Edition 45, Strategy

A Model for Corporate Sustainability

By: Antonio Lloret1 and Elsa Flores2

A company’s competitiveness is linked to its long-term performance and its relationship to its industry and its competitors. A competitive company is one that is constantly aware of the conditions under which it may lose or generate value.

Since competitiveness (and not simply comparison) is a long-term phenomenon, a company must understand how to constantly create value, and one requirement for doing so is having a strategy that enables it to meet its goals. According to Thompson et al. (2009), strategy consists of the competitive movements and business management used by administrators to grow the business, attract and satisfy consumers, and successfully competes through operations that work toward organizational targets. According to Porter (1996), it is the way in which the company’s activities fit together or, more generally, a theory on how to generate competitive advantages (Barney and Hesterly, 2010).

So when a strategy is accompanied by a business model that creates, generates and captures value, the company becomes more competitive. In other words, a strategically directed business model can become a model for a long-term competitive business.

The long-term emphasis is important. Competitiveness understood as a “once in a while” thing is only an illusion. Thinking in this way means generalizing that a good business is infinitely replicable, which is a fallacy out of keeping with the concept of competitiveness. In fact, a long-term competitive advantage is called a “sustainable competitive advantage.” Here, sustainability means permanence amid the restrictions imposed by economic, social and environmental systems, in which business decisions are constantly subject to the limitations of those systems. For example, an economic limitation is the production capacity of a plant; a social limitation would be individual preferences for goods and services, and an environmental imitation would be the scarcity of an input like energy. These restrictions limit the level of competitiveness a company can attain, and therefore its permanence. Neglecting to take these into account is tantamount to assuming that business decisions are linear. Sustainability practices are key to a company’s survival, because well-aimed sustainable actions within its strategy are a source of competitive advantages.

In summary, competitiveness only makes sense in the long term and is subject to the limits imposed by economic, social and environmental systems. Sustainability aligned with strategy is key to making the company more competitive. But if this is true, how do we devise a model for corporate sustainability?

1Profesor investigador de la Escuela de Negocios

ITAM

2Asistente de investigación

ITAM

For a business model to grow, generate and capture value, it requires the simultaneous use of three systems that sustain the company’s strategy. These elements, as shown in figure 1, represent the infrastructure on which the company can generate strategies that enable it to be competitive in the long term. When one or more of these supports is absent or underestimated, the company may lose value over time.

These elements buttress a company’s strategy and serve as the bases for corporate sustainability, and they are what enable it to attain competitiveness.

The first element of competitive strategy is the classic argument of the competitive advantage based on cost leadership and the company’s differentiation or benefits (Porter, 1985). The same argument, which is even more evident from the standpoint of the laws of supply and demand, is the first pillar of the strategy, the catalysts for individual preferences, on the one hand, and the generator of operating margins on the other. Demand represents the perceived benefits customers acquire from the good or service produced by the company. This perceived benefit is what we generally understand as differentiation, and can be measured in the distance between the availability of payment and the price paid. Thus, the company that offers more perceived benefits than the competition will be able to grow and generate more value. Sustainability, from the perspective of differentiation, is an element that enhances the company’s attributes and can increase its differentiation and improve its attraction of value.

On the other hand, in competitive strategy, supply is the way in which the company exploits the average cost of operation, generally through strategic actions that reduce this cost. By comparing the average cost with the price set by the market, the company obtains an operating margin. With standardized merchandise and a price generated by the market, the company is more competitive than its peers if it obtains higher margins based on its lower average costs. By reducing costs it can also lower prices so that consumers perceive more of a benefit when choosing that company. This ratio of benefits less cost is reflected in stronger financial performance and, if carried to the long-term, a sustainable competitiveness. The link between competitiveness and sustainability can be found in the bibliography on financial performance and environmental performance (for example, Clarkson et al., 2011; King and Lenox, 2001; or Lipsky et al., 2003). The results indicate that a company that makes an effort to improve its environmental performance also achieves positive financial returns over time. Porter and Van der Linde (1995) posit that, since pollution is a form of wasted resources, lower pollution should mean higher productivity.

A second element in the model of corporate sustainability is the vision of resources and capacities (Barney, 1991; Hart, 1995, Russo and Fouts, 1997). According to this notion, the company proposes the use and exploitation of strategic assets, resources and capacities based on the tangible and intangible assets that enable it to remain competitive. This position considers a company’s resources and capacities to be accretive when they are valuable, rare, inimitable, and adaptable to the organization in a purely entrepreneurial context or as an extension of natural resources (Hart, 1995), given that strategic assets are subject to the biophysical limitations imposed by the environment itself. Additionally, Hart posits that the biophysical limits imposed can be a source of competitive advantage. One way to obtain new capacities and resources based on the limitations of natural resources is to develop a sustainable vision of the company. Companies may acquire advantages by reducing waste, designing new products and technologies, integrating stakeholders into the decision-making process and, most importantly, having a long-term vision (Hart, 1995). This is the clearest link between ecology, the environment and the company. The varying availability of natural resources for mining and manufacturing companies or for food and beverage makers is a vulnerability that can be strategically managed to ensure the attraction, generation and creation of value. In summary, the sustainability of the business is accompanied by the creation and application of strategic actions consistent with environmental limitations encountered over time.

Finally, the third element, which is institutional theory or the new institutionalism, has recently been explored in the literature on management by Peng et al. (2009), among others. Peng proposes that competitive advantages stem from the institutional limits established within and outside of the company. However, we must go beyond the limits and establish the institutional vision as an indispensable phenomenon for understanding corporate sustainability. Based on the classic definitions, institutions are the precepts, laws, rules, codes, customs and traditions that determine our behavior. They thus establish the limits within which individuals, companies and governments may act. Their main attribute is that they lend certainty to business transactions and reduce transaction costs. In this sense, the institutional theory of the company indicates that the regulatory or cognitive framework establishes the limits within which the organization moves, formally and informally. In order for sustainability to exist, the company must have an institutional vision, because it is subject to regional, national and international regulations, in addition to internal self-regulatory mechanisms that guide its conduct. The capacity to adapt to institutional conditions gives the company the capacity to generate long-term strategies that can help it to create, attract and generate value.

To sum up, the business model of corporate sustainability is subject to the limitations imposed by economic, environmental and social systems. The company’s strategy must be long-term to ensure competitiveness. To this end, it must incorporate the notion of sustainability into the business model, which is obtained by three elements: 1) competitive strategy, in which strategies for differentiation and costs spearhead the vision but are limited if they do not take into account the elements inherit in 2) the vision of natural resources and 3) institutional theory. A strategy that incorporates all three of these elements can be adapted and react more swiftly to changes in the environment, reducing the company’s exposure to risk, because these elements enable the company to adopt a longer-term thought for the purpose of creating, generating and attracting value.

References

  • Barney JB. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management 17(1): 99-120.
  • Barney JB. y Hesterly WS (2009). Strategic Management and Competitive Advantage. Prentice Hall.
  • Clarkson PM, Li Y, Richardson GD, Vasvari FP. 2011. Does it really pay to be green? Determinants and consequences of proactive environmental strategies. Journal of Accounting and Public Policy 30(2): 122-144.
  • Hart SL. 1995. A Natural-Resource-Based View of the Firm. The Academy of Management Review 20(4): 986-1014. http://www.jstor.org/stable/258963.
  • King A, Lenox MJ. 2001. Does It Really Pay to Be Green? Accounting for Strategy Selection in the Relationship Between Environmental and Financial Performance. Journal of Industrial Ecology 5(1): 105-116.
  • Russo, M. y Fouts, A. 1997. A Resource Based Perspective on Corporate Environmental Performance and Profitability. Academy of Management Review,40: 534-559.
  • Orlitzky M, Schimdt FL, Rynes SL. 2003. Corporate Social and Financial Performance: A Meta-analysis. Organization Studies 24(3): 403-441.
  • Peng, M. (2009) The Institution-Based View as a Third Leg for a Strategy Tripod. Academy of Management Perspectives. Vol (23) núm. 3 pp. 63-81
  • Porter, M. E. (1985). Competitive Advantage.Nueva York, The Free Press: 11-15.
  • Porter ME, van der Linde C. 1995. Toward a New Conception of the Environment-Competitiveness Relationship. The Journal of Economic Perspectives 9(4): 97-118.
  • Thompson, Strickland y Gamble (2008), Crafting and Executing Strategy, McGraw-Hill/Irwin.

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