Role of Strategic Management in Achieving Sustainability

Strategic management has developed from corporate planning (1960) to shareholder value maximization (1980-2000) to stakeholder value maximization (2000-2023), which also incorporates the sustainability issues of society and the environment. Until the end of the 20^th century, the scope of value creation and hence competitive advantage were narrowly defined in terms of profit. Today, companies are using a much wider scope of value creation and competitive advantage that includes different domains of value and sources of value creation in creating stakeholder value and achieving sustainability. Research shows that most large companies, such as Unilever, Procter and Gamble, 3M, and Marks and Spenser, have become extremely successful in generating long-term profitability. These companies have successfully addressed the sustainability issues of corporate social responsibility and the environment by focusing on creating strategic value and then converting it into long-term financial benefits for the company.

During the last decade of the 20^th century, the primary goal of strategic management was to maximize the long-run profitability of the firm to maximize shareholder value to achieve superior financial performance was quite appropriate because during that time social and environmental factors were not considered in the description of sustainability of competitive advantage. This view of the firm implies that the management should act solely in the interest of shareholders and that the success of the market economy depends on how firms respond to profit incentives. Therefore, when the firm focuses on maximizing long-term profits, it best serves the interests of both society and the shareholders. The stakeholder theory of value maximization suggests that the firm should act in the interest of all its stakeholders (including society). However, before the end of the 20^th century, this contrasting view of stakeholder theory was perceived as a threat to the shareholder value maximization principle, because pursuing the interest of stakeholders would ruin shareholders’ interest. During the same period, it was perceived that a firm could be extremely successful without considering the cost of taking on environmental and social responsibilities, which could eventually reduce shareholder value. Furthermore, during the 21^st century, the reputation of shareholder value maximization faded because of several drawbacks connected to firms’ short-term orientation, financial manipulation, and avoidance of risk management that caused the 2008-09 global financial crisis. There is still an ongoing debate over whether companies should act in the interest of their shareholders or stakeholders. The adoption of shareholder or stakeholder value maximization also depends on which geographical location the company is operating. In the United States, Canada, and the United Kingdom, firm boards act to support shareholder value maximization, and in Asian countries, company boards endorse stakeholder value maximization.

During the current decade, particularly after the great recession, the focus of strategic management has largely shifted from maximization of shareholder value to follow the interests of stakeholders (including social and environmental responsibilities) which implies maximizing the total value creation (or enterprise value) and its fair distribution to stakeholders. The practical experience of firms shows that when firms act in favor of stakeholders and consider wider sets of interests, including that of society and environment, in creating value achieve superior financial performance.

Creating Stakeholder Value

The company creates value for its customers in such a manner that enables the company to capture part of that value for itself and its stakeholders to achieve sustainability goals. A company’s offering can create company value in three different domains: monetary, functional, and psychological.

Monetary Value

Monetary value relates directly to a firm’s financial performance goals, such as return on investment (ROI), profit margins, and earnings per share (EPS).

Functional Value

The functional and psychological value relates to the firm’s strategic goals and creates non-monetary strategic value for the company in the long run. Functional and psychological goals are not directly related to profits however, they can be converted indirectly into monetary value through economic value analysis. A firm’s product can create functional value when it affects other offerings in the firm’s product portfolio. For example, a software program can be used as a technological platform to design various high-margin products.

Psychological Value

A company creates psychological value for its employees and stakeholders when its corporate social responsibility (CSR) efforts generate results that are of psychological importance. For example, when a company undertakes distinct programs to preserve the natural environment and promote different social causes, it can help to build the company’s brand and culture.

Sustainability

The word sustainability, as mentioned above, was often used until the end of the 20^th century in relation to competitive advantage, and not involving the environment and social responsibility. During the current century, sustainability is extensively used to describe the “triple bottom line (TBL).” TBL was first introduced by John Elkington in 1994 as a proposed new accounting framework that included social and environmental dimensions of performance. After the dawn of the 21^st century, the goal of strategic management has shifted from maximizing the firm’s long-term profitability (in one dimension of performance) to incorporating performance in three dimensions called sustainability: financial, social, and environmental. The TBL dimensions are also known as the 3Ps: profits (the traditional profit/loss account), people (the social responsibility account), and planet (the environmental responsibility account).

Firm’s Profit/Loss Responsibility

The firm’s long-term responsibility is to maximize the total value creation for its stakeholders. This implies that the firm remains successful in the long run irrespective of changes in its external environment, including the social and physical environment.

Firm’s Social Responsibility

The company that uses the sustainability framework for its business has a social responsibility towards its employees, customers, and local communities. Archie Carrol proposed four primary responsibilities of a business: economic, legal, ethical, and discretionary. A firm must first make a profit to fulfill its economic obligations, and in doing so, it must also follow the laws to satisfy its legal responsibilities. After satisfying the legal and economic responsibilities, the firm should focus on satisfying its social responsibilities: ethical and discretionary. Ethical responsibilities usually are accepted beliefs about a firm’s behavior in society. Beliefs are a set of values, such as commitment to a particular standard, stakeholder interest, and a set of moral rules that guide the decisions and actions of people in an organization. Discretionary responsibilities are voluntary and not an obligation. Examples are charitable donations and providing day-care centers. Both responsibilities, ethical and discretionary, are equally important in fulfilling a firm’s social responsibility.

Firm’s Environmental Responsibility

Two decades ago, companies were not held responsible if they were polluting the environment. Companies dumped their waste in forests, lakes, or rivers and polluted the air by emitting and releasing gases containing hazardous materials and smoke into the atmosphere. These past practices not only polluted the environment but also caused harm to the local population. Based on complaints, the governments finally passed laws preventing the firms from polluting the environment. Therefore, environmental responsibility has become an obligation to the companies to keep their environmental footprint as minimum as possible.

Today, the scope of sustainability has broadened, which also includes Carrol’s four responsibilities, as mentioned above. Therefore, to survive and remain successful over the long run, or to be sustainable, a firm must conform to its economic, legal, social, environmental, and other stakeholder responsibilities.

Examples of Companies that use the Triple Bottom Line Framework

Here are some examples of businesses that use the triple bottom line framework to achieve sustainability goals in renewable energy, reducing carbon footprint, and renewable or recyclable materials.

Unilever’s Sustainability Program

Unilever, a multinational company that supplies food, personal, and household products, launched a sustainability program in November 2010. The company successfully achieved its strategic goals of sustainability by reducing its environmental footprint, increasing sales, and increasing its long-term profitability. As a result, the company became the global leader in sustainability. To achieve this success, Unilever embedded ambitious sustainability performance target measures into its strategic, operational, and human resource management system. The plan was monitored by the board and performance-based incentive bonuses were linked to quantitative targets to be achieved for emission and waste reduction, and energy and water conservation.

Mark and Spencer become 100% Carbon Neutral

Marks and Spencer, a clothing and food retailer in the UK, announced in June 2012 that it had achieved its goal of going “carbon neutral”. To achieve this goal, the company launched its ambitious environmental sustainability strategy, called Plan A, in 2007, which transformed the company. Since 2012 it is 100% carbon neutral and its operational waste going to landfills is also 0%.

Ecologic Brands Creates a Better, Cheaper, and Eco-Friendly Bottle

Jolie Corbett, the founder, and CEO of Ecologic Brands created the world’s first paper bottle that addresses a few social and environmental challenges caused by plastic. The hybrid paper and plastic bottles use 30% plastic material compared to regular ones and the shells use 100% recyclable cardboard and newspaper, therefore, the bottle sends less plastic waste to landfill operations. The bottles can reduce a product’s packaging cost and can also create strategic value, which can be converted into monetary value in the long-run.

Achieving Strategic Sustainability: Competitive Advantage Sustainability

Some firms, particularly in stable industries, can sustain their competitive advantage over the long run. However, in today’s dynamic business environment, it is becoming increasingly difficult to sustain a competitive advantage for a very long. Intense competition can erode the competitive advantage over time and cause companies to give more importance to short-term tactics over long-term value-creation goals. An excessive short-term orientation of the firm can further cause more focus on building short-term advantages which are not enough to achieve long-term strategic goals and objectives and generate a sustainable competitive advantage. As a result, a company must constantly work to improve its competitive advantage, not only by cascading short-term advantages but also by finding additional sources of complex competitive advantages to achieve strategic sustainability. Some companies such as Toyota, Canon, Walmart, and Samsung Electronics have achieved strategic sustainability in both profitability and market share by developing many-layer of long-term competitive advantages using low-cost, differentiation, and innovation strategies. Additionally, these companies have developed responsiveness and adaptability to their social and natural environments.

References and Further Reading

1. M. Grant, Contemporary Strategy Analysis (United Kingdom: John Wiley & Sons, Ltd., 2018), Chapters 2, 4 and 15.
2. L. Wheelen & J. D. Hunger, Strategic Management & Business Policy (New Jersey: Prentice-Hall, 2018), Chapters 1, 3, 6 & 10.
3. A. Chernev, Strategic Marketing Management (USA: Cerebellum Press, 2014), Chapters 3, 5 and 6.
4. Timothy F. Slaper, The Triple Bottom Line: What Is It and How Does It Work? Indiana University Kelley School of Business, Indiana Business Research Center.
5. Jabil Inc. acquires Ecologic Brands, February 17, 2021.
6. Ashok N., The Effect of Changing External Environment on Industry Structure, Competition, and Profitability, A&N Strategy Consulting (December 23, 2022).