Sustainability Management and Corporate Competitiveness Model

Transcription

1 MONTHLY FOCUS NO Sustainability Management and Corporate Competitiveness Model By KIM Jong-Nyun

2 1. Changing Concept of Corporate Value For business, the first decade of the 21st century was an era of growth while the period after the global financial crisis in 2008 was one of sustainability management. This is based on an analysis of the business performance of the world s 100 largest firms in terms of market capitalization, excluding financial institutions in 2000, 2007 and In the pre-crisis period, the sales of these 100 firms soared 80.5% (annual average of 8.8%) and their corporate value (measured by market capitalization) rose 22.8%. In the post-crisis period, however, their sales rose only 26.9% (annual average of 4.8%) and corporate value slid 21.6%. Fizzled corporate growth and falling corporate value led to heightened interest in the sustainable growth of a business. Table 1. Performance of the World s 100 Largest Firms Market capitalization (Annual average, year-on-year) (-5.9%) (3.0%) 10.6 Sales (Annual average, year-on-year) (4.8%) (8.8%) 4.1 Gross profit margin ratio 32.6% 36.0% 32.7% Operating profit to sales ratio 14.9% 15.8% 11.9% Number of employees 1,542 1,513 1,299 Such changes suggest that the correlation between competitiveness/dynamic capabilities (DC) and corporate value has weakened with the passing of the 2008 financial crisis. To confirm this, the 100 largest firms were mapped into a matrix. X coordinates are the combined rankings of firms in terms of competitiveness (measured by growth in per capita operating profit) and DC (sales growth). Y coordinates are their rankings in terms of corporate value (growth in market capitalization). The results showed that there was a positive correlation between competitiveness/dc and corporate value during the period. For instance, the firms that restructured themselves when the dotcom bubble burst, gained a competitive edge or secured the basis for another phase of growth by redefining their business, which then helped boost their corporate value. However, the correlation substantially weakened after 2007 presumably due to the rise of a third factor such as sustainability management. Table 2. Correlation Coefficient between Corporate Value and Competitiveness Period Corporate value and competitiveness Corporate value and dynamic capabilities Corporate value and competitivenessdynamic capabilities To take a closer look into the effects of sustainability management, 15 global firms were selected as case studies. All 15 firms have sustainability management factors in their business model or are ranked higher by global sustainability management assessment institutions.

3 They have also seen their corporate value increase due to factors other than higher competitiveness or DC. II. Global Trends in Sustainability Management Six trends for sustainability management were induced from the case studies. 1. HSE: from requirements to motivations of business transformation The selected firms all declared that caring for health, safety and the environment (HSE) was an important aspect in their corporate mission and vision, and were changing ways of production, transportation, building management, distribution, logistics and consumption. Also they are doing away with simply manufacturing environment- or health-related products and seeking more fundamental changes to find new opportunities in HSE by reshaping their business structure. The American multinational conglomerate GE expanded its healthcare and energy departments at the expense of its consumer, industrial goods and finance departments. While doing so, it promoted its two new corporate visions, Ecomagination (ecology plus imagination) in 2005 and Healthymagination (health plus imagination) in And Pepsi redefined itself as a healthy food maker, reducing its line of fizzy drinks and successfully transformed its business. 2. Accessibility: seizing opportunities from low-income consumers Using distinctive product/profit models, the firms increased consumer accessibility. They offer easily accessible products and services to as many people as possible who are socially vulnerable, including low-income families and those living in under-developed countries. Such offerings cannot boost corporate profits immediately but they can increase the satisfaction (utility) of the vulnerable, which will in turn raise the public welfare for the whole society. Vodafone launched M-Pesa, a mobile payment system, in Kenya, as a part of its corporate social responsibility efforts as well as being a new income source for the mobile carrier. 3. Connection and cooperation: sound business environment is the basis of competitiveness The firms and their partners aggressively work together from the beginning stages of the value chain. Firms help their existing and potential partners improve productivity and efficiency to become self-sustainable. This will ultimately better the whole business environment. The firms also provide seed capital for promising venture start-ups to foster them into partners. Ford applies the One Ford strategy which connects its departments across the globe when furthering relations with partners so as to reduce any unnecessary loss of resources and other inefficiencies.

4 4. Regional development: creating a virtuous cycle benefiting both business and regional communities The firms not only trade with suppliers at a fair price, but directly invest in areas where they procure resources. Direct capital and technology investment make such areas economically self-sufficient and ensure businesses can secure a stable supply of resources. Since 2000, Nestlé has educated coffee growers in advanced farming techniques and helped them receive bank loans. These efforts have improved farming conditions and improved Nestlé s resource procurement system. Furthermore, the firm has been able to achieve a yearly 30% growth since. Additionally, the firms in the case study also work together with other firms operating in the same are for simultaneous growth. This cooperative network creates a better business environment in terms of transportation, logistics and employment. 5. Employee satisfaction: from financial compensation to better quality of life The standards for a favorable workplace are expanding from financial to non-financial incentives. More global firms are recognizing that creating a pleasant work environment is important to sustainability management because employee satisfaction is a prerequisite to related activities. Higher employee satisfaction leads to higher productivity and lower employee turnover, which are the basis of stable business operation and cost cuts. For the past fifteen years, SAS has been selected as one of the 100 Best Firms to Work by Fortune magazine. Its employee turnover ratio is a meager 2.6% which is far below the industry average of 22% which in turn enables SAS to maintain long-term customer relations, retain business knowhow, and reduce hiring and training costs. 6. CSR: from sharing to giving opportunity to share In the past, businesses were at the forefront of their corporate social responsibility (CSR) activities. Now, they are shifting their role to platform provider to enable consumers to actively participate in CSR activities. Pepsi launched its Refresh Project, which donates the funds budgeted for marketing to areas chosen by the consumers. Through the project, Pepsi has linked consumer purchases to increased public value, which ultimately benefits the company. TOMS shoes One for One Program donates a pair of shoes with every purchase to those living in underdeveloped countries. Thanks to the program, the company was able to achieve a sale of over one million pair of shoes only five years into the business, in Also, employees are encouraged to take part in CSR programs, which in turn strengthens their sense of belonging to the company and raises the company s reputation in society. All in all, the six trends explained above suggest that sustainability management benefit both firms and other stakeholders.

5 Table 3. Sustainability Management Benefits Business and Stakeholders For Business For Stakeholders HSE Is a growth engine and provides Enhances quality of life opportunities to transform the business or enter new ones Accessibility Secures new markets by attracting new customers Increases product accessibility for the socially marginalized, including lowincome families and disabled Connection and cooperation Regional development Employee satisfaction Social contribution Establishes trust-based relationships with partners for long-term growth Secures quality physical resources Builds up friendly relations with regional communities Heightens employee satisfaction and job performance Enhances social reputation Creates a sound business environment Helps regional communities develop socially and economically Career development programs and an open organizational culture boost employee satisfaction Resolves social issues Helps stakeholders meet social responsibility III. Expansion of the Corporate Competitiveness Model As drivers for corporate value diversify, the concept of corporate competitiveness is also changing. The pre-existing Samsung Economic Research Institute corporate competitiveness index (SERI CI) model incorporated a wide range of competitiveness research based on a resource-based perspective. At the center of the model were the resources retained by firms, which was surrounded by the intangible assets that differentiated the firms. Then in the 1990s, in line with the emergence of the dynamic capabilities theory, dynamic capabilities (DC) was also added.

6 Figure 1. Progress in Competitiveness Theories and SERI s CI Model Note: 1. EVA is economic value added. 2. Differentiation part is based on M. Treacy's theory of competitive advantage. Today, value creation is increasingly about raising the total amount of economic and social value than about improving the short-term balance sheet. Moreover, the rise of stakeholder capitalism has changed the concept of corporate competitiveness into the ability to meet the needs of the diverse range of stakeholders. Reflecting these changes, this study modified the existing SERI CI model by incorporating the six sustainability management trends described above. The focus of the model shifted from efficiency to openness-oriented sustainability management with flexibility-based DC becoming a dynamic factor. What should be noted in the new model is that sustainability management is regarded as an investment connecting social value with business, not CSR, which is usually considered a cost. The existing three differentiation factors, namely product, operation and customer, were expanded to externality, co-evolution and empathy, respectively.

7 Figure 2. Global Firms Sustainability Management Trends and Expanded Concept of Competitiveness Caring for the HSE and accessibility were added on the product side of the model as sustainability management factors. The two are classified into externality, which has been recognized as a social value, but has not been measured so far. On the operation side, ecological partnership and regional harmony were considered sustainability management factors for co-evolution with partners and regional communities. Lastly, a favorable workplace or GWP and CSR were added on the customer side for empathy. Employees are regarded as internal customers and the external society as potential customers.

8 Figure 3. Expanded SERI CI Model IV. Suggestions: sustainability practices need to be built into a business model To make sustainability management an engine for higher business competitiveness, the above practices should be integrated into everyday operations. Active communication should also be simultaneously implemented. Sustainability management needs to be utilized to speed up growth. The first decade of the 21 st century saw Korean firms competitiveness soar. The SERI CI of Korea s 100 largest firms soared to 81 in 2010 from 48 in 2000, less than half the global average at that time. However, during the same period, their differentiation index failed to achieve such a jump, staying low at 48 in Sustainability management can be utilized to strengthen their differentiation capability. Furthermore, sustainability management needs to be understood as a way of modifying the way of business, not as additional input of resources. Thus, firms should view it as an essential element of their business operations, not as an act of profit redistribution to boost their reputation. In today s era of open communication and information, it is important for firms to publicize their sustainability management practices in a consistent manner. Lastly, sustainability management practices need to be connected to job performance. For this, key performance indicators (KPI) should be devised so as to make relevant investment decisions in a consistent manner from a strategic perspective. Data collection is also needed for an accurate assessment.

9 Table 4. Sustainability Management Factors and KPI Factor Sub-factors Key performance indicators Product Externality HSE Accessibility - HSE index - The environment in sustainability reports - Ratio of spending on the socially vulnerable to the total budget Operation Co-evolution Ecological partnership - Difference of profit ratio between contractors and their partners Regional harmony - Employment growth/sales growth Customer Empathy GWP - GWP index - Ranking in the survey of best firms to work for CSR - Society in sustainability reports Table 5. Suggestions Sustainability management needs to be utilized to speed up growth Sustainability management needs to be understood as a way of modifying the way of business Firms need to publicize their sustainability management practices Sustainability management activities need to be reflected in job performance assessment Details Korean firms competitiveness has soared Sustainability management can be utilized to strengthen their differentiation capability Firms should view sustainability management as an essential element of their business operations, not as an extra investment External investors increasingly assess the results of sustainability management as the basis for their investment decisions. Thus it is important to publicize related activities. KPIs should be devised so as to accurately reflect relevant activities into performance assessment