Towards sustainability governance in value networks

Transcription

1 Towards sustainability governance in value networks

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3 Towards sustainability governance in value networks Project no SustainValue Sustainable value creation in manufacturing networks This project is supported by funding from the Nanosciences, Nanotechnologies, Materials and new Production Technologies Programme under the 7th Research Framework Programme of the European Union.

4 Contents Foreword 4 Workbook background: SustainValue project 5 Introduction: Setting the scene 6 1 Creating sustainable value in the networked manufacturing industry Why did we write this workbook? What is it all about? How does this book support sustainable value creation in manufacturing industry networks? 10 Part I: Analysing sustainability governance within a value network 13 2 Defining key actors 14 3 Analysing relationships Defining joint strategic objectives 19 Overview of Part I and discussion 21 Part II: Organising sustainability governance within a value network 23 5 Determining roles, benefits and responsibilities 24 6 Negotiating network structure and tasks 25 7 Coordinating actions and business operations 27 Overview of Part II and discussion 30 Part III: Developing sustainability governance within a value network 31 8 Talking about joint actions as a value network 32 9 Strengthening trust through joint actions Thinking sustainability at network level 35 Overview of Part III and discussion 37 Conclusions: Sustainability in value networks 38 References 39 2

5 Editors: Katri Valkokari and Katariina Palomäki Authors: Amirmostofian, A. Beer, J. Brenken, B. Evans, S. Frey, D. Fumagalli, L. Grefrath, C. Holgado Granados, M. Liyanage, J. Macchi, M. Palomäki, K. Rana, P. Reunanen, M. Rotaru, R. Ruder, P.M. Schreiber, V. Schäperkötter, C. Short, S. Uusitalo, T. Valkokari, K. Valkokari, P. Wagner, D. Disclaimer The content of the publication herein is the sole responsibility of the publishers and it does not necessarily represent the views expressed by the European Commission or its services. 3

6 Foreword The overall goal of the SustainValue project is to develop industrial models, solutions and performance standards for new sustainable and better performing production and service networks. This workbook is based on the update for deliverable 1.2 of the project answering to the goal of developing a sustainability governance model for manufacturing networks. The workbook focuses on network-level co-development methods and tools, presents the appropriate tools and methods developed in the SustainValue project and elsewhere, and emphasises the network approach within them. In other words, the workbook does not present new tools but gathers up the network governance-related tools and supporting information for their utilisation at value network level. The theoretical backgrounds and the development processes of the presented tools and methods have been described in more detail in the project s deliverables and other publications (see the reference list). The workbook proceeds as follows. The introduction presents the concept of governance and the SustainValue value network governance model. Part I Analysing deals with analyses of the value network and broader business ecosystem around the network. Through these analyses, network actors are able to identify the total sustainability impacts over the product life cycle and the requirements of all the actors involved as well as to create joint strategic sustainability objectives. Part II Organising offers tools and methods for understanding and discussing the collaboration models, network structure, roles and responsibilities both inside the value network and with other stakeholders within the business ecosystem. Part III Developing focuses on sustainable development as a value network, thus considering the value network as an entity, and it discusses the evaluation of the progress and future development needs. The practical challenges presented in the beginning of the main parts and the key questions in Table 1 guide the reader to choose suitable tools in the particular situations. The research leading to the results presented in this workbook has received funding from the European Community s Seventh Framework Programme (FP7/ ) under grant agreement n The authors wish to acknowledge the Commission for its support. The editors wish to give their warmest thanks to all the authors of this workbook! February 2014 Katri Valkokari Katariina Palomäki 4

7 Workbook background: SustainValue project This workbook and the tools presented are based on the work carried out in the Sustainable value creation in manufacturing networks (SustainValue) project (task 1.2, deliverable 1.2). SustainValue is a collaborative EU project coordinated by VTT Technical Research Centre of Finland. The project s duration is three years, and the work started in April The consortium consists of 11 partners, including research organisations Politecnico di Milano, Cambridge University, the Center for Industrial Asset Management at the University of Stavanger, and the Research Institute for Operations Management at RWTH Aachen University; industrial partners FIDIA, Riversimple, CLAAS, and Elcon Solutions Oy; and the German Institute for Standardisation (DIN). According to the project s vision: New forms of business models and value networks together enable knowledge-based transformation of the manufacturing industry and improve all three dimensions of sustainable value (economic, environmental and social). The project rose to the challenge by aiming to develop industrial models, solutions and performance standards for new sustainable and better performing value networks. The research contributes to extended product utilisation by creating new business models and value-added services. The research focuses on: 1) designing governance models and business architecture for sustainable manufacturing networks, 2) delivering a set of tools and methods for sustainable and value-added business modelling and network analysis, and providing a methodology for developing sustainable solutions, 3) developing a governing framework for sustainabilityperformance standards across integrated value networks and verification processes, and 4) testing and validating the tools and methods in real-world use cases. For more information, see the project website: 5

8 Introduction: Setting the scene 1 Creating sustainable value in the networked manufacturing industry 1.1 Why did we write this workbook? The global distribution of work within the manufacturing industry and the growing importance of service business alongside other structural changes in networks have challenged the traditional business models in Western countries, emphasising value co-creation between network actors. The growing complexity and shorter life cycles of products also drive companies to collaborate in new ways. Now the success of a firm depends on its strategic collaboration with other organisations that have an influence on the creation and delivery of its services or products. Thus, the companies cannot solve the complex sustainability challenges (Figure 1) alone. The concept of value networks represents a paradigm shift towards the co-creation of multiple sustainable values between network actors. In the integrated and networked production setting much of the opportunity to address sustainability rests on enhanced network management. The focal companies of value networks are now also asked to consider the sustainability performance of their entire supply chain to cope with new requirements and interests from customers and other stakeholders. The advantages of network coordination are considerable and, alongside the opportunity to address sustainability, they include enhanced learning, more efficient use of resources, increased capacity to plan for and address complex problems, greater competitiveness and better services for clients and customers (Provan & Kenis 2007). Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs (ISO 2010). Sustainability combines social, environmental and economic viewpoints. This workbook considers sustainable value co-creation in the manufacturing industry. Sustainable value networks and sustainable manufacturing are important cornerstones of sustainable development. Sustainable value network is an organisational form that aims to gain a future competitive edge for all participants through interaction and collaboration, thereby being able to balance the three key aspects of sustainability (environmental, economic and social). Sustainable manufacturing can be defined as the ability to use, in a smart way, natural resources for manufacturing by creating products and solutions via a network of suppliers, customers, partners and collaborators that with the help of new technologies, regulatory measures and coherent social behaviour are able to satisfy sustainability economical, environmental and social objectives. Thus, it preserves the environment while continuing to improve the quality of human life and remaining financially viable in the long term by returning adequate profits and growth (developed from Garetti & Taisch 2011). 6

9 Economic challenges by producing effectively and efficiently and creating new services ensuring development and competitiveness through time Environmental challenges by promoting minimal use of natural resources (in particular non- renewable energy) and managing them in the best possible way while reducing environmental impact Societal challenges by promoting social development and improved quality of life through renewed quality of wealth and jobs Figure 1. Key challenges to which sustainable manufacturing must respond. Sustainability issues are recognised as strategically essential in business. According to Lacy et al. (2010), 93 % of CEOs see sustainability as important to their company s future success. Strengthening the brand, reputation and trust is the strongest driver and motivator for CEOs to take action on sustainability issues, followed by revenue growth and cost reduction, the CEO s personal motivation, and consumer and customer demand. Sustainable business practices and products are now opening up new markets and sources of demand, driving new business models and sources of innovation, changing industry cost structures, and, little by little, permeating all elements of operations. In this change, partnerships and collaboration have been acknowledged as critical elements of companies approaches to sustainability. (Lacy et al ) This workbook presents a sustainable value network governance process and suggests relevant tools to support businesses that want to be more sustainable and want their network members to develop alongside them. 1.2 What is it all about? The governance model addresses the rules, processes, metrics and organisational structures needed for effective planning, decision-making, steering and control. Governance can be discussed at corporate and network level, from the point of view of internal or external governance. Corporate governance involves a set of relationships between a company s management, its board, its shareholders and other stakeholders (OECD 2004). It provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Originally, corporate governance was built around the concept of accountability, but later on the key principles of good corporate governance also came to cover transparency, responsibility and fairness. (Shkolnikov & Wilson 2008.) The main differences between the company and network governance models are related to legal aspects, decision-making processes and control mechanisms. Networks consist of independent actors who have their own targets and decision-making models and, typically, limited formal accountability to network-level goals. Thus, conformity to rules and procedures is not governed by binding regulations but is more voluntary and requires interaction between the parties in order to build a shared understanding and action agenda. Intentional networks with a distinct identity therefore need governance to ensure that participants engage in collective and mutually supportive action, that conflict is addressed and that network resources are acquired and utilised efficiently and effectively. 7

10 Though corporate governance already extends into many areas of creating sustainable business, stakeholder involvement in decision-making and regulatory enforcement mechanisms needs to be broadened (Shkolnikov & Wilson 2008; Bosselmann et al. 2008). Moreover, since manufacturing activities are presently organised through networked processes within value networks, new models for network governance are needed in order to ensure sustainable development and performance also at network level. These governance models should enable clear identification of network actors and stakeholders who are and can be influenced by the sustainability of the product or service during its life cycle. In network governance, it is governance structures that make actors work together the process, rules and norms by which the network allows individuals to influence the network s operations and decision-making. Governance involves the use of institutions and structures of authority and collaboration to allocate resources and coordinate and control joint actions across the value network as a whole (Provan & Kenis 2007). As described above, network governance deals with many important questions (Figure 2): How is the governance structure organised is governance shared or does it have a leading organisation (typically focal company) or perhaps a third party that works as an administrative organisation?, What are the governance mechanisms are they governed by contracts or relational norms, or how are these combined? and To what levels do network governance, collaboration and decision-making extend strategic, tactic or operative issues?. Governance structure i) shared, ii) lead organisation, iii) network administrative organisation (NAO) Contractual-based or relational-based or both/and Governance mechanisms (principles) Collaboration Strategic, tactic and operative levels Figure 2. Elements of network governance. The SustainValue governance model illustrates sustainability governance within a value network as a process that guides the activities of all the actors involved towards sustainable development and performance over the product life cycle. The SustainValue governance model process integrates: i) the requirements and commitment of stakeholders within a business ecosystem and ii) business models and self-interest of value network companies. The SustainValue governance model for a value network (Figure 3) includes three main tasks analysing, organising and developing that are in accordance with company level approaches but highlight the need for multilevel network governance. These tasks also form the outline of this workbook. 8

11 Analysing - Defining and describing the key players of the value network and business ecosystem - Identifying impacts over the product life cycle and requirements of stakeholders within business ecosystem Organising - Forming shared targets and collaboration models both inside the value network and with the stakeholders within business ecosystem - Aligning business models and integrating processes according to sustainability objectives Developing - Evaluating progress and setting new targets through shared action agenda - Renewing actions, operations and business models towards sustainable value network Figure 3. The SustainValue governance model. Analysing (Part I): In order to guide the activities of all the actors involved towards the sustainability objectives, companies must first define the key players inside the value network and the boundaries between the network and business ecosystem. This network analysis requires the connections (e.g. business relationships, informal collaboration, ownerships etc.) between the actors to be pictured. In order to do so, the network members need to understand the network s value to each member, and their objectives, self-interests and expectations should be covered. Concurrently, the requirements and expectations of important stakeholders within the business ecosystem need to be defined. Based on these initial analyses, companies can identify the total sustainability impacts over the product life cycle and the requirements of all the actors involved. Organising (Part II): The analysis of the actors involved and the understanding of their requirements direct the organising and managing of sustainable development at network level. Shared targets and collaboration models are formed both inside the manufacturing network and towards other stakeholders within the business ecosystem. In this phase, an important aspect of the sustainability governance in value networks is the connection between sustainable development and business models. Thus, aligning business models and integrating processes according to the sustainability objectives should be considered carefully. Developing (Part III): In order to ensure continuous improvement as well as renewal, progress should be evaluated through a shared action agenda, and new targets should be set transparently based on the achievements. In this phase, actors should renew actions, operations and business models together to become a truly sustainable value network in the manufacturing industry. Whereas the first two phases of the governance model concentrate on building up and developing the sustainable value network so that it really fits and works together, this third phase focuses on the network as an entity and, thus, also discusses its relationship with external stakeholders, the environment and the whole ecosystem. The future structure and performance of a network are co-produced by the actors involved, and the governance of the network-level activities is thereby more or less self-sustaining and evolving. 9

12 Table 1 sums up the key issues of the value network governance process. Table 1. Governance model, its phases, key questions and results. Analysing Organising Developing Key questions in each phase Key results With whom do we collaborate and cooperate to co-create a new shared value from sustainability? How are we able to control or influence the choices of all parties with regard to sustainability? An understanding of the key players, the relationship types with them, their roles and the value for each actor How do we collaborate with our network members? What is the appropriate cooperation model according to our sustainability targets? How do we define and agree on the decision-making mechanism within the network? An understanding of the structure of the network, different roles within it, the possibilities of affecting each other and sustainability objectives; alignment of different business models and building a base for new, sustainable business opportunities How do we set new targets and evaluate the progress through a shared action agenda? How do we constantly renew our network settings and collaboration models? How do we identify the impacts over the product life cycle and more broadly on the business ecosystem? An understanding of the network as a collaborative entity, of the integration of formal and informal governance and of the vision of future development needs 1.3 How does this book support sustainable value creation in manufacturing industry networks? This workbook has been developed first of all for managers involved in companies sustainability and corporate responsibility management, and for consultants and auditors who work in the field. The reader could be a representative of the focal company in a network and, thus, have a special view on the business and the interest in developing the network. This workbook does not aim to describe the steps to build up a new network from scratch but presents important perspectives and tools for developing an already established network towards a sustainable value network. The workbook is developed especially for the needs of business-to-business networks in the (European) manufacturing industry and presents network-level co-development methods and tools. Its focus is on strategic and tactic governance and, thus, operational issues (e.g. reporting, measuring) are not covered. The internal transformation processes and development practices for supporting manufacturing firms that design their structure and sustainable products, services and processes are covered in more detail in other work packages of the SustainValue project (for results, see Holgado Granados & Macchi 2012, 2013; Grefrath et al. 2013). The workbook takes the perspective of a focal company, focusing on value networks and their governance and, thus, emphasising value network members and the interaction between them but excluding internal stakeholders (owners, employees, etc.) and detailed discussion on external stakeholders in the broader business ecosystem. Thus, the workbook distinguishes those network members that have business relationships with each other (suppliers, customers, service providers, etc.) from those external stakeholders with which the relationship is not based on direct business relations. 10

13 With this focus and definition as the foundation, the following figure (Figure 4) presents the network governance model on a more detailed level. In each main stage of the network governance process, the work starts by making decisions on the governance structure, then proceeds to issues related to governance mechanisms, and finally to discussing collaboration of the network: In the analysing phase, the aim is to create joint strategic sustainability objectives within the value network based on analyses and understanding the interests of all the actors involved (both the network and stakeholders). In the organising phase, the network actors agree on the organising (e.g. network structures, roles, responsibilities) within the network in order to be able to coordinate the actions. In the developing phase, the network actors continuously work together to develop the joint objectives and evaluate the progress and required changes. Analysing Organising Developing Governance structure Defining key actors Determining roles, benefits and responsibilities Talking about joint actions as a value network Governance mechanism Analysing relationships Negotiating network structure and tasks Strengthening trust through joint actions Collaboration Developing joint strategic objectives Coordinating actions and business operations Thinking sustainability at network level Figure 4. Value network governance: elements and process. Figure 4 also outlines the structure of this workbook. Each element is further discussed in the chapters that present the important issues, steps and tools that help in the strategic governance of the network. The following table presents and briefly describes the workbook s tools and check lists. Table 2. Table presenting the workbook s tools and check lists (next page) This workbook presents examples of how the selected tools could support sustainability governance within a value network. It needs to be pointed out, however, that the tools can be adapted to different purposes and may be utilised in more than one phase. Each part of the workbook works independently and, thus, the tools and methods of the workbook do not need to be used one after the other. The practical challenges presented in the beginning of the main parts and the key questions in Table 1 guide the reader to choose a suitable tool for the particular situation. Background to Introduction in the SustainValue project Palomäki, K., Reunanen, M., Valkokari, K. & Valkokari, P Sustainability gaps and stakeholder requirements. D1.1, SustainValue project. Valkokari, K., Valkokari, P., Reunanen, M., Palomäki, K. & Amirmostofian, A Towards sustainability governance in manufacturing networks. D1.2, SustainValue project. Holgado Granados, M. & Macchi, M A reference business model architecture for sustainable manufacturing products, services and processes. D1.3, SustainValue project. 11

14 Table 2. Table presenting the workbook s tools and check lists. Chapter Tools and check lists Description Part I: Part II: Part III: 2. Defining key actors Network picturing tool A tool for recognising key players more broadly in the business ecosystem and, especially, the value network members participating in the life cycle of products or services 3. Analysing relationships 4. Defining joint strategic objectives 5. Determining roles, benefits and responsibilities 6. Negotiating network structure and tasks 7. Coordinating actions and business operations 8. Talking about joint actions as a value network 9. Strengthening trust through joint actions 10. Thinking sustainability at network level Value mapping tool Relationship analysis Supplier evaluation matrix Maturity assessment for network conditions Sustainability matrix Actor contribution benefit check list Collaboration models, network management tasks check list Steps for aligning business models Sustainable business model element archetypes Shared action agenda for the future development of the value network Strategic roadmapping tool Relationship interaction matrix Corporate sustainability continuum A tool for identifying potential stakeholders and for defining the sustainability priorities Analysing the relationships (type of relationships, sustainability-related objectives) with value network actors and other stakeholder groups A tool for searching and evaluating possible suppliers Elements and a set of questions for assessing the relationships between actors and the network effectiveness A tool for evaluating and coordinating the interests and sustainability objectives of stakeholders, e.g. in supplier selection A check list for discussing the roles, contributions and benefits of each stakeholder group Models and a check list for making decisions on the structure of the network and on the way activities are organised Steps that guide the alignment of the business models of network actors An approach to selecting business model(s) that deliver business model innovation for sustainability Important steps for the development of the value network as an entity Identification of obstacles, solutions and steps for future development, and the shared targets and vision For describing the evolvement of relationships Supports in framing the present situation regarding sustainable development and in studying future paths 12

15 Part I: Analysing sustainability governance within a value network Analysing - Defining and describing the key players of the value network and business ecosystem - Identifying impacts over the product life cycle and requirements of stakeholders within business ecosystem Organising - Forming shared targets and collaboration models both inside the value network and with the stakeholders within business ecosystem - Aligning business models and integrating processes according to sustainability objectives Developing - Evaluating progress and setting new targets through shared action agenda - Renewing actions, operations and business models towards sustainable value network Figure 5. The focus of Part I: Analysing. Part I describes the analysing phase of the sustainability governance process. In this phase, it is important that the organisation defines the key players and their roles inside the value network as well as in the broader business ecosystem. The phase proceeds from defining the key actors to analysing the relationships with the identified actors and describing, aligning and developing new strategic sustainability objectives with the actors. For this, network picturing or value mapping are examples of exercises with which to start. Forming shared targets as such takes place in the following phase, but these two phases partly overlap, and the work should already have been started in this phase. Based on these initial, company-centric analyses, companies are able to proceed to the next phases of the governance model, organising and developing within the value network. Practical challenges: Recognising the value network actors and the key stakeholders in the business ecosystem Understanding formal and informal relationships and their strength and value from the viewpoint of sustainability Describing and aligning strategic objectives Communicating within the value network and with stakeholders in order to create a shared understanding and true involvement Tasks of the phase: Defining key actors (both the value network and stakeholders) Analysing relationships Defining joint strategic objectives 13

16 2 Defining key actors In a traditional value network within the manufacturing industry, suppliers, lead producers (typically the focal company) and customers can be defined as the most typical roles. However, the roles and operation models are changing towards more collaborative processes and different partnerships as well as roles of service providers, and integrators are thereby emerging within value networks. In addition to value network members, the company s business ecosystem includes various stakeholder groups that influence and are affected by the company s actions (see Figure 6), and the interests of these external stakeholders should also be considered. The aim of this phase is to define the key actors in the organisation s value network, and the stakeholders in its business ecosystem (Figure 6) and their roles, in order to recognise with whom to collaborate to create shared value. Media Governments Workforce/ employees Suppliers Competitors Lead producer Internal network Local NGOs INGOs Customers Research institutes/ universities End customers Extended Enterprise, Value Network Labour unions Supplements Trade associations Communities International organisations Pressure groups Figure 6. The company s business ecosystem and value network (Koivisto et al. 2004). The network picturing tool helps in recognising the key players more broadly in the industrial sector and, more specifically, the value of network members participating in the life cycle of products or services. Furthermore, the relationships and informal linkages between the actors can be described. In order to recognise important actors other than the present business partners (value network members), the vertical and horizontal dimensions of the networks should be distinguished between (Figure 7). This also helps to define the network position of the focal company. 14

17 VERTICAL NETWORKS AND PARTNERSHIPS END-USERS B-to-B CUSTOMER HORIZONTAL NETWORKS for R&D, marketing,learning regional co-operation RESEARCH INSTITUTES INNOVATORS FOCAL COMPANY Owners, employees AUTHORITIES and SOCIETY LOCAL COMMUNITIES Regional community INDUSTRIAL FORUMS PARTNERS: R&D partners Manufacturing partners: Service providers SUPPLIERS: Equipment suppliers Component suppliers Manufacturing subcontractors Figure 7. Network picturing tool (modified from Valkokari et al. 2004). A network picture is a starting point for representing network actors, links and their resources, like competences and intellectual property (IP). It is important to fi gure out the company s negotiation position related to possible collaborators suppliers, partners, customers and stakeholders. Network picturing works as a sense-making device and can consequently shape managerial decisions, actions and evaluations regarding the network s dimensions and the network position of the focal company. Network picturing supports a shared sense-making process when it is done together at company or even network level. In such a workshop, the participants are able to create a shared understanding about their relationships with other network members and to recognise if there are missing links between them and the key players of their business environment. Defi ne the unit of analysis (i.e., the business unit, company or network). The focus is on the key players (network actors) participating in the life cycle of products or services. Identify the network actors and place them in the vertical and/or horizontal network dimensions. Recognise the role of network actors (such as subcontractor, supplier, partner, service provider, etc.) and consider your relationship to them, include informal relationships between the actors (see also Chapter 3, Analysing relationships). The value mapping tool helps in identifying potential stakeholders in the business ecosystem and value network and in defi ning the sustainability priorities that will assist in exploring the new sustainable value proposition. A clear understanding of the purpose of the organisation and the sustainability and target positions for the future helps in determining the sustainability priorities. The value mapping tool supports this. 15

18 1. Unit of Analysis Investors & Shareholders 2 Finish 3. Purpose Environment Suppliers & Partners Start Value Captured Society Employees Value Missed / Destroyed / Wasted Value Opportuni es Customers Figure 8. Value mapping tool (Short et al. 2012, Bocken et al. 2013). The value mapping tool supports exploring, mapping and analysing of the relationships and exchanges between the stakeholders through mapping the current value, the destroyed and missed value and value opportunities. This is carried out to develop opportunities for new sustainable value propositions from a system perspective without being firm-centric. Here, every value can be illustrated for every stakeholder to obtain an easy overview of changes for each stakeholder. In the case that cooperation partners for the new service are needed, they can also be identified by this value mapping tool. 16

19 Step 1 Setting the scene Decide on the unit of analysis (product/service, business unit, company or an industry) Add or modify any missing stakeholders (can be done based on the results of network picturing) Identify the business purpose of the unit of analysis (yellow star) Step 2 Mapping the value (follow the spiral, clockwise) Current value is captured for each stakeholder Value missed and destroyed for each stakeholder (use different colour post-its to distinguish values) Step 3 Generating solutions Eliminate value destroyed Where is the conflict between stakeholders? How might it be resolved? Look for ways to utilise missed value Explore new value opportunities extending the value proposition, shifting to a higher added value The use of the tool and the design of workshops should be adapted to the size and complexity of the business. For more complex businesses, it may be desirable to focus on specific business units or product lines to ensure the process is manageable. To maximise the potential of the tool, representatives or suitable proxies for each major stakeholder group should participate in the process to solicit a broad perspectives on value. This tool provides a structured approach for entrepreneurs and business managers to gain a more complete understanding of the value proposition of the company and to explore opportunities to transform the value proposition towards more sustainable solutions. 3 Analysing relationships After the key actors in the network have been identified, they, the connections with them, and their sustainabilityrelated objectives should be analysed (Relationship analysis, Table 3). The first step in this phase is to recognise and distinguish between those actors with which the organisation has a business relationship that can be controlled, e.g. with business contracts, and actors with which influencing takes place through, for example, shared projects, involvement in programmes, and external communication. Thus, the business relationships also take various forms, for instance some of the suppliers can be considered partners whereas others are classified as sub-contractors similarly, the relationships with customers also take different forms. 17

20 Table 3. Analysing the relationships with different value network actors and stakeholder groups. Actors Connections Objectives related to sustainability Focal company Business relationship with direct suppliers and customers Fulfilling orders, ensuring economic performance Defining and monitoring environmental and social performance criteria Customers Business relationship Collaboration and strategic partnerships Life cycle services Direct suppliers (=supply chain members) Other stakeholder groups (government, customers, NGOs, etc.) Business relationship (including both partnerships and armslength relationships) Exert pressure and offer incentives for the focal company as well as other supply chain members Cooperation and integration for sustainable performance Fulfilling environmental and social criteria Fulfilling additional (normative/ethical) stakeholder requirements of environmentally and socially extended value network performance Relationship analyses can be conducted internally within the focal company, though discussion with network members is very useful as it may help to clarify their interests, objectives and expectations. It is important to have a broad insight into the networked business environment and also to figure out which actors are not directly involved in the company s value creation process. For instance, exploring the business environment of customers as well as defining customers of customers that may offer new insights into sustainability as well as the offering of the network. Due to their network position, focal companies have more power over their suppliers than their customers. Sourcing companies therefore typically have different tools for evaluating their suppliers and guiding their development work, including sustainability issues. The supplier evaluation matrix is a tool for searching and evaluating possible suppliers (to operate as value network members). When deciding between possible suppliers, it is important to compare their characteristics, such as their resources, competences and commitment related to cooperation. Table 4 shows an example of a supplier (network member) evaluation matrix. The criteria according to which a decision is made in the end are case specific and should be aligned with the strategic objectives of the sourcing company. Table 4. Supplier evalution matrix. 18

21 In addition to evaluating suppliers, identification and categorisation of external stakeholders should be considered in this phase. Stakeholders may be categorised according to, e.g., three main attributes power, legitimacy and urgency they hold relative to the relationship with the focal company and other network members. The salience of a particular stakeholder to a company is low if only one of these three attributes is present, moderate if two attributes are present and high if all three attributes are present. Thus, the company should, at least, identify those stakeholders that are most important to it and that hold the combination of all three attributes, the so-called definitive stakeholders. (See Mitchell et al ) 4. Defining joint strategic objectives After the focal company has identified and analysed its network s key actors, other stakeholders and their roles as well as its relationship with each stakeholder group, the analysing phase proceeds to the organising phase. In this phase, network actors describe and align their strategic objectives together. This is an important step for an actor and for the sustainable development within the network. Communicating with stakeholders and within the value network is crucial in order to create true involvement in the joint strategic objectives. The following igure (Figure 9) describes how the different level objectives influence and guide each other. Network level Setting the objectives Setting the objectives Company level Strategy of the sustainable value network Shared objectives and performance indicators of the network Objectives of the network partner (in accordance with their business models) Feedback information Feedback information Figure 9. Interdependency of strategy and objectives at the value network and network actor level. A maturity assessment of network conditions can be used to create a shared understanding of the network s present sustainability level and development needs. It proposes three elements objective alignment, capability matching and partnership health that can be used for assessing the relationships between actors in a network and that together characterise network effectiveness. The maturity assessment model also considers contracts, a formal governance mechanism, as an instrument through which the actors commitment towards sustainability can be assessed and practices agreed. Moreover, this model and the related questions bring out many other concrete issues that network actors need to discuss and decide on. Objective alignment describes the match between an organisation s objectives and those of potential network members and, thus, focuses on how well organisations are able to align their organisational objectives with their value-adding collaborators to find common ground for progress in sustainable business development. Capability matching describes the ability to deploy resources, skills, competences/abilities and experiences of organisations for collaborative purpose. Partnership health indicates the condition or status (e.g. the level of collaboration) of the mutually beneficial relationship between two or more members within a network. 19

22 Objective alignment Capability matching Partnership health Sustainability objectives of contract partners Assessment of contract partners capabilities Knowledge, information and data sharing Criteria for sourcing and service contract decisions Contract design and objective alignment Life cycle thinking in contract design Technological capability Resource availability and accessibility Knowledge base Collaboration capability Network level processes and division of work Cost and benefit sharing Decentralised centralised decision making Relationship development Figure 10. Network condition elements. These elements and their sub-elements can be utilised in analysing the current state in a network as well as in setting targets towards sustainable development at network level, thus also providing a roadmap for actions. The following list of questions, relating to each of the elements, supports this assessment: Questions regarding objective alignment: To what extent are sustainability objectives defined and utilised by the company s network members? Are there any measures in place to align sustainability objectives of network members with the company s sustainability objectives? Do sustainability objectives of network members take into consideration a variety of stakeholders besides shareholders? What are the criteria besides economic efficiency on which sourcing and service decisions are based? Do contracts with network members take into account possibly diverging or conflicting objectives with the company? How are contracts designed to allow for objective alignment with network members? To what extent are life cycle considerations made in contract design/terms with network members? Questions regarding capability matching: Are measures in place to assess the capabilities of the network members across the network? Do the firm and its network evaluate environmental and social impacts when deciding to invest in technologies and/or equipment for the manufacturing process? How are the technologies and equipment used in the value network, managed and evaluated regarding their environmental and social impacts? Are there initiatives/processes to configure and coordinate resource availability/ accessibility? To what extent are the initiatives regarding training and expertise defined, managed and improved to develop the knowledge base across the value network? What are the initiatives/methods for collaboration across the value network and to what extent are they implemented and improved? 20

23 Questions regarding partnership health: How is the knowledge, information and data sharing organised between the network members? To what extent are the network level process and the division of work (e.g. roles and responsibilities) defined and agreed between the network members? To what extent is cost and benefit sharing agreed (or transparent) between the network members? How are decision-making criteria agreed between the network members? How do the network members agree on the relationship and its development needs? The sustainability matrix is another tool for evaluating and coordinating interests and sustainability objectives of stakeholders, and it can be used in, e.g., supplier selection, customer communication and when considering collaboration initiatives within a business ecosystem. The interests of various stakeholders in key strategic sustainability issues are evaluated and presented on a colour scale in the matrix (key actors key issues). This is an exercise that the assessing company can carry out on its own A B C D E F G H I J Key stakeholders A Group and division B Shareholders C Employees D Customers and distributors E Suppliers F Competitors G Government authorities H NGOs I Local community J Media and general public Weak Medium Strong Figure 11. Sustainability matrix (modified from Timlon 2011, Carroll 1991). Key issues 1 Environmental care 2 Creation of employment opportunities 3 Employee s family benefits 4 Education, training and personal development 5 Working conditions 6 Auditing and reporting 7 Community interaction 8 Value network development 9 Technology transfer and market development Overview of Part I and discussion After this governance process phase, the networking company will have recognised the key players in its networked business environment, relationship types with them, their roles (network members and stakeholders) and the value for each actor. In other words, the company will have a better understanding with whom and how it can collaborate in order to develop sustainable value. Using the tools presented in Part I on collaborative development work within a value network, at the same time communicates with the network actors and stakeholders, sometimes even involving building up completely new connections. Many of the tools can, or even should, be used in a workshop-like setting in which the focal company, jointly with its stakeholders and/or value network representatives, holds a discussion on relevant issues for the development towards sustainability. 21

24 In the governance of sustainable value networks, transparency, interaction with stakeholders and bidirectionality of feedback loops are some of the important principles to look into. As in network cooperation generally, good network governance provides continuous interaction, cooperation and joint development as well as openness and willingness of network members to work together. In this first phase of the network governance process, network actors have a unique opportunity to launch new, more open and interactive practices that may, at best, become everyday routines in the network. Background to Part I in the SustainValue project Palomäki, K., Reunanen, M., Valkokari, K. & Valkokari, P Sustainability gaps and stakeholder requirements. D1.1, SustainValue project. Valkokari, K., Valkokari, P., Reunanen, M., Palomäki, K. & Amirmostofian, A Towards sustainability governance in manufacturing networks. D1.2, SustainValue project. Rana, P., Short, S. & Evans, S Lessons learned report, documenting the impact from use of the tools & methods and areas for improvement. D2.5, SustainValue project. Valkokari, P., Valkokari, K., Reunanen, M., Grefrath, C. & Wagner, D Analysis of the existing methodologies supporting innovation and solution engineering. D3.2, SustainValue project. Grefrath, C., Wagner, D., Ruder, P.M., Rotaru, R., Frey, D., Brenken, B., Reunanen, M., Valkokari, P., Valkokari, K., Macchi, M., Holgado Granados, M., Fumagalli, L., Evans, S., Rana, P. & Short, S Development methodology for sustainable solutions. D3.3, SustainValue project. Liyanage, J., Beer, J., Valkokari, K., Macchi, M., Rana, P., Short, S. & Evans, S Multi-objective sustainabilityperformance framework. D4.1, SustainValue project. Holgado Granados, M. & Macchi, M Sustainability metrics and sustainability-performance KPIs. D4.2, SustainValue project. 22

25 Part II: Organising sustainability governance within a value network Analysing - Defining and describing the key players of the value network and business ecosystem - Identifying impacts over the product life cycle and requirements of stakeholders within business ecosystem Organising - Forming shared targets and collaboration models both inside the value network and with the stakeholders within business ecosystem - Aligning business models and integrating processes according to sustainability objectives Developing - Evaluating progress and setting new targets through shared action agenda - Renewing actions, operations and business models towards sustainable value network Figure 12. The focus of Part II: Organising. Part II describes the organising phase of the network-level sustainability governance process, and it broadens the focus from inside of companies and internally performed analyses to network level and collaborative decisionmaking on how to organise cooperation in practice and how to affect each other. It focuses on negotiating and agreeing on the network structure and the roles of network members in a setting in which business models of network actors can be seen as tools for describing and negotiating business interests, sustainability objectives, and network responsibilities and benefits. Agreeing on guidelines for network operations together also makes the coordination of tactical and operational actions more transparent and fluent. If the network members are not committed to working together and not willing to negotiate collaboration principles for sustainability, they will not be able to go through this phase. Practical challenges: Understanding and discussing the expected contribution of each actor, the benefit and risk sharing within the network and the broader business ecosystem Understanding the various network structures as well as the formal and informal governance mechanisms and ways and possibilities to affect other actors Coordination and knowledge sharing with the network actors and stakeholders Business transformation and business model redesign according to the new sustainable value proposition(s) Long-term vision of sustainability Tasks of the phase: Determining roles, benefits and responsibilities Negotiating network structure and tasks Coordinating actions and business operations 23

26 5 Determining roles, benefits and responsibilities The analysis performed internally, at company level, of the network roles supports the preparation for negotiations and a contracting process at network level. The network actors must clarify their roles and responsibilities and consider conflicts of interest through negotiations. In order to support the formation of a successful collaboration between network members, companies must have clearly defined but different roles. In addition to negotiating the roles and responsibilities, the issue of wealth dissemination, benefits and risks also needs to be discussed in this phase. The dissemination of organisational wealth should be fair and reflect the contribution of each stakeholder to the network s wealth creation. This relates to both the financial and intellectual contributions of stakeholders and network actors. The distributed benefits do not always have to appear in the form of direct financial benefits but can also be in the form of, for example, lower prices, innovative solutions, increased accountability and transparency, and education and knowledge. (Sachs & Maurer 2009.) The following table presents network members and stakeholder groups, their contribution to collaboration and examples of benefits: the Actor contribution benefit check list. Table 5. Network actors and stakeholders roles, contributions and benefits (modified from Paasi et al. 2013, Seuring 2011, Sachs & Maurer 2009, Boutilier 2009). End customer/ user Focal company (product/ service company) Contribution Knowledge about sustainability requirements (both present and future) Fulfilling orders, ensuring sustainable value network performance Defining and monitoring environmental and social performance criteria Knowledge about the business solution and customer needs Considering the needs of employees Suppliers Cooperation and integration for supply chain performance Fulfilling environmental and social criteria Contribution to network efficiency, cooperation, resources and performance Product/solution better connected to offering, complementary resources Other external Bearing risks due to pollution and stakeholder contamination groups (e.g. Information on emerging social risks government, Fulfilling additional environmental community, and social stakeholder NGOS) requirements Benefit More sustainable solutions that are based on customer needs Supplier commitment Sustained business partnerships New approaches, solutions, innovation, knowledge about enduser needs Customer loyalty New network connections Reduced conflict with unions Recruitment and retention of the most talented employees Sustained business partnerships Local community support Enhancement of brand value Geographical expansion of markets Procurement conditions, compensation of supplier risk Transparency of value network and knowledge contribution Sustained business partnerships Corporate philanthropy, financial and non financial compensations for risks borne Education and employability Knowledge exchange, better transparency of actions Understanding and considering other stakeholders expectations 24

27 It has been stated that for a company to be viable over time, it must demonstrate its ability to both achieve the multiple objectives of the different parties and distribute the value created in ways that maintain its commitment. Risk and benefit sharing are an important factor in the success of a network, the network actors commitment to the pursuit of the jointly set goals and an aspect of network governance tasks. (Ayuso & Argandoña 2007.) 6 Negotiating network structure and tasks Network actors should be able to form a shared understanding of what to do and why, and then figure out who should do it. In order to answer the question on how to do it, different collaboration models can be reviewed. In this organising phase, decisions are made on the structure of the network and how the activities are organised. Governance structures refer to the degree of centralised or distributed coordination (Svahn & Westerlund 2007). According to their structure, networks can be divided into hierarchical hub-spoke and multiplex models (Doz 2001). Within the hub-spoke model, the focal company is responsible for network governance. In the multiplex model, the network governance takes place within and between the network actors. In another classification, three types of governance within networks have been identified: i) shared governance, ii) lead organisation (typically focal company) governed, and iii) network administrative organisation (NAO) governed. Under NAO governance, all activities and decisions are coordinated through one organisation specifically created to oversee the network. (Provan et al ) Successful adoption of a particular form of governance is based on four key structural and relational contingencies: trust, size (number of participants), goal consensus and nature of the task (specifically the need for network-level competencies) (Provan & Kenis 2007). In this phase, the focal company with its network members may discuss whether the future collaboration should adopt characteristics of another governance model, e.g. by sharing the governing role with more than just one actor (the focal company). Leadproducer Supplier 1 Supplier 1 Supplier 2 Supplier 3 Subcontractor 3.2 Subcontractor 1.1 Subcontractor 1.1 Subcontractor 2.1 Subcontractor 3.1 Subcontractor 1.2 Subcontractor 2.2 Subcontractor 3.2 Subcontractor 3.1 Supplier 2 Subcontractor 2.3 Hierarchical hub-spoke governance Supplier 3 Supplier 3 Subcontractor 2.3 Subcontractor 2.1 Subcontractor 3.2 Multiplex governance NAO Supplier 2 Supplier 1 Subcontractor 1.1 Network administrative organisation (NAO) governance Figure 13. Collaboration models (according to Provan et al. 2007). 25

28 It is important to understand what the mechanisms are with which the governing organisation is able to influence and control the key actors choices regarding sustainability in order to choose the appropriate network management models (related to the network structure and governance mechanism). Network management typically balances (Poppo & Zenger 2002): the contractual governance mechanism: the use of a formalised, legally-binding agreement to govern the inter-firm relationships and the relational governance mechanism: the role of norms of solidarity, flexibility and information sharing in the relationship process In regard to contractual governance, contracts are often seen as a key issue for protecting against risks. Contracts can, however, also work as tools for organising collaboration and introducing flexibility into the network. As such, they work as part of relational governance mechanisms. A contract document itself can be seen as an instrument for managing the network and formalising the networking process. Thus, contracts can be seen as a way to communicate in a network. The main tasks of value network management in the manufacturing industry include (Svahn & Westerlund 2007): 1) Integrating value activities: Combining value-creating activities, capabilities, expertise, processes, technologies, products and components that network actors provide. This requires common standards, rules, and synchronised information and material flows between all the actors in order to ensure efficiency of operations. 2) Controlling and monitoring other actors and their activities: The degree of control varies by the negotiation power and network position, which are based on the network structure and ownership of important resources from the perspective of the network goal. 3) Coordinating the value activities of various actors: Necessary for guiding and scheduling the value activities of actors in the network towards common objectives. 4) Influencing the other actors and their underlying value-creating activities: The degree of influence varies in different business situations, and, based on their network position, the actors have different powers to influence others. A hub company (i.e. the focal company) often has more power to influence the entire network than an individual network member. As illustrated in Table 6, which combines the different network roles and management tasks, there are several ways to guide the co-evolution of a value network and its stakeholders towards sustainability. In all of these tasks, network management requires both formal control governance and informal guidance. However, the integration and control of activities are typically based on a formal contractual governance mechanism whereas coordination and influence are based on relational governance mechanisms, e.g. social relationships and collaboration between the actors involved. Table 6. Network management tasks and possibilities from the viewpoint of the focal company. Elements of network management Network role Integrate Control Coordinate Influence Direct suppliers X (through contracts and X X X cooperation) Direct customers X (through contracts and X X cooperation) End customers X Other external stakeholder groups (NGOs, governments, local communities) X X 26

29 Based on their network position and the network s governance model, the network actors have different opportunities to participate in network governance. Thus, in addition to contractual governance mechanisms, politics, bargaining, negotiation and compromise become critical control mechanisms, as organisations still remain relatively autonomous and must be convinced to work together as they cannot be forced to do so (Phillips et al. 2000). Collaboration will increase the possibilities to influence the decisions of other network actors because, through collaboration, the governing organisation can also influence the choices that they cannot directly guide through formal contracts. Collaboration and interaction related to it build so-called social capital, which supports relational governance within the network. Furthermore, the need for collaboration depends on whether the network actors (or other stakeholders) have an interest in the same issues. For example, the sustainability matrix (see Figure 11 in Chapter 4) can be utilised in order to define whether the actors have the same or different concerns on sustainability issues. Together with the social capital, this issue affects the way collaboration comes off and evolves (Table 7). (Boutilier 2009.) Table 7. Social capital (adapted from Boutilier 2009). 7 Coordinating actions and business operations Since Describing and aligning strategic objectives in Part I discussed forming shared targets on a strategic level (Figure 9), this phase looks into the target setting carried out as a network. In this phase, the networked actors need to coordinate their actions, match their capabilities and share knowledge relating to this. The maturity assessment carried out in the previous phase also serves for this task, as it describes the path of actions to be taken in order to improve the capability matching process. Strategic level (problem structuring, envisionin, long-term goals) Tactical level (agenda-building, negotiation, business model, networking) Operational level (experiments, projects,innovations, implementation) Figure 14. Forming shared targets three levels (modified from Kemp et al. 2007). 27

30 On a tactical level, the business model works as a tool through which companies can negotiate and communicate issues relating to their role in the network as well as their own self-interests and expectations of collaboration. It provides a link between the strategy and operations/processes (e.g. Hedman & Kalling 2003; Amit & Zott 2001). Though a business model is company specific, its meaning to the network lies in its ability to represent and verbalise how a company works: how it captures, creates and delivers value. A business model could be described with the help of, for example, a business model canvas (Figure 15). Key partners Key activities Value proposition Customer relationships Customer segments Key resources Channels Cost structure Revenue streams Figure 15. Business model canvas (Osterwalder & Pigneur 2010). The transition towards a sustainable business model requires a significant shift in the way businesses are conceived and operated to create sustainable value. The business model redesign could assist in embedding sustainability into the core purpose and processes of firms whilst delivering sustainable value (environmental, social and economic). This requires comprehensive consideration with a system-wide perspective to rethink the value proposition and create, deliver and capture sustainable value. After understanding each network actor s business purpose and business models and its approaches to sustainability, the network can proceed to discussing how the actors and the elements of their business models (see Figure 15) really fit together and how to redesign the business models with the focus on the network. Steps for aligning business models assists companies in aligning their business models at network level. The output of this process is a transformation/development of the network-level sustainable value proposition. Exploring and developing opportunities for the sustainable value proposition Generating one or more sustainable value propositions towards designing a sustainable business model with the focus on the value network. This is concerned with understanding and analysing the current situation and other actors business models across the network to develop the joint sustainable value proposition. Concept generation and selection Selecting one or a combination of feasible business models, concepts or solutions for the transformation of the joint sustainable value proposition. Designing the value delivery system and business models Includes the identification and potential development of the value delivery system (key activities, channels, resources, earning models) whilst analysing the cost incurred through the life cycle to assist in evaluating the options. What are the activities, resources, suppliers/partners and channels? How is value created and delivered to the identified stakeholders? How is value captured from the viewpoint of each value network member? The alignment of business models requires system-wide rethinking of the value proposition as well as creating, delivering and capturing sustainable value. Thus, it may necessitate several negotiation rounds before all the network members are able to agree on their role, responsibility and tasks within collateral operations. 28

31 Sustainable business model element archetypes also support the transformation of the new sustainable value proposition by providing a selection of groupings and mechanisms that help in delivering business model innovation for sustainability. The proposed categorisation of archetypes is a set of elements that constitutes part of a business model design and can thus be used in the first step of the Steps for aligning business models presented above. Archetypes can serve as options and possibilities for sustainable business models by providing inspiration for the practice of translating social and environmental value creation into economic profit and competitive advantage for the company or a network to build the business case for sustainability. Thus, they can be characterised as optional strategies and, generally, a business model is developed using a combination of several of the archetypes. As the following table shows, sustainability can be practised in various ways there are many opportunities for businesses. Maximise material and energy efficiency Non-finite benign resources/ processes Create value from waste Deliver functionality rather than ownership Encourage sufficiency Adopt a stewardship role Re-purpose business for society/ environment Develop scale -up solutions Maintenance, Cradle2Cradle Consumer extended Not for profit circular (closed education Collaborative Lean Renewable warranty Ethical (fair) Hybrid loop) economy approaches Low carbon energy sources trade businesses Demand (sourcing, Rental, lease Social Industrial management production, Additive Zero emissions Resource enterprise symbiosis Cap & trade crowd funding, manufacturing solutions Pay per use stewardship lobbying) Social/ Reuse, upcycle, re Licensing, Slow fashion De-materialise Bio-mimicry Private Consumer care environmental products/ Finance regeneration manufacture Product franchising packaging Green Initiative (PFI), Choice editing longevity chemistry and DBFO Base of Extended Open Increase slow Biodiversity pyramid producer functionality manufacturing Chemical Sharing assets innovations protection responsibility management (collaborative (platforms) Localisation companies consumption) Figure 16. Sustainable business model archetypes (Short et al. 2012b, Bocken et al. 2013). The proposed archetypes are intended for use in a workshop environment. The archetypes provide assistance in two main ways: In developing the value proposition by providing a structure for identifying and exploring opportunities for transforming currently negative outcomes of the business model or exploring new ways to create positive sustainable value. Designing and developing the business model structure by providing guidance on mechanisms to realise a desired value proposition. In addition to network-level discussions and development, the typology is applicable to all business modelling activities, from exploring opportunities for new start-ups to assisting in redesigning business models for established large corporations. 29

32 Overview of Part II and discussion After this phase, the network members understand the structure of the network, the different roles within it and the possibilities to affect each other and the sustainability objectives. Based on this, actors are better able to agree on the alignment of their different business models and find new business opportunities relating to sustainability (archetypes). To continue the discussion on this part of the network structure, it needs to be added, however, that the role of the network structure in defining the possible ways to affect a network is not as black and white as described but more complex. Many factors contribute to a company s position and power as well as to the sustainability ambitions in a network. For example, it has been suggested that the density of the network and the centrality of a particular actor in the network also play a role in shaping the influences and acceptance within the network and, thus, the attentiveness of companies to stakeholder concerns and their willingness to accommodate their requests. Shifting from peripheral to central positions within a network may enable firms to deepen their commitment to sustainability and broaden the scope of their sustainability interactions. Moreover, increased centrality may give a company a better brokering position that provides opportunities to access other players and influence their collaboration as well as others expectations, perceptions and prevailing norms. (Vurro, Russo & Perrini 2009.) The level of interconnectedness, in turn, is a factor in determining a company s approach towards rule setting, sustainability commitment and interactions so that as density increases, relational attitudes with the goal of creating value for all the actors involved replace self-interested and instrumental approaches. (Vurro, Russo & Perrini 2009.) In addition to network s structural factors, also e.g. social attributes (see Chapter 3, Mitchell et al. 1997) affect the formation of network roles, positions and interaction. Finally, to conclude this part, from the principles of good corporate governance, a focal company has a moral obligation to use power responsibly and to influence positively the weaker parties, e.g. by setting standards, serving as a role model, through anti-pressure group campaigns, personnel training and value orientation (Amaeshi et al. 2008). Background to Part II in the SustainValue project Valkokari, K., Valkokari, P., Reunanen, M., Palomäki, K. & Amirmostofian, A Towards sustainability governance in manufacturing networks. D1.2, SustainValue project. Rana, P., Short, S. & Evans, S First stage prototype tools and methods, capable of being fully used by industrial partners. D2.4, SustainValue project. Rana, P., Short, S. & Evans, S Lessons learned report, documenting the impact from use of the tools & methods and areas for improvement. D2.5, SustainValue project. Grefrath, C., Wagner, D., Ruder, P.M., Rotaru, R., Frey, D., Brenken, B., Reunanen, M., Valkokari, P., Valkokari, K., Macchi, M., Holgado Granados, M., Fumagalli, L., Evans, S., Rana, P. & Short, S Development methodology for sustainable solutions. D3.3, SustainValue project. 30

33 Part III: Developing sustainability governance within a value network Analysing - Defining and describing the - key players of the value network and business ecosystem - Identifying impacts over the product life cycle and requirements of stakeholders within business ecosystem Organising - Forming shared targets and collaboration models both inside the value network and with the stakeholders within business ecosystem - Aligning business models and integrating processes according to sustainability objectives Developing - Evaluating progress and setting new targets through shared action agenda - Renewing actions, operations and business models towards sustainable value network Figure 17. The focus of Part III: Developing. Part III describes the developing phase of the sustainable value network governance process. This part focuses on the network-level collaboration based on a shared action agenda and feedback loops enabling co-creation and building trust, the key elements of relational business practices. Based on the shared action agenda and joint actions, the network members evaluate the progress and set new targets. It is important that parties also openly assess the needs to change the network configuration, structure and operation model. Furthermore, the value network should also be able to collaborate with its stakeholders as a network. At network level, there is no single centralised control mechanism that governs the value network s behaviour and dynamics, and changes also emerge over time without any singular entity deliberately governing the network evolution. The network s evolution is co-produced based on external influences from the business environment and internal interaction and relationships between network members. As a consequence, due to the complex network relationships and interdependencies also with other networks, development activities occur that may conflict with some of the actors. Although value networks are often defined as long-term arrangements, they can (and should) be distinguished from companies by dynamics and temporariness, which means that when the joint objectives are achieved the network can, for example, be broken down. Thus, network members should be prepared for the dissolution of the network as well as for searching and involving new actors when required. Practical challenges: A value network works together as an entity A value network collaborates with its stakeholders and integrates them into processes A critical assessment of the structure and processes as well as of the sustainability level inside the value network and between network actors, and developing them if necessary Enabling trusted collaboration schemes, joint processes and action Developing a vision and plans for the future at network level 31

34 Tasks of the phase: Talking about joint actions as a value network Strengthening trust through joint actions Thinking sustainability at network level 8 Talking about joint actions as a value network Companies or even networks cannot solve sustainability challenges (Figure 1) alone because, in practice, they share the problems with several layers of stakeholders (Figure 18). Therefore, sustainable development requires a broader perspective, and the value network should be able to collaborate with its stakeholders as an entity, as a network. Sustaining for future generations Sustainable development in the present society at the global level Stakeholder collaboration within business ecosystem Value network working together Figure 18. Layers of networked sustainable development. Once the governance process has been organised and is in operation, the network actors have the opportunity to assess, together, that the structure and processes work as planned and to develop them if necessary. Nonetheless, renewing actions, processes and structures at network level still requires understanding of their internal and external dependencies. The changes at network level have an influence on the network s stakeholders, at present and also in the future society. These dependencies should be analysed with the help of, for example, the sustainability matrix (Figure 11), which is a tool for evaluating and coordinating interests and sustainability objectives of stakeholders. 32

35 With regard to stakeholder involvement, the network should also find a balance between including too many or too few groups of stakeholders in its activities and thus carry out a categorisation and prioritisation of stakeholders and decide which stakeholders it will include in its sustainability efforts. Moreover, the network s ability to strengthen collateral relationships also between stakeholders, e.g. match groups of stakeholders and network actors when they have the same kind of sustainability concerns, could help configure an open-minded core of involved parties willing to collaborate for the common good. Thus, building a shared action agenda for the future development of the value network could take the sustainability governance within a value network to the next level. Build a shared understanding of strategic objectives at the value network level include clear identification of risks and opportunities Identify the stakeholders in the business ecosystem and their input to the sustainability strategy and performance ensure regular and active engagement with stakeholders Consider integration of network members internal controls and management systems include transparent communication of cost and benefit sharing and rewarding Develop shared, measurable and relevant sustainability indicators and metrics ensure transparency and openly communicate (report and evaluate), include financial and non-financial aspects (modified from Kruse & Lundbergh 2010) A shared action agenda will be implemented through joint actions within the value network and with stakeholders. With regard to studying future paths, a strategic roadmapping tool is also suitable in this phase (see, e.g., Phaal et al. 2012). The strength of the roadmapping approach lies in the identification of obstacles and threats as well as opportunities, solutions and steps for dealing with them, and in the generation of shared targets and a common vision (Phaal et al. 2004; McDowall & Eames 2006). Keeping the sustainability target of a value network in mind, a roadmapping tool can be used to plot the identified value proposition and business model additions and activities on a timeline that stretches from the current date to a projected end point the longterm sustainability vision. Thus, in addition to network-level visioning, this kind of strategic planning supports the actual transformation and implementation. Developing a joint vision/ recognising a specific problem or need that should be addressed Choosing and defining the roadmap layers (typically market/business, product/service, technology) and sub-layers Organising facilitated workshops of which the first ones focus on the main layers of the roadmap, and the last one gathers the themes together on a time basis (near, mid, long-term) Discussions and iteration rounds Follow-up activity and updating of the roadmap on a periodic basis Moreover, as with most of the other tools presented in this workbook, many of the benefits of roadmapping come from the process that brings actors together, provides an opportunity for sharing information and perspectives, and provides a vehicle for holistic consideration of problems, opportunities and new ideas (Phaal et al. 2004). The previously (in Chapter 4) presented Maturity assessment for network conditions may also be used at this point of the governance process since it can be used in setting targets and roadmaps for future development. 33

36 9 Strengthening trust through joint actions In a strong collaborative relationship, all the parties discuss the joint actions together, define the outcomes and learn together and from each other. Trust is a function of an informal governance mechanism that can mitigate potential conflicts between network members. Firms that have built continuous relationships and trust with their network members should benefit from these informal governance mechanisms by utilising knowledge more efficiently. (Filatotchev & Nakajima 2010.) Joint actions and working together as a network are a key to strengthening trust between network members and stakeholder groups. The relationship interaction matrix (Figure 19) aims to evaluate the evolvement of relationships through joint actions. The vertical axis describes a shared understanding between actors, i.e. how well the interests of network actors are aligned and if they consider the network mutually beneficial. The actors should consider whether the interests of all participants are aligned to each other and to the shared sustainability objectives. The horizontal axis defines interaction between the network members, i.e. how many contacts there are between the actors and whether the communication is bidirectional or multidirectional. Network-level considerations based on the relationship interaction matrix could help the network members to build a shared understanding of the different perceptions of the actors involved. This, in turn, supports transparency within the value network and concurrently strengthens the relationships. HIGH Shared understanding and alignment of interests Reputation-based formal relationships Occasional cooperation Joint actions Collaborative relationships Joint actions Conflicting relationships LOW SIMPLE Interaction (communication, relationships) COMPLEX Figure 19. Shared understanding and interaction in relationships (modified from Boutilier 2009, Paasi et al. 2013). 34

37 Sustainability has also been discussed from the viewpoint of cultural change, which is closely related to relational governance through shared norms, the willingness to collaborate and social capital between the actors and to trust as an enabler behind all of these. Moving from mere compliance to involvement by stakeholders to the pursuit of value in all three dimensions of sustainability requires that organisations, as well as value networks, develop the necessary culture and internal capabilities to do so. Three levels of culture with respect to organisational attitudes to stakeholders and the creation of value have been recognised, and they are as follows: Level 1. A compliance culture: The organisation is not particularly involved with its stakeholders, but basic societal norms are respected and the organisation seeks to avoid the unacceptable destruction of value (economic, social or environmental). Level 2. A relationship management culture: The organisation recognises the instrumental value of good relations with immediate stakeholders (e.g. customers, workers, communities, business partners) and seeks to provide value that is appropriate to each, within the limits of what is possible and only after the demands of the investors are satisfied. Level 3. A sustainable organisation culture: The organisation recognises the interdependencies and synergies between the company, its stakeholders, value networks and society, and it seeks to maximise the creation of economic, social and environmental value. (Wheeler et al ) However, it needs to be pointed out that organisations do not have static cultures, and their relationships with stakeholders and network members vary over time, which also causes changes to beliefs, attitudes and norms inside the value network. Similarly to the sustainability continuum presented in the next chapter, this framework with its three levels can be used as a tool for assessing and developing current and future organisational approaches to stakeholders and value creation. (Wheeler et al ) These levels of culture can also be used to assess and mirror the atmosphere and attitudes towards sustainability at network level. In the development of network governance and the network s sustainability thinking, the framework of Wheeler et al. can be used to, for example, pose questions such as whether the network members and the whole network s value propositions are feasible and how the cultures should be developed in the future. Furthermore, the maturity assessment describing network conditions (presented in Chapter 4) could also be utilised here to evaluate the value network s present state and development needs. 10 Thinking sustainability at network level Network-level sustainability thinking at its best requires individual network actors to prefer the common good over their self-interests. Nonetheless, this kind of thinking cannot be reached if the actors are not able to trust their network members and are afraid of opportunistic behaviour. The more familiar the network members are with each other s needs and aims, the better the chances of avoiding this kind of opportunistic behaviour. However, it has to be acknowledged that in business relationships, individual actors also always have their own interests. When implementing a shared action agenda (considering all three sustainability levels), transparent communication and feedback loops are prerequisites for sustainability thinking as a network. Through just processes and joint action, network members can even create shared cognitive models that facilitate co-creation. If the starting points for the network actors are very different regarding sustainability levels, e.g. one actor is very sustainability driven and the others are at the compliance level, at this phase they need to recognise and reassess their objectives, separately and together, and make decisions on how they need to develop and what measures they need to carry out in order to reach the set objectives. This should be done from the viewpoint of the whole value network so that the current level and the target level are truly synchronised between the network actors. Moreover, the progress should be evaluated together from time to time. 35

38 The corporate sustainability continuum (Willard 2005) can support the framing of the present situation regarding sustainable development and when comparing the levels of sustainability of different actors. The continuum represents the progress of firms on the path towards sustainability, and a firm can use it when exploring the question Where are we with respect to sustainability as a strategic choice?. Furthermore, it can also be utilised in studying future paths for sustainability and development needs in order to achieve the same level between the network actors, and it can thereby also be utilised within the strategy development process. Figure 20. Corporate sustainability continuum (modified from Willard 2005). 36