction of turnover also contributes to sustainability, especially of the economic success. Companies that sell products that are not easily explained are at an advantage, since the sales force needs a lot of knowledge in order to be successful. Indirect distribution channels can be broken down into online and offline retailing. In the context of the sustainability debate, retailers should critically assess if an ever increasing range of products is really needed. It must be evaluated whether valuable resources should be spent on the procurement and restocking of goods to satisfy every wish of the customer or whether the customer is willing to limit his choices. A similar argument can be made for 24 hour deliveries: the offering of many online retailers is attractive, but constitutes an ecological burden due to an increase in transport activities. The physical distribution to the customer or reseller should rely on logistics that are environmentally friendly - measured for example by the carbon footprint - as discussed in Chapter 12. 368 Dienel, W. (2000), p. 60 and p. 64 <?page no="294"?> 13.3 Sustainable Marketing Measures 293 @ www.uvk.de Location policy Production site Consideration of social and ecological aspects Branch location Consideration of social and ecological aspects Comprehensive goods provision to the population Direct distribution channels Distribution No sales triathlon Low fluctuation Indirect distribution channels Retailing offline Critically challenge depth of the product range Retailing online Critically challenge 24h-deliveries Physical distribution Resource efficient logistics Consideration of carbon footprint Table 13-5: Potential for a sustainable distribution policy 1133. .33..44 CCo ommmmu unniicca atti ioonn PPo olliiccyy In addition to product design, pricing decisions and product distribution, marketing also has the task of communications, namely to inform about the existence and advantages of products and to motivate a purchase. The information function includes bringing the good to the attention of consumers. This is particularly important for consumer goods, which need to be repurchased relatively quickly. The motivation function not only refers to the attempt of convincing a potential customer to make a purchase, but also involves positive reinforcement for a buying decision that has already been made. The possibility of buyer’s remorse needs to be reduced with the help of communication measures. A distinction is made between personal communication and mass communication. Personal communication is direct communication from person to person. Feedback between the parties in the form of questions and dialogue is possible. Personal communication is thus more flexible and is considered to have more credibility. It is particularly relevant in the case of products that are not easily explained and/ or expensive (such as investment goods marketing). Mass communication refers to the public transmission of messages which relies on technical communication platforms. The communication partners are sepa- <?page no="295"?> 294 13 Marketing @ www.uvk.de rated by space and/ or time. Mass communication targets many unknown recipients and no feedback is possible. Typical instruments of communication policy include advertising, sales promotion, public relations and personal selling. These so-called above-the-line activities can be contrasted with the new communication instruments direct marketing, product placement, sponsoring, events and merchandising as below-the-line activities. 369 In addition to the efficiency of communication, namely the economic element of sustainability, there is the possibility to save resources with all of the instruments in order to include the ecological dimension as well. The social dimension can be satisfied by offering humane working conditions for all employees in the communications industry. Resources are used in print materials for direct marketing, billboards or newspaper ads. Here it can be attempted to use environmentally friendly materials or reduce the circulation. This is an economic aspect at the same time. In sales promotions or at trade fair appearances, display materials or components of the booth can be reused or environmentally friendly products can be utilized. Independent of the type of communication or the instruments chosen, the communication function is decisive. This is particularly true in the context of sustainable marketing. For that reason, the information and motivation functions of the company’s communication measures should dominate. Dienel researches the barriers to consuming eco food and concludes that the communications policy has an important function when it comes to ) providing information about the attributes of eco products, ) creating credibility and resolving doubt, ) eliminating or reducing the impression that individual action is irrelevant, ) preventing the loss of prestige (granola type), ) breaking habits, especially with regard to the choice of retailer or brand, ) creating transparency concerning prices, since the assessment of adequate prices for eco products is frequently difficult for consumers. 370 In the context of the information function, companies point out product advantages and reduce possibly existing information deficits about product features, availability (which retailers), use or disposal of the product. Here it is also important to remind customers about the purchase of the product in order to 369 See on the previous paragraphs Ramme, I. (2009), pp. 165o166 370 Dienel, W. (2000), p. 65 <?page no="296"?> 13.3 Sustainable Marketing Measures 295 @ www.uvk.de create and maintain product loyalty. Of central importance is the establishment of trust, the maintenance of credibility and the ability to meet all expectations in this regard. Sustainability should be more than empty words and constitute an authentic promise of the company. 371 Greenwashing, the communication of a sustainable or green image that is not backed by facts 372 must be avoided. 373 The motivating function concerns the motivation to purchase a product or to prefer a certain retailer, but also the motivation to act in a certain desirable manner, such as separating trash, conserving fuel, environmentally conscious driving or the appropriate storage or treatment of products in order to increase their useful life. This should be accomplished without a raised index finger. 374 The communication policy is also needed in reducing cognitive dissonances. These develop if doubts arise about the appropriateness of a purchase, especially if it was the result of a difficult or long decision process. Thus the customer regrets the purchase. 375 In the case of sustainable products this can happen if the customer feels that he outed himself as a granola type or that he is a narrowminded bore who just bought an environmentally friendly automobile. 376 With a thorough understanding of the target group and data from market research, this outcome should be avoidable. Communication instruments Marketing, direct marketing, public relations, trade fair attendance and so forth Resource saving, especially of paper Environmentally friendly materials Reuse of materials Humane working conditions 371 Prax, C. (2013), p. 96 372 Greenpeace (2013) 373 Prax, C. (2013), p. 99 374 Prax, C. (2013), p. 99 375 Ramme, I. (2009), p. 165 376 Reidel, M. (2012), p. 13 <?page no="297"?> 296 13 Marketing @ www.uvk.de Communication function information Information about products and behavior Stress product attributes Reminder to purchase the product Change accustomed behavior Build trust, which must be maintained and cannot be disappointed No greenwashing Communication function motivation Motivation to purchase Achieve behavioral change Reduce buyer’s remorse Reaffirm that decision was correct and avoid negative associations with the customer segment Table 13-6: Potential for a sustainable communication policy At a glance Starting with the definition of sustainable marketing as a concept for the market-oriented management of a company with the aim of satisfying customers’ needs and achieving the corporate goals, while at the same time taking into consideration the demands of the market environment, society and the natural environment, diverse aspects of sustainability, especially with regard to the four P’s were discussed. While the recommendations cannot always be implemented without accepting compromise, Kotler’s statement which was made more than forty years ago remains true today: marketing satisfies customer needs and improves their well-being. What is good for customers in the long-term is also good for business. 377 Needed are a large number of companies that are serious about their commitment to the environment and society and achieve economic success at the same time. A quote may serve as clarification: „We are fully convinced that economical, ecological and social aspects are not mutually exclusive. In contrast, it is specifically the compatibility of all three aspects, which serves as the basis for long-term successful activities.” 378 377 Kotler, P. (1972), p. 57 378 Globetrotter (2013) <?page no="298"?> OxZ|]šZX]| 297 @ www.uvk.de Suggestions for further reading Standard volume of the marketing literature: Armstrong, G; Kotler, P. (2013): Marketing - An Introduction, Upper Saddle River, 11 th edition. Easily understood introduction to marketing: Ramme, I. (2009): Marketing - Einführung mit Fallbeispielen, Aufgaben und Lösungen, Stuttgart, 3 rd edition. Two of the more comprehensive publications about sustainable marketing: Schmidt-Riediger, B. (2008): Sustainability Marketing in the German Food Processing Industry. Dissertation at Technischen Universität München. Belz, F. M.; Peattie, K. (2012) Sustainability Marketing: A Global Perspective, Hoboken, 2 nd ed. Literature Armstrong, G; Kotler, P. (2013): Marketing - An Introduction, Upper Saddle River, 11 th edition. Balderjahn, I. (2004): Nachhaltiges Marketing-Management: Möglichkeiten einer umwelt- und sozialverträglichen Unternehmenspolitik, Stuttgart. Balderjahn, I./ Peyer, M. (2012): Das Bewusstein für fairen Konsum: Konzeptualisierung, Messung und Wirkung. In: DBW, 72. Jg. 4/ 2012, 343-364. Belly, C. (2012): Treue soll sich lohnen. In: Horizont, 14/ 2012, 78. Bezencon, V./ Blili, S. (2010): Ethical products and consumer involvement: what’s new? In: European Journal of Marketing, 44. Jg. 9-10/ 2010, 1306- 1321. Brechtel, D. (2012): Doppelte Zustimmung. In: Horizont, 18/ 2012, 31. Brechtel, D. (2012): Manifestation der Marke. In: Horizont, 17/ 2012, 37. Buckley, J/ Ó Tuama, S. (2005): International pricing and distribution of therapeutic pharmaceuticals: an ethical minefield. In: Business Ethics: A European Review, 14. Jg. 4/ 2005, 127-141. Bundeszentrale für politische Bildung (2013): Überschuldung privater Haushalte, online: http: / / www.bpb.de/ nachschlagen/ zahlen-und-fakten/ sozialesituation-in-deutschland/ 61794/ ueberschuldung-privater-haushalte Campillo-Lundtbeck, S. (2012): Der Preis der Preisfixierung. In: Horizont, 4/ 2012, 2. Campillo-Lundtbeck, S. (2012): For you, vor Ort, vorbei. In: Horizont, 4/ 2012, 4. <?page no="299"?> 298 13 Marketing @ www.uvk.de Campillo-Lundtbeck, S. (2013): Marken in der Moralfalle. In: Horizont, 19/ 2013, 17. Crane, A./ Desmond, J. (2002): Societal marketing and morality. In: European Journal of Marketing, 36. Jg. 5/ 2002, 548-569. Daub, C.-H./ Ergenzinger, R. (2005): Enabling sustainable management through a new multi-disciplinary concept of customer satisfaction. In: European Journal of Marketing, 39. Jg. 9-10/ 2005, 998-1012. Dienel, W. (2000): Organisationsprobleme im Ökomarketing - eine transaktionskostentheoretische Analyse im Absatzkanal konventioneller Lebensmittelhandel. Dissertation at Humboldt Universität Berlin. Diller, H. (2008): Preispolitik, Stuttgart, 4 th edition. Elkington, J. (1997): Cannibals With Forks: The Triple Bottom Line of 21 st Century Business, Gabriola Island (Canada). Fassnacht, M. (2012): Die Frage ist, ob Schlecker überhaupt noch Zeit hat. In: Horizont, 4/ 2012, 4. Greenpeace (2013): Greenwashing, online: http: / / stopgreenwash.org Gupta, S./ Ogden, D. T. (2009): To buy or not to buy? A social dilemma perspective on green buying. In: Journal of Consumer Marketing, 26. Jg. 6/ 2009, 376-391. Jacob, E. (2011): Marken auf dem Prüfstand. In: Horizont, 47/ 2011, 24. Jansson, J./ Marell, A./ Nordlung, A. (2010): Green consumer behavior: determinants of curtailment and eco-innovation adoption. In: Journal of Consumer Marketing, 27. Jg. 4/ 2010, 358-370. Janter, K. (2012): Zeigen wie der Strom fließt. In: Horizont, 14/ 2012, 54. Karle, R. (2012): Marke unter Strom setzen. In: Horizont, 18/ 2012, 40. Kotler, P./ Levy, S. J. (1969): Broadening the Concept of Marketing. In: Journal of Marketing, 33. Jg., 1969, 10-15. Kotler, P. (1972): What consumerism means for marketers. In: Harvard Business Review, 50. Jg. 3/ 1972, 48-57. KPMG (2012): Expect the Unexpected: Building business value in a changing world, online: www.kpmg.com. Leonidou, L. C./ Leonidou, C. N./ Palihawadana, D./ Hultman, M. (2011): Evaluating the green advertising practices of international firms: a trend analysis. In: International Marketing Review, 28. Jg. 1/ 2011, 6-33. Lerchenmüller, M. (2003): Handelsbetriebslehre, Herne, 4 th edition. Longsworth, A./ Longsworth, A./ Meyer, R./ Hughes, D. (2011): Green Brands, Global Insights 2011. Price, Packaging, and Perception. Global results from <?page no="300"?> OxZ|]šZX]| 299 @ www.uvk.de the 2011 ImagePower Green Brands Survey, online: http: / / de.slideshare.net/ WPPGreenBrandsSurvey/ 2011-green-brands-global-media-deck Lotti, M./ Lehmann, D. (2007): Memo on AMA Definition of Marketing, 17 th Dec, 2007, online: http: / / www.marketingpower.com/ Community/ ARC/ Pages/ Additional/ Definition/ default.aspx Martin, D./ Schouten, J. (2012): Sustainable Marketing, Pearson Education. Meffert, H./ Burmann, C./ Kirchgeorg, M. (2011): Marketing: Grundlagen marktorientierter Unternehmensführung. Konzepte o Instrumente - Praxisbeispiele, Wiesbaden, 12 th edition. N.N. (2012): Methodology, online, http: / / www.interbrand.com/ de/ best-globalbrands/ best-global-brands-methodology/ Overview.aspx Pickett-Baker, J./ Ozaki, R. (2008): Pro-environmental products: marketing influence on consumer purchase decision. In: Journal of Consumer Marketing, 25. Jg. 5/ 2008, 281-293. Pimpel, R. (2012): Sippenhaft für Suppenmarken. In: Horizont, 18/ 2012, 19. Polonski, M. J. (1995): A stakeholder theory approach to designing environmental marketing strategy. In: Journal of business and industrial marketing, 10. Jg. 3/ 1995, 29-46. Prax, C. (2013): Nachhaltige Nachhaltigkeit. In: Absatzwirtschaft, Sonderausgabe Marken, 96-99. Ramme, I. (2009): Marketing - Einführung mit Fallbeispielen, Aufgaben und Lösungen, Stuttgart, 3 rd edition. Reidel, M. (2011): IT-Marken jagen Coca Cola. In: Horizont, 40/ 2011, 22. Reidel, M. (2012): Mehr Power für den Hybrid. In: Horizont, 17/ 2012, 13. Schaltegger, S. (2012): Nachhaltigkeitsmetamorphose der BWL. In: DBW, 72. Jg. 4/ 2012, 279-290. Schmidt-Riediger, B. (2008): Sustainability Marketing in the German Food Processing Industry. Dissertation at Technischen Universität München. Schneider, G. (2012): Option ohne Antrieb. In: Horizont, 14/ 2012, 42. Slaper, T. F./ Hall, T. J. (2011): The Triple Bottom Line: What Is It and How Does It Work? In: Indiana Business Review, Spring, 1-5. Spinello, R.A. (1992): Ethics, Pricing and the Pharmaceutical Industry. In Journal of Business Ethics, 11/ 1992, 617-626. Thogersen, J./ Haugaard, P./ Olesen, A. (2010): Consumer responses to ecolabels. In: European Journal of Marketing, 44. Jg. 11-12/ 2010, 1787-1810. <?page no="301"?> 300 13 Marketing Vaaland, T. I./ Heide, M./ Grønhaug, K. (2008): Corporate social responsibility: investigating theory and research in the marketing context. In: European Journal of Marketing, 42. Jg. 9-10/ 2008, 927-953. Warner, S./ Nice, H. (2011): Meaningful Brands - Havas Media launches global results, online http: / / www.havasmedia.com/ 2011/ 11/ meaningful-brandshavas-media-launches-global-results, accessed on March 2012. Wildemann, H. (2005): Wachstumsorientiertes Kundenbeziehungsmanagement statt König-Kunde-Prinzip, online http: / / www.tcw.de/ uploads/ html/ pub likationen/ aufsatz/ files/ Wachstumsorientiertes_Kundenbeziehungsmanage ment.pdf Zimmer, J. (2012): „Wir müssen die Servicequalität verbessern“. Interview mit Holger Böhme. In: Horizont, 14/ 2012, 58. <?page no="302"?> 1144 IInntteeggrraall MMaannaaggeemmeenntt -- NNeeww PPeerrssppeeccttiivveess ffoorr SSuuss-ttaaiinnaabbllee DDeevveellooppmmeenntt by Thomas Ginter Learning Objectives The readers ) understand that daily business is characterized by increasing dynamics and complexity. This requires a fresh perspective on the functioning of corporations, ) are familiar with the “integral approach” of Ken Wilber and its relevance for sustainable management, ) can apply the fundamental insights from the integral approach to the management of companies. List of Key Terms ) Integral approach ) Holarchy of development ) States ) Development stages ) Development lines ) Types ) Four-Quadrant Model 1144..11 DDeeffiinniinngg tthhee PPrroobblleemm: : CCoommpplleexxiittyy aanndd iittss CCoonnssee-qquueennc ceess Are you familiar with the parable of the three blind men who are asked to examine an elephant by an Indian raja? 379 After they have learned about the elephant by touch alone, the raja explained to the men: “You just examined an elephant. Now tell me, what is an elephant? ” The first man described the elephant as a stately column, since he had examined a leg. The second man assured that the elephant can be compared to a brush, since he had focused on the tail of the animal. Finally the third man, who had examined the tusks, assured that the elephant is closer to a plowshare. And soon the men began to argue about the 379 The story of the three blind men exits in different versions which have their origin among others in Buddhism, Jainism and Sufism. The version used originated in the socalled Palikanon (Khuddaka Nikaya, Udana (Pali) 54o56), an ancient Buddhist writing from the first century B.C. <?page no="303"?> 302 14 Integral Management - New Perspectives @ www.uvk.de truth. This is what happens every day as decision makers in companies try to comprehend the context of corporate activities from the various perspectives such as production, controlling or marketing. They all describe the situation from their subjective perspective, which is based in their functional background. And even if many “cross-functional” meetings and projects are initiated in most companies, the participants are only rarely able to consider the entire company in the context of the market environment. What is the reason for this limited perspective? Essentially such a focus on a specific perspective is natural and in some cases even appropriate - consider the case of difficult open heart surgery. But important is the ability to adjust the perspective or, if the current situation calls for it, to consider a completely new perspective. In addition it is essential especially for managers to capture the “entire picture.” Due to the increasing d complexity of most management situations, this turns out to be rather difficult. A fundamental distinction can be made between detail complexity and dynamic complexity. While the conventional instruments of strategic planning primarily deal with mastering detail complexity, such as a simulation involving a large number of variables and comp lex sp ec ific ati ons, dynamic c omplexi ty is c on cer ned wit h situ ations whe re the underlying causal relations are not immediately obvious to the observer and implemented interventions will not necessarily yield the expected consequences or show effects that completely differ in the short and the long run. The equilibrium between market change and needed adjustment of the production capacities is a dynamic problem. But the sustainable improvement of the product quality or the increase in customer satisfaction cannot be directly linked to specific variables or activities. 380 Once we accept that our world and with it obviously also the business environment is increasingly dynamic and thus gains in complexity, we have to question whether management is still able to fine-tune business activities with the help of classical instruments such as planning, organization and control. The answer is obvious in my opinion: the use of statistical instruments to manage dynamic complexity resembles the attempt to fly a supersonic jet in visual flight mode. The focus of responsible managers on details is certainly also an indication of insecurity in light of the tremendous tasks and changes which the managers face in the age of information and complexity. In addition to downplaying complexity by focusing on individual tasks, many managers take rescue in actionist business or completely disregard dynamic problems - same as it ever was! But even the attempt to understand dynamic problems in a purely rational fashion is 380 On the difference between detail complexity and dynamic complexity see for example Senge, P. (2011), pp. 89o92. A nice approach to the topic of complexity can be found in Malik, F. (2009), pp. 21o63 <?page no="304"?> 14.2 The Integral Approach 303 @ www.uvk.de only partly suitable to achieve a comprehensive understanding of the complex corporate situation. Only the rational formation of patterns combined with an intuitive understanding will allow us to get a glimpse of the true situation. If we do not want to abandon control completely, an entirely new view of the functioning of corporations is needed; new perspectives for sustainable development! 1144..22 TThhee IInntteeggrraall AApppprrooaacchh The influence of dynamic complexity on management situations has been of interest for visionary thinkers in theory and practice since the middle of the past century. Of outstanding importance in this regard is systems theory, which provides a framework for reference. Some of the heroes of this movement, whose works have made outstanding contributions towards a new thinking about corporations will be presented at the beginning of this section, before we turn to a discussion of the d integral approach. While it does not directly belong to systems theory, it is developed in the same spirit and has become a valuable companion on the way towards a new management approach. No doubt leading the way in transferring the insights from systems theory to modern management research was Stafford Beer. His viable system model is based on the function of the human central nervous system and serves as the basis in numerous systems cybernetic approaches for the organizational structuring of corporations. 381 In the German speaking world Hans Ulrich 382 and his disciples Walter Krieg, Peter Gomez, Gilbert Probst, Thomas Dyllick and Fredmund Malik where the first to deal with the topic. This initially led to the St. Gallen systems approach and - as a further development - the St. Gallen management model developed by Hans Ullrich and Walter Krieg. The model puts management in a position to view aspects of corporate leadership from a supposedly holistic and integrated perspective. While classical management models think of complexity as an obstacle which must be overcome, the task according to this approach is to maintain the complexity of leadership systems in order to assure - according to the idea that complex tasks require complex management systems - the continuous adaptation of the corporation to an environment which is subject to dynamic change. The adaptation to the environment takes place mainly via self-organization and evolutionary change processes; the manager consequently serves as catalyst for strategic decisions and not as company chief. 383 The practice-oriented imple- 381 For a full exposition of the model see Beer, S. (1972) 382 On this point see Ulrich, H. (1968) 383 For a comprehensive analysis see Ullrich, H./ Krieg, W. (1973) <?page no="305"?> 304 14 Integral Management - New Perspectives @ www.uvk.de mentation of the St. Gallen management model goes back to Fredmund Malik, who founded the management center St. Gallen in 1977 (today Malik Management Center St. Gallen AG) with the aim of testing and further developing the theoretical insights. 384 And finally I would like to point out the outstanding contributions of Peter Senge, the director the Center for Organizational Learning which was founded in 1991 at the MIT Sloan School of Management. Especially his book “The Fifth Discipline: the Art and Practice of the Learning Organization” and the corresponding “Fieldbook” opened up the principles of shaping a learning organization on the basis of so-called “systems archetypes” to a broad audience. 385 Without trying to play down the achievements of the pioneers of systems managements, it is nonetheless true that they did not really have a holistic view, but rather focused on the systems perspective. Ken Wilber, whose theories will be discussed at length in the following, thus also accuses the systems theory of “subtle reductionism.” While systems theory pretends that it takes a comprehensive approach, it appears unsuitable to explain individual and intersubjective realities or to take the needed perspective. 386 According to Wilber, reality can be considered from four different perspectives: from an inner (subjective / qualitative) and an outer (objective / quantitative), as well as from an individual and a collective perspective. 387 Figure 14-1: The d Four-Quadrant Model - Different perspectives on reality, Wilber, K. (2001b), p. 85 384 An overview of the refinements of the St. Gallen management model by Fredmund Malik is available at Malik, F. (2007) 385 Senge, P. (2011) as well as Senge, P./ Kleiner, A./ Smith, B./ Roberts, C./ Ross, R. (1996) 386 For a comprehensive treatment see Wilber, K. (2001a), pp. 169o174 387 On this issue see Wilber, K. (2001a), pp. 160o165 and Wilber, K. (2001b), p. 85 <?page no="306"?> 14.2 The Integral Approach 305 @ www.uvk.de In my opinion Wilber is correct in stating that a complete picture of reality can only be divined if all four perspectives are indeed included in the contemplation. Otherwise reality is reduced to one perspective (systems theory focuses on the lower right quadrant), which is frequently sold as the only “truth.” And already we are in the midst of the d integral approach. In the following we will first deal with the idea of the HOLON and then consider the individual components of the integral theory, d STATES, d DEVELOPMENT STAG- ES, d DEVELOPMENT LINES, d TYPES, d QUADRANTS, which are summarized by Wilber as AQAL (all quadrants / all levels). Finally we will demonstrate the importance of the approach for management research in the final section. Here we go! oo HHOOLLOONNSS “The world as a whole is not composed of things or processes, but rather of holons.” 388 But what does the term holon mean? It was coined by Arthur Koestler, an engineer, editor, author, reporter and philosopher born in 1905 in Budapest. A holon describes a whole entity in and of itself, which at the same time is a part of another complete structure. Reality, according to Koestler, is neither made up of parts nor of an ultimate complete entity. 389 An atom is part of an entire molecule, and the molecule in turn is part of a complete cell and a cell in turn is part of an entire organism - according to the principle of transcendence and inclusion. While the individual parts form a human being, they simultaneously work individually and in autonomy. 390 Figure 14-2: Holarchy of development, Wilber, K. (2004), pp. 40o42 388 Wilber, K. (2001a), p. 57 389 On the term HOLON see Koestler, A. (1968), p. 59 390 On this and the following a comprehensive treatment can be found in Wilber, K. (2001a), pp. 57o109 as well as the summary in Wilber, K. (2004), pp. 40o42 <?page no="307"?> 306 14 Integral Management - New Perspectives @ www.uvk.de Holons thus always appear in the form of a hierarchically structured nesting, called d holarchy of development by Wilber. In addition, each holon has internal/ external as well as individual/ collective aspects, which brings us back to the d Four-Quadrant Model described by Wilber. Note: Every complex entity such as a corporation is made up of d holarchies of development, and always possesses internal/ external as well as individual/ collective aspects. oo SST TAAT TE ES S The d state describes the way something is or the way something is perceived at any specific moment. Ultimately the state always describes the current condition or status of an individual holon (for example a human being) or of a social holon (for example a corporation). An additional distinction can be made between states that tend to be observable subjectively on the inside or objectively on the outside. I am sure you noticed - again we can draw on the Four- Quadrant Model of Wilber when categorizing different states. Certain states point to subjective realities in one’s own inner world (upper left - such as happy or sad). Other states relate to objectively measurable individual realities in the outside world (upper right - such as fever or no fever). Certain states are shared with others on a collective cultural level (lower left - such as team spirit or opportunistic behavior) or on a collective social level (lower right - such as war or peace). A central feature of states is the observation that they come and go; every state is only of a transient nature. 391 Note: In order to fully capture the status quo of a complex entity, it is initially required to provide a description of the current situation which takes into consideration all possible realities (internal/ external, individual/ collective). oo DDEEVVEELLOOPPMMEENNT T SSTTA AG GEESS While d states are transient, stages are lasting. Once a certain stage, better d development stage, has been reached reliably, the concrete potential of the stage is available permanently. An example is the development of a child. Once 391 On this point see Wilber, K. (2007), pp. 14o15 <?page no="308"?> 14.2 The Integral Approach 307 @ www.uvk.de a child has learned how to speak, it can normally draw on this ability at all times during her further development. For this reason, Wilber views the stages as the true milestones of growth and development. 392 Each stage constitutes a certain level of organization or complexity. A molecule is of greater complexity, for example, than an atom. For that reason it possesses a plethora of new attributes. The existence of development stages is also apparent when studying human history. The first communities were organized along hunting and gathering. Following the discovery of gardening and farming, the complexity of the required interrelations increased and at the same time brought with it a new intensity of exchange beyond the familiar tribe. The next step was the transformation to an industrial society and the corresponding revolution in the way production processes were organized. This also involved an increase in the complexity of interactions while important new qualities emerged at the same time. Finally the transition from industrial age to information age brought with it a previously unknown increase in complexity and an abundance of new qualities that now must be discovered and utilized. 393 It is characteristic for these d holarchies of development that each stage must be passed. No stage can be skipped; the development does not allow any shortcuts. Note: Stages represent the degree of growth and development of a complex entity. With each additional new stage the extent of complexity increases while new qualities are simultaneously emerging. Development stages cannot be skipped. oo DDE EV VEEL LO OP PM ME EN NT T LLI IN NE ES S The concept of d development lines is based on the research by Howard Gardner of Harvard University about multiple intelligences. 394 He argues that humans possess numerous different types of intelligence such as linguistic intelligence, logical-mathematical intelligence, physical-kinesthetic intelligence, inter and intrapersonal intelligence and so forth. Each of these development lines is unique as it can develop in relative independence from the other lines. It is possib- 392 Wilber, K. (2007), p. 16 393 On this issue see Wilber, K. (2007), pp. 16o18 as well as Wilber’s description of the history of human development in Wilber, K. (1984) 394 On this issue see Gardner, H. (2002) <?page no="309"?> 308 14 Integral Management - New Perspectives @ www.uvk.de le for example that a high level has been reached on one line, while another line is characterized by a very low development stage. Examples include a highly intelligent unscrupulous criminal or a top athlete with limited cognitive abilities. Wilber stresses that these types of development do not only exist in the individual inner field, but basically in all four quadrants. All lines can pass the fundamental stages described above. They mark the respective strengths and weaknesses within a quadrant and thus reveal possible developmental starting points. 395 Note: The determination and assessment of relevant d development lines of complex entities makes it possible to establish a comprehensive profile of strengths and weaknesses which serves as the basis for sustainable development. oo TTY YPPO OLLOOGGIIE ESS Generally speaking, d types are related groups that share one or several common features. The creation of types is a methodological tool which allows the ordering of appearances or characteristics in such a way that the features which are considered to be most relevant are given specific attention. An example of a simple typology would be the distinction between male and female. According to Carol Gilligan, the male logic is mostly based on autonomy, justice and rights, while the female logic primarily focuses on relationships, care and responsibility. Males tend to engage in activities, while females look for companionship and so forth. 396 One of Gilligan’s favorite stories on this issue goes as follows: “A little boy and a little girl are playing together. Says the boy: Let us play pirates! Says the girl: Let us play that we are neighbors! The boy: No, I want to play pirates! Okay, says the girl, you can be a pirate that lives next door.” 397 The result of such a process is the identification of groups that are as similar as possible within one type, while types should be as different as possible. According to Wilber et al., examples of types can be found everywhere, respectively in each quadrant: there are types in music (jazz, rock, classic and so forth), types of relationships (friendship, love affair, professional relationship, and so forth), types of geography (dessert, forest, mountains and so forth), but also in a business context, such as industry classifications (automotive, electrical industry, 395 Wilber, K. (2007), pp. 43o45 396 For a comprehensive treatment see Gilligan, C. (1999) 397 Wilber, K. (2009), p. 47 <?page no="310"?> 14.2 The Integral Approach 309 @ www.uvk.de food industry and so forth) or typologies of buyers which form the basis for target group segmentation. All types have their unique characteristics, strengths and weaknesses, but objectively a certain type is not better or worse than another one - they are simply different. Even if two members or elements of the same type develop differently, their typology remains fundamentally unchanged. A person with the typology “left handed” can be a left handed savage, scientist or saint. 398 Note: The typology of different groups primarily serves to identify centrally relevant patterns and aims at finding a creative approach to the respective patterns of a specific type. oo FFOOUURR--QQUUAADDRRAANNTT M MOODDEELL As already mentioned above, reality can be observed from four different perspectives: from an inner (subjective/ qualitative) and an outer (objective/ quantitative), as well as from an individual and a collective perspective. Let us take a closer look at the individual quadrants using the example of humans (see figure 14-3): In the upper left quadrant we find the attitudes, needs, personality and values of the individual. If instead the individual is observed from the outside, from an objective and scientific perspective, we no longer deal with thoughts, feelings and emotions, but with neurotransmitters, the limbic system, the neocortex, DNA and so forth. All these material components can be observed from the outside and help scientists to determine how an individual event is manifested on the outside. The upper right quadrant thus does not display emotions, but neurotransmitters, no sudden desires, but the limbic system, no inner visions, but the neocortex. But even these two perspectives only reflect one part of the whole system. The lower left quadrant for example completes the above described individual perspectives in the sense of adding a collective WE to each individual I. It reflects the cultural environment in a broad sense, which in turn obviously also has an outer equivalence, respectively appearance, which is reflected in the lower right quadrant. 399 This point of view which considers several perspectives is not limited to humans, but can generally be applied to all individual and social holons, including the corporation. 398 Wilber, K./ Patten, T./ Leonard, A./ Morelli, M. (2010), pp. 141o146 399 On this issue see Wilber, K. (2009), pp. 70o72 <?page no="311"?> 310 14 Integral Management - New Perspectives @ www.uvk.de Figure 14-3: The four quadrants related to humans, Wilber, K. (2009), p. 72 Note: In order to obtain an integral view on an individual or social entity, it is absolutely indispensable to include all four quadrants; denying or ignoring as irrelevant one of the perspectives implies a negligent reduction of reality. And what is the link of all of this to sustainable corporate management? We will deal with this question in the closing section. <?page no="312"?> 14.3 Fields of Tension in Integral Management 311 @ www.uvk.de 1144..33 FFiieellddss ooff TTeennssiioonn iinn IInntteeggrraall MMaannaaggeemmeenntt Let us initially transfer all the fundamental insights of the integral approach to the management of companies: Each company consists of d holarchies of development and always has both inner/ outer as well as individual/ collective aspects. In order to capture the status quo, respectively the d state of a company in a comprehensive manner, a description of the state is needed, which takes into consideration all possible realities (internal/ external, individual/ collective). d Development stages represent the degree of growth and development of a company. With each new stage, the degree of complexity increases, while new qualities are emerging at the same time. Development stages cannot be skipped. The determination and evaluation of the relevant d development lines for companies allow the preparation of a comprehensive profile of strengths and weaknesses which can serve as the basis for sustainable corporate development. The application of d typologies in the corporate context primarily serves to identify central patterns and aims at finding a creative way of handling the various patterns that a certain type exhibits. In order to obtain an integral perspective on a company, it is mandatory to include all d four quadrants; denying or ignoring as irrelevant one of the perspectives implies a negligent reduction of reality. All this implies that SUSTAINABILITY is only possible if the interrelations and mutual dependencies among all four quadrants are recognized and the above mentioned specification criteria (states, stages, lines, types) are considered in the management process. In this context, let us take a more differentiated look at the axioms defined above. Initially it is important to understand that a company is a social holon, which can only be truly understood and developed in a sustainable manner if several different perspectives are considered. The starting point for a company analysis which follows this differentiated approach can initially be the identification and assessment of relevant d states as representations of the current status of the company. For many companies, the current corporate situation is <?page no="313"?> 312 14 Integral Management - New Perspectives @ www.uvk.de measured with reference to productivity, profitability, success, liquidity and return. If instead the Four-Quadrant Model of Wilber is used, it becomes clear that these parameters merely reflect the collective outside and furthermore continuously interact with and mutually influence additional parameters from the remaining three quadrants (such as employee satisfaction, corporate climate, fluctuation rate). An overview is provided in Figure 14-4. Figure 14-4: States as instruments for the determination of the status quo It is not at all relevant which of these parameters are of greater or lesser importance. Instead the different parameters express different perspectives on one and the same event. This statement is true in general, also for the consideration of different d stages of development of a company. Examples of relevant stages in the corporate context are provided in Figure 14-5. Once a company has sustainably achieved a certain development stage, the concrete potentials of the stage are permanently available. Each stage represents a specific level of organization and complexity. As an example, a company can develop from an authoritarian structure via strategic company towards a social network (lower right). This is always accompanied by corresponding development processes in the remaining three quadrants. Accordingly a company that is organized as a social network needs a relativist/ socio-centric corporate culture (lower left) as its base, socially competent pluralists as employees (upper left), which possess a broad range of process-oriented capabilities (upper right). 400 400 Bär, M./ Krumm, R./ Wiehle, H. (2010) as well as Krumm, R. (2012) <?page no="314"?> 14.3 Fields of Tension in Integral Management 313 @ www.uvk.de Figure 14-5: Development stages of a company 401 Let us now take a look at the d development lines of a company. As a reminder: with the help of development lines we can identify the current development in different areas of competency of a company (strength/ weaknesses) in order to derive suggestions for the sustainable development of the company. It is possible that a company is far along on one line, while it is only at the lowest development stage in another line. Examples include a highly efficient company characterized by exploitive leadership behavior or a company managed by highly ethical leaders without any innovative power. A selection of relevant d development lines for a company is shown in Figure 14-6. 401 See the outstanding book by Beck, D.E/ Cowan, C.C (2011), and Cook-Greuter, S. (2008), pp. 21o64 <?page no="315"?> 314 14 Integral Management - New Perspectives @ www.uvk.de Figure 14-6: Possible development lines for a company Let us finally turn to d typologies that are relevant in the corporate environment. The aim is to allow a creative handling of the respective patterns found in one type. A large number of typologies are available in business research such as the typology of personalities following Meyer-Briggs 402 (upper left), the behavioral typology following DISC 403 (upper right), the typology of corporate culture following Ansoff 404 (lower left), as well as a collection of differing systems typologies, such as legal form, size or industry for companies (lower right). The following Figure 14-7 once again condenses these insights. All the previously presented perspectives thus form the foundations for sustainable integral management. Management which is understood in this manner will always be caught in a field of tension between truth, truthfulness, systemic and cultural fit. 405 While truth is concerned with control and management of individual behavior from the outside, truthfulness focuses on the psychological understanding. Truthfulness manifests itself and can be developed via personal initiative and self-control. Systemic fit meanwhile is concerned with establishing suitable steering mechanisms which can serve as foun- 402 Briggs Myers, I. (1995) 403 Gay, F. (2004) 404 Ansoff, H.I. (1979) 405 On this point, also see the exposition by Barrett, R. (2006) <?page no="316"?> 14.3 Fields of Tension in Integral Management 315 @ www.uvk.de dations for the self-guided overall system. Cultural fit finally focuses on the development of corporate values and modes of thinking in accordance with a continuously changing dynamic corporate environment. Figure 14-7: Company typologies All the previously presented perspectives thus form the foundations for sustainable integral management. Management which is understood in this man- Figure 14-8: Fields of tension in integral management <?page no="317"?> 316 14 Integral Management - New Perspectives @ www.uvk.de ner will always be caught in a field of tension between truth, truthfulness, systemic and cultural fit. 406 While truth is concerned with control and management of individual behavior from the outside, truthfulness focuses on the psychological understanding. Truthfulness manifests itself and can be developed via personal initiative and self-control. Systemic fit meanwhile is concerned with establishing suitable steering mechanisms which can serve as foundations for the self-guided overall system. Cultural fit finally focuses on the development of corporate values and modes of thinking in accordance with a continuously changing dynamic corporate environment. I want to close out this Chapter with a quote from Fernando Pessoa, who writes in his Book of Disquiet: “Anything and everything, depending on how one sees it, is a marvel or a hindrance, an all or a nothing, a path or a problem. To see something in constantly new ways is to renew and multiply it.” 407 At a Glance Our world and with it obviously also the corporate environment is becoming increasingly dynamic and thus more complex. In order to successfully cope with this complexity we need a perspective on the world that is as comprehensive as possible. The d integral approach by Ken Wilber opens up the possibility of viewing and comprehending a company from many different perspectives. SUSTAINABILITY is only achievable if management considers and includes all these different perspectives in positioning the company. 406 On this point, also see the exposition by Barrett, R. (2006) 407 See Pessoa, F. (2006), p. 101 <?page no="318"?> OxZ|]šZX]| 317 @ www.uvk.de Suggestions for further reading A compact overview of the integral approach: Wilber, K. (2000): A Theory of Everything: An Integral Vision for Business, Politics, Science and Spirituality, Boston. An example for the application of the integral approach in management: Barrett, R. (2006): Building a Values-Driven Organization, London & New York. Literature Ansoff, H. I. (1979): Strategic Management, Hoboken. Bär, M./ Krumm, R./ Wiehle, H (2010): Unternehmen verstehen, gestalten, verändern. o Das Graves-Value-System in der Praxis, Wiesbaden. Bar re tt , R. (200 6): Bui ldi n g a V al ues-D ri ve n Organi zati on, Lo ndon & New Yo rk. Beck, D. E./ Cowan, C. C. (2011): Spiral Dynamics o Leadership, Werte und Wandel, Bielefeld. Beer, S. (1972): Brain of the firm, Chichester et al. Briggs K./ Myers, I. (1995): Gifts Differing: Understanding Personality Type, Mountain View. Cook-Greuter, S. (2008): Selbst-Entwicklung o neun Stufen des zunehmenden Erfassens, in: Integral informiert, No. 14, September/ October 2008, 21 o 64. Gardner, H. (1991): Abschied vom I.Q. Die Rahmen-Theorie der vielfachen Intelligenzen, Stuttgart. Gardner, H. (2002): Intelligenzen. Die Vielfalt des menschlichen Geistes, Stuttgart. Gay, F. (2004): Das DISG-Persönlichkeitsprofil o Persönliche Stärke ist kein Zufall, Remchingen. Gilligan, C. (1999): Die andere Stimme, München. Koestler, A. (1968): Das Gespenst in der Maschine, Bern. Krumm, R. (2012): 9 Levels of Value Systems, Haiger. Malik, F. (2007): Management: Das A und O des Handwerks (Management: Komplexität meistern, Band 1), Frankfurt a. M. <?page no="319"?> 318 14 Integral Management - New Perspectives Malik, F. (2009): Systemisches Management, Evolution, Selbstorganisation. Grundprobleme, Funktionsmechanismen und Lösungsansätze für komplexe Systeme, Bern et al. Pessoa, F. (2006): Das Buch der Unruhe, Frankfurt a. M. Senge, P./ Kleiner, A./ Smith, B./ Roberts, C./ Ross, R. (1996): Das Fieldbook zur Fünften Disziplin, Stuttgart. Senge, P. (2011): Die fünfte Disziplin o Kunst und Praxis der lernenden Organisation, Stuttgart. Ulrich, H. (1968): Die Unternehmung als produktives soziales System, Bern. Ulrich, H./ Krieg, W. (1973): Das St. Galler Management-Modell, Bern/ Stuttgart. Wilber, K. (1984): Halbzeit der Evolution, Bern et al. Wilber, K. (2001a): Eros, Kosmos, Logos. Eine Jahrtausend-Vision, Frankfurt a. M. Wilber, K. (2001b): Ganzheitlich handeln. Eine integrale Vision für Wirtschaft, Politik, Wissenschaft und Spiritualität, Freiamt. Wilber, K. (2004): Eine kurze Geschichte des Kosmos, Frankfurt a. M. Wilber, K. (2007): Integrale Spiritualität - Spirituelle Intelligenz rettet die Welt, München. Wilber, K. (2009): Integrale Vision - eine kurze Geschichte der Integralen Spiritualität, München. Wilber, K./ Patten, T./ Leonard, A./ Morelli, M. (2010): Integrale Lebenspraxiskörperliche Gesundheit, emotionale Balance, geistige Klarheit, spirituelles Erwachen, München. <?page no="320"?> AAbboouutt tthhee AAu utth hoorrss Prof. Dr. Thomas Barth Author of Chapter 10: Instruments for Implementing Sustainability Prof. Dr. Thomas Barth is Professor of Business Administration with a focus on controlling and accounting. Prior to his university appointment he worked for several years at an international auditing company. In addition, Prof. Barth is active as a tax advisor in Stuttgart. Prof. Dr. Horst Blumenstock Author of Chapter 4: Sustainable Personnel Management Prof. Dr. Horst Blumenstock is Professor of Business Administration with a focus on corporate leadership and personnel management. Prior to his university appointment he was active for more than ten years in various functions in business practice, among others as head of personnel for a major media group. In addition to his responsibilities at the university, he is active as adviser, especially for small and medium sized enterprises and family-run businesses. Prof. Dr. Erskin Blunck Author of Chapter 3: Strategic Sustainability Management Prof. Dr. Erskin Blunck is Professor for International Management and heads the MBA International Management at HfWU as Dean of Studies. Following his studies in Hohenheim, Portland/ Oregon and his doctorate at University of Hohenheim in 1997, Professor Blunck was active as strategy consultant and head of product management for an international electronics company. Since 2004 he has been involved in teaching and research as professor at Nürtingen University. Professor Blunck furthermore is active as strategy advisor and supports companies in his role as supervisory board member. <?page no="321"?> 320 About the Authors @ www.uvk.de Prof. Dr. Dr. Dietmar Ernst Author of Chapter 2: Sustainable Business Management Prof. Dr. Dr. Dietmar Ernst is Professor for International Finance. He is Dean of Studies and heads the Master’s Program in International Finance. He is also director of the German Institute of Corporate Finance (DICF) and the European Institute for Financial Engineering and Derivatives Research (EIFD). Previously he worked for several years as investment manager at a private equity company and in the area of mergers & acquisitions. Dietmar Ernst studied international economics at Tübingen University and received his doctorate in both business and natural sciences. He is the author of textbooks and other publications. Prof. Dr. Katja Gabius Author of Chapter 11: Legal Implications of Sustainability Prof. Dr. Katja Gabius is Professor of Business Law, with specializations in banking law, corporate law, capital market law and general civil law. After receiving her doctorate from Freiburg University, Prof. Gabius initially worked at an international law firm with a focus on business law and then was responsible for the legal department of a bank. Following an apprenticeship at a bank, Katja Gabius studied law in Konstanz and Freiburg. Since 2008 she has been professor at HfWU Nürtingen-Geislingen, initially as Dean of Studies for the program in Business Law, since 2012 in Nürtingen. <?page no="322"?> About the Authors 321 @ www.uvk.de Prof. Dr. Thomas Ginter Author of Chapter 14: Integral Management - New Perspectives for Sustainable Development Prof. Dr. Thomas Ginter is Professor of Business Administration with a focus on marketing, management and distribution. After receiving his doctorate from FU Berlin, Prof. Ginter initially assumed the position of head of marketing for a globally leading manufacturer of industrial robots. In 2001, Professor Ginter was appointed to Rosenheim University, where he held the position of Dean of Studies until his move to Albstadt-Sigmaringen University in 2004. Since 2011, Professor Ginter teaches at HfWU in Nürtingen. In addition to his professorship, Professor Ginter is also active as strategy consultant and organizational developer. Prof. Dr. Hans-Jürgen Gnam Author of Chapter 7: Operational Environmental Management Prof. Dr. Hans-Jürgen Gnam is Professor for Environmental and Material Flow Management as well as sustainability officer at the university. He spent more than 20 years in various functions as a business practitioner, among others as management representative for environment, safety and health protection at a major, internationally active pharmaceuticals company. In addition to his activities at the University, he works as an advisor on environmental issues, work safety and health protection. Prof. Dr. Carsten Herbes Author of Chapter 5: International Management and Sustainability Prof. Dr. Carsten Herbes has been Professor for International Management and Renewable Energy and Managing Director of the Institute for International Research on Sustainable Management and Renewable Energy since 2012. Previously he spent close to ten years at an international consulting company in the Munich and Tokyo offices, after that at a bioenergy company, most recently as member of the management board. <?page no="323"?> 322 About the Authors @ www.uvk.de Areas of specialization: marketing, costs and social acceptance of renewable energy, especially biogas, international development of renewable energy, strategy and organization of internationally active companies, Japanese economy. Prof. Dr. Iris Ramme Author of Chapter 13: Marketing Prof. Dr. Iris Ramme has been Professor of Business Administration with a focus on marketing and market research since 1997. After receiving her doctoral degree at Dortmund University in 1989, Professor Ramme held leading positions in the media industry and in the financial services industry in market research and in marketing. In addition to her professorship, Professor Ramme has been the Director of International Affairs since 2010. Prof. Dr. Monika Reintjes Author of Chapter 12: Shaping the Value Chain Prof. Dr. Monika Reintjes is Professor of Business Administration with a focus on procurement and logistics management. After receiving her doctoral degree in 1997 from Siegen University, Professor Reintjes was active from 1997 until 2009 in leading positions in the IT services industry and the electronics industry before becoming managing director of a production and development site for medium sized companies. In addition to her professorship, Professor Reintjes is also active as an adviser in the electronics industry. <?page no="324"?> About the Authors 323 @ www.uvk.de Prof. Dr. Ulrich Sailer Author of Chapter 1: Sustainability - An Introduction and Chapter 9: Controlling Prof. Dr. Ulrich Sailer has been Professor at HfWU since 2001. He heads the Business Administration program and serves as Faculty Vice-Dean. His research interests are in the fields of controlling, finance and management, especially the systemic approach. Prior to his university appointment, he was active for about 10 years as member of the management board of several companies. Prof. Dr. Steffen Scheurer Author of Chapter 10: Instruments for Implementing Sustainability Prof. Dr. Steffen Scheurer teaches Accounting and Controlling at HfWU Nürtingen-Geislingen in the study program Health and Tourism Management. In addition, he is the scientific head of the part-time MBA Program in International Project Management. He is author of numerous articles and co-author of a textbook on project management. He is also active in a number of research projects under the auspices of the German Society for Project Management. He has more than 20 years of consulting experience in the fields of project management, corporate leadership and controlling. Prof. Dr. Frank Andreas Schittenhelm Author of Chapter 6: Innovation Management and Sustainability, and Chapter 8: Financial Management and Sustainability Prof. Dr. Andreas Schittenhelm joined HfWU Nürtingen-Geislingen in 2012 as Professor for International Financial Management. He previously held a professorship at Esslingen University. As Vice-Dean of the Faculty of Business at that school, he established the Master’s Program in Innovation Manage- <?page no="325"?> 324 About the Authors ment, which he headed for several years. In addition to his university activities, he works as an advisor on the topic area of risk management and lectures at Deutsche Aktuar-Akademie Prof. Dr. Lisa Schwalbe Author of Chapter 7: Operational Environmental Management Prof. Dr. Lisa Schwalbe joined HfWU in 2001 as Professor for Supply and Disposal Technologies. She heads two Bachelor’s Programs: Energy and Resource Management since 2002 and Sustainable Product Management, which she developed, since 2012. Prior to her appointment she worked as an independent consultant in the areas of quality, environmental, health and work safety management. Previously she worked in various industries in the fields of environmental technologies, environmental measurement technologies, environmental impact assessment, environmental management and waste disposal. In addition to her professorship, she holds an advisory role for management systems for several companies. <?page no="326"?> GGlloossssa arryy 3-Pillar-Model The model establishes that sustainability is only possible if ecological, social and economic aspects are considered jointly. Behavioral Approach The behavioral approach tries to explain social and technical relationships in markets and organizations and to point out economic consequences with the help of general theories about human behavior. Brundlandt-Report/ Brundlandt-Commission Gro Harlem Brundlandt chaired the “World Commission on Environment and Development” which was appointed by the United Nations. The final report of that commission from the year 1987 is entitled “Our Common Future” and is frequently called the Brundlandt-Report. It has strongly influenced the common understanding of sustainable development. Carbon Accounting Reporting and valuation of a company’s emissions. Needed for external accounting of emissions rights and reporting on emissions. Carbon Controlling Monetary or non-monetary valuation of emissions for management and decision purposes. City Logistics The complete system of supply and waste disposal for urban retail operations. Collateralized Debt Obligations (CDO) Tradable securities which are frequently used by issuers to transfer risks to the capital markets. Competition of Systems among Nation States Nation states compete for foreign investors and occasionally resort to the strategic use of low levels of protection, for example with regard to the environment or workers’ rights. Complex Systems / Complexity A complex system consists of very many or even countless factors that are subject to constant change. For that reason it cannot be understood or anticipated. <?page no="327"?> 326 Glossary @ www.uvk.de Even management based on experience quickly reaches its limitations due to the continuous change. One possibility is to comprehend the system in its entirety together with all fundamental linkages. A complicated system also contains many factors, but it is static and for that reason can be understood with massive effort if needed. Compliance Narrow definition: corporations follow the law. Broader definition: corporations not only follow the law, but also fulfill societal expectations. Complicated systems Complicated systems, just as complex systems, are made up of a large number of factors. However, complicated systems are static. For that reason, these systems can be understood, regulated and predicted if the necessary effort is made. Core Labor Standards of the International Labor Organization (ILO) These norms dating back to the year 1998 define minimum standards for all 185 member nations of the ILO such as freedom of assembly, abolition of forced and compulsory labor, abolition of child labor and the removal of discrimination on the job. The standards combined eight international IAO agreements and made them binding. They are hard to enforce in many countries characterized by a strong informal or shadow economy, where labor unions are irrelevant. Corporate Citizenship Societal activities in the local neighborhood of the corporation such as sponsoring, endowments, donations that go beyond the narrowly defined business purpose. Corporate Governance Good and transparent corporate management. In Germany typically based on the German Corporate Governance Code. It contains regulations for transparent corporate management and control and is supposed to strengthen trust in corporate management. Corporate Social Responsibility Concept that is used by companies to voluntarily integrate social and environmental issues into their corporate activities and the exchange with the stakeholders. (Definition of CSR from the Green Book of the European Commission) Corporate Value Creation Within the subsystems procurement, production, (physical) distribution and logistics, corporate value creation combines factors of production in order to start production processes which generate a value increase. <?page no="328"?> Glossary 327 @ www.uvk.de Cradle to Cradle According to the cradle-to-cradle approach, which was first published by William McDonough and Michael Braungart in the year 2002, offerings are designed in such a way that they come as close as possible to fulfilling the demands of eco-effectiveness. The classical life cycle analysis (from cradle to grave) is replaced with a strategic focus of the company on offerings that are in line with the principles of a circular economy. Culture of Trust Trust among the members of an organization and in the organization is a central organizational principle. The culture of trust becomes apparent for example via the cooperative and participative leadership model, open communication, cooperation characterized by reduced control and surveillance processes or the mutual appreciation among members of the organization. Decision-Oriented Business Management Refers to a school of thought within business management that systematically stresses the importance of decisions. Heinen is the founder of this school, which facilitated the easier interaction of business management with other social sciences. From an analysis of decisions follows the renunciation of the idea of a one-dimensional target function in the form of profit maximization. Instead the pursuit of multiple targets is stressed and thus a bundle of targets should be assumed. In addition to typical economic goals (earnings, sales and profitability, maintaining the corporate potential), the importance of power or prestige is also pointed out. Development Lines The concept of development lines is based on the research by Howard Gardner of Harvard University about multiple intelligences. He argues that humans possess numerous different types of intelligence such as linguistic intelligence, logical-mathematical intelligence, physical-kinesthetic intelligence, inter and intrapersonal intelligence. The determination and assessment of the relevant development lines of a company allows the preparation of a comprehensive profile of strengths and weaknesses which serves as the basis for sustainable development. Development Stages Development stages represent the degree of growth and development of a company. While states are transitory, stages are lasting. Once a certain stage, better development stage, has been reached reliably, the concrete potential of the stage is available permanently. With each new stage, the degree of complexi- <?page no="329"?> 328 Glossary @ www.uvk.de ty increases, while new qualities are emerging at the same time. As an example, a company can develop from an authoritarian structure via strategic company towards a social network. Development stages cannot be skipped. DIN EN ISO 14001 German version of the internationally valid norm with the title “Environmental Management Systems - Requirements with Guidance for Use.” Distribution Assures that the customer has access to the products or services in the appropriate quantity, at the desired time and in the desired location. Diversification Effect Follows from modern portfolio theory. Spreading the available capital over several investable assets leads to a reduction of risk. EFQM The European Foundation for Quality Management (EFQM) developed the EFQM model. This quality management approach is significantly more comprehensive than ISO 9001. All success factors of a company need to be considered and systematically improved. The basis for the approach is a self-assessment which reveals strengths and weaknesses. The evaluation criteria for the EFQM model include not only results (which are indicative of strong performance in the past) but also so-called enablers, in other words activities which are expected to assure future strong results if applied in a planned and systematic fashion. EMAS Abbreviation for “Eco-Management and Audit Scheme.” Term used for the Regulation (EC) No. 1221/ 2009 of the European Parliament and of the Council of 25 November 2009 on the voluntary participation by organizations in a Community eco-management and audit scheme. Environmental Approach Deals with the environmental problems of industrial societies, which have resulted in a conceptual shift in politics, business and science. In management science, two main directions can be identified: • ethical and normative ecological business management and • an approach that focuses on ecology. Ethical and normative business management demands a fundamental reorientation of economic thinking and acting by highlighting the compatibility of ecological and economic thinking. The approach which focuses on ecology is not <?page no="330"?> Glossary 329 @ www.uvk.de so much concerned with a complete reorientation of business management, but rather stresses the inclusion of ecological topics in traditional business management. Environmental Management Systems (following EMAS) The part of the overall management system that deals with organizational structure, planning activities, responsibilities, behavior, approaches, procedures and tools for the specification, implementation, realization, assessment and continuation of the environmental policy and the management of all environmental aspects. Factor Theory Research approach in business management developed by Gutenberg which is centered on a process which combines factors of production. Factor theory was influential in shaping the development of business management following the Second World War. Progress was made particularly in the fields of production, cost and investment theory, as well as in the application of quantitative methods. Also characteristic, however, is the neglect of other central aspects in the production process or business in general (management, personnel, marketing). Four-Quadrant Model According to Ken Wilber, reality can be observed from four different perspectives: from an inner (subjective/ qualitative) and an outer (objective/ quantitative), as well as from an individual and a collective perspective. In order to obtain an integral view on an individual or social entity, it is absolutely indispensable to include all four quadrants; denying or ignoring as irrelevant one of the perspectives implies a negligent reduction of reality. Fuzzy Front End Early (first) stage in the innovation process used to generate ideas. German Sustainability Code Was recommended for introduction in 2011 by the Council for Sustainable Development of the Federal Republic of Germany. The aim of the German Sustainability Code is to show the achievements concerning sustainability in a database in order to increase transparency and comparability and achieve increased commitment. Global Compact In the year 1999, the United Nations appealed to the leading companies to establish minimum standards in the fields of human rights, environmental protection, labor standards and the fight against corruption. <?page no="331"?> 330 Glossary @ www.uvk.de Global Reporting Initiative (GRI) The GRI is a nonprofit organization which was founded in the year 1997 jointly by CER ES a nd the En vir onm ental Pro gra m of the Uni te d Natio ns (UN EP) in the US. The aim of the Global Reporting Initiative is the support of sustainability reporting of all organizations. Greenwashing Corporations engage in greenwashing if they incorrectly praise their environmental activities, even though these are inexistent or insignificant. Holarchies of Development The term “holon” was coined by Arthur Koestler. A holon describes a whole entity in and of itself, which at the same time is a part of another complete structure (such as atom - molecule - cell - organism). Holons always appear in the form of a hierarchically structured nesting, which can also be called holarchy of development. These are also found at companies (such as employee - team - department - business area - company). Holistic Management Comprehensive management approach which integrates the economic, social and ecological dimensions and provides approaches for dealing with the resulting complexity. This approach broadens traditional business management, which is rational, theoretical, neutral and based on the model of homo oeconomicus, by incorporating real humans, society and its values. Industrial Flight Hypothesis Holds that corporations, in order to maximize profits, will move their production locations to avoid government regulation which would result in increased costs. Initial Public Offering (IPO) Going public of a corporation. The valuation of the company is mostly based on the expectation of major future sales increases, which are highly uncertain. Innovation Triangle Describes the linkages between innovation process, culture of innovation and innovation manager. Integral Approach The approach was developed by Ken Wilber and attempts to draw a map of reality that is as precise as possible. Wilber assumes that reality always has an <?page no="332"?> Glossary 331 @ www.uvk.de absolute (unchangeable) and a relative (changeable) aspect. Core of the integral approach is the “Four-Quadrant Model.” Integrated Management A company must be understood as an open system which constantly interacts with its environment. For its further development, the consideration of all internal systems levels is required. The future development of the company thus requires a holistic, or to use the expression of Richter, an integrated management concept. Integrative Sustainability Model Due to the numerous interrelations between economic, ecological and social considerations it is impossible to look at them in isolation. Instead an integrated approach is needed. ISO 14001 Internationally recognized environmental standards which were developed by the International Organization for Standardization in the year 1996. The certification of corporate environmental management systems can be based on this norm. It is criticized that the norm only helps to optimize production and reduce waste, but no attempts are made to further develop the core business and the product design in a sustainable fashion. ISO 26000 Guidelines on sustainability published by the International Organization for Standardization in the year 2010. It contains standards concerning the social and societal responsibility of companies. Due to the comprehensive international acceptance it is considered to be the dominant guide for responsible business. Just-in-Time Procurement Just-in-time procurement foregoes the holding of inventories. Only the concrete demand in the production process triggers a delivery on the date the good is needed. The delivery is thus synchronized with regard to delivery quantity and date. Logistics Planning, management, implementation and control of material flows and all associated flows of value and information within a company, but also between the company and its clients or suppliers. <?page no="333"?> 332 Glossary @ www.uvk.de Material Flow Cost Accounting Instrument for capturing the quantities of material flows and stocks in processes or production lines both in physical and monetary units. Inefficiencies in the use of the materials during production can be revealed with this type of analysis. Model of Man Simplified and standardized patterns of human behavior which have been assigned by one person to another person. Subjective and generalized perspective on human behavior or of the superior about his employee, his cognitive abilities and his motivation. Model/ Modeling Modeling is the construction of a model. The model captures reality in a reduced manner based on the aims of the modeler. Each decision is supported at least implicitly by a model. In order to arrive at better foundations for needed decisions, it makes sense to turn every implicit model into an explicit one and in that way allow for the possibility of validation. This is recommended especially in the case of increasing complexity. Suitable modeling software is available. New Institutional Economics In the sixties microeconomics moved away from stringent neoclassical equilibrium theory. New institutional economics was developed. New institutional economics analyzes production not against a technical and economic background, but rather against a legal and economic background. New institutional economics does not focus on the possession of factors of production, but instead on the right to that factor of production, which can be transferred to another economic subject. Occupational Health Management Creation of sustainable structures at the company, aimed at workplace health promotion and workplace safety. The goal of workplace health promotion is to maintain the health of employees, to strengthen their health potential and to improve their well-being while at work. This means avoiding bodily strain, reducing the consumption of tobacco and alcohol and avoiding psychological stress. OECD Principles for Multinational Enterprises The 34 OECD member countries as well as eight additional states have made a commitment to encourage multinational corporations that conduct business on or from their territories to adhere to the Principles (human rights, employment, environment and corruption). The OECD Principles are not legally binding for <?page no="334"?> Glossary 333 @ www.uvk.de companies. Violations can be reported to the national contact office, but the publication of a violation is the worst thing that can happen to an involved company. Pollution Haven Hypothesis Argues that polluting industries will relocate their production sites into countries with weak environmental legislation. The empirical evidence is not clear. Procurement The task of procurement is the targeted and systematic sourcing of all needed input factors that are not produced in-house on the factor markets in order to maintain the corporate production processes. Production Transformation of input factors into marketable products, services or intermediary goods, which become input factors at a later production stage. Race-to-the-Bottom Hypothesis Argues that corporations will invest in countries where profits are highest. High taxes and strict regulations to protection the environment and workers reduce profits and for that reason, countries that pursue such policies will be avoided. In order to prevent capital flight, countries will be forced to increasingly lower their standards. The empirical evidence is not clear. Resilience The term resilience (“resilire” means to “bounce back” or “rebound”) originates from physics and means “to return to the original state.” It describes the reaction of materials to outside influences in an elastic and flexible manner while maintaining their original form. In biology this term is used similarly. It describes the ability of a system to survive when exposed to external disturbances. When transferring attributes of biological systems to company strategy, it is interesting to note that these are based on the principles of diversity, modularity, direct feedback, close social networks, redundancies and flexibility. Risk-Return Analysis Description of an investment with the help of the parameters risk and return. A graphical analysis allows the explicit consideration of accepted risks. Self-Organization In systems theory, self-organization refers to the development of a system from within. In contrast to the organization from the outside, there is no entity <?page no="335"?> 334 Glossary @ www.uvk.de which gets involved with the system because of higher knowledge or a hierarchical superiority. Self-organization is relevant especially in complex systems, since an outside organization is simply unable to support the system in a meaningful way. These considerations provide a justification for a decentralized organizational structure or leadership by objectives. Shared Value The shared value approach by Michael Porter and Mark Kramer is looking for a way to avoid decision making based on trade-offs. This can be accomplished by taking a fresh look at products and markets with the aim of achieving joint value added and by discovering new market opportunities, reassessing the productivity of value creation as well as establishing local clusters to improve the competitive position, innovative power and productivity. Shareholder Value Shareholder value refers to the market value of the equity capital. Simply speaking, the shareholder value is equal to the value of a company and the resulting value per share from the perspective of the providers of equity capital. The shareholder value approach was developed by Alfred Rappaport. It is a concept which orients corporate management on the future cash flows to the providers of equity capital. Stakeholders other than the providers of equity capital are not explicitly considered. Stage-Gate Model Description of a stepwise innovation process aimed at the successful creation and commercialization of innovations. Stakeholder Stakeholders are all interest groups or groups of persons that are involved in any way in the sustainable business success of a company. This includes for examples employees, municipalities, customers, suppliers, loan providers and the owners of the company (shareholders). The influence of the stakeholders on the company differs depending on their power and their interest to wield influence. Frequently a fundamental difference in interests is assumed to exist between shareholders and all other stakeholders. StakeholderValue Stakeholder value refers to the return or utility that accrues to the various groups that are in contact with the company. Stakeholder value also stands for a value based corporate strategy which aims to balance the interests of all stakeholders. This requires an economic system that is based on the principles of a social economy. <?page no="336"?> Glossary 335 @ www.uvk.de States A state describes the way something is or the way something is perceived to be at any specific moment. In order to fully capture the status quo of a company, it is initially required to provide a description of the current situation (for example with regard to the variables productivity, per-capita output, satisfaction of employees or work climate). Strategic Personnel Management This approach assumes a dependency between corporate strategy and available human resources. In this way, personnel management becomes a strategic partner and the personnel strategy or a part of it must be included in the corporate strategy. From this it strictly follows that personnel measures can be evaluated according to their contribution to corporate success. Strategic Sustainability Management Strategic sustainability management is concerned with the strategic aspects for realizing the Three-Pillar-Model with its economic, ecological and social targets. Starting from the organizational purpose, the sustainability targets influence strategy process and contents and require an expanded treatment which includes the ecological dimension. Strategy Process The way a strategy is formed can be called strategy process. Typical questions in this regard are “how,” “who,” and “when.” The strategy process can be decomposed into the three areas strategic thinking, strategy development and change management. Sustainability Assessment An assessment model that allows insights about specific settings or strategies concerning strengths and weaknesses of sustainability management at all levels of the company. Sustainability Balanced Scorecard The balanced scorecard, an instrument to implement strategy is enhanced to include the dimension of sustainability. The financial, customer, process and development perspectives of the balanced scorecard are combined with economic, ecological and social sustainability, so that a total of 12 fields of action are created. With the assignment of strategically relevant indicators, sustainability is anchored both in strategy and implementation. <?page no="337"?> 336 Glossary @ www.uvk.de Sustainability Reporting (CSR Report) Provision of all information that is relevant for social responsibility and creation of transparency with regard to sustainable economic activities. Numerous corporations currently follow the recommendations of the international Global Reporting Initiative. Analysts, investors and the public are provided with qualitatively outstanding and comparable information. Sustainability Mission statement for human development with a future. “Sustainable development means that environmental aspects must be considered on equal footing with social and economic considerations. Future-oriented economic activities thus require that we leave an intact ecological, social and economic structure to our children and grandchildren. One is impossible without the other.” (Basic premise about sustainable actions of the Council for Sustainable Development) Sustainable Business Management Sustainable business management deals with economic activities of corporations that are successful in the long run, taking into consideration the relationships with other companies and the surrounding economic areas. Long-term success is achieved by the optimal deployment of all factors of production. The interests of stakeholders are aligned via negotiations and the adequate participation in corporate activities and corporate success is assured. Systems-Oriented Approach The systems-oriented approach was developed by Ulrich. He thinks of the corporation as a system of various sub-systems, which are interconnected in multiple ways. The approach thus deals intensively with the behavior of systems on the basis of formal insights from cybernetics as well as general systems theory. Typologies Generally speaking, types are related groups that share one or several common features. The application of typologies in the corporate context primarily serves to identify centrally relevant patterns and aims at finding a creative approach to the respective patterns of a specific type. A large number of typologies are available in business research such as the typology of personalities following Meyer-Briggs, the behavioral typology following DISC or the typology of corporate culture following Ansoff. <?page no="338"?> Vendor-Managed Inventory Vendor-managed inventory allows for a buffer stock between supplier and customer, which is used by the customer to obtain the needed materials as they are needed in production. It is restocked by the supplier in line with the drawdown and the stipulated upper and lower inventory levels. Venture Capital Equity capital that is provided to young entrepreneurs who otherwise would have no access to funding by investors who are willing to assume risk. The investment periods tend to be short to medium term. Weighted Average Cost of Capital (WACC) Discount rate used to evaluate the profitability of investments. Work-Life-Balance The various roles and spheres of life of a person (employee) are in balance, provide mutual support or at a minimum do not hinder each other. The ability to reach this state allows the organization of work, family, social and leisure activities according to personal requirements or wishes, while at the same time meeting the expectations of others. Qs_\\š]C 33