My colleague John O'Rourke was recently quoted in an article about Sustainability Reporting.
One of the questions the article raised if sustainability reports can really help managers make better decisions. John's response was very clear: it helps opening up managers' eyes to important environmental and social topics. Management guru Michael Porter goes even further, he states that sustainability can lead to competitive advantage. Making sustainability part of your value proposition, in terms of environmentally friendly products or transparency towards stakeholders, can lead to strategic differentiation.
If you are a regular reader of this weblog, you know I like to approach strategy and management from a stakeholder theory perspective, and this goes for this topic even more so. In order for Performance management to add to sustainability, it should not only take your own objectives into account, but also those of your stakeholders. As I like to stress, every stakeholder offers contributions. Customers offer their business, partners and employees their skills, shareholders offer capital, regulators fair competition and society offers the infrastructure to do business. And in my book, you can only benefit from stakeholder contributions, if you are also willing to contribute to their requirements as well. Reciprocity is the key.
Let's look at a very simple way on how to visualize decision-making and establish if managers make sustainable -- and, in my view, thus better --decisions.
Step 1
For every strategic decision, create a graph with two dimensions. On the horizontal axis the internal (business) performance is measured, going from "as is" to "to be" (obviously the "to be" is higher business performance). On the vertical axis you place external performance, which is the performance of your stakeholders. A hot topic here is environmental or social performance.
Step 2
Distinguish four quadrants. The quadrant top-left describes what happens if you give too much away, at the cost of yourself. This is not sustainable by nature. Bottom-left describes the situation where no one benefits, also not a good place to be. Bottom-right is where you benefit, but not other stakeholders. Top-right marks top performance for both you and other stakeholders.
Step 3
Plot the expected outcome of your decision in the graph as a line, going from the "as is" to the "to be" situation. The figure shows three possible examples (theoretically the line could go from right to left, but it is usually not expected that a good business decision decreased internal business performance).
Now we can assess the sustainability of the strategic decision:
- If the arrow goes flat, internal performance improves, but no change to the external performance. This is sustainable, it adds value, but the stakeholders are not impacted. In Porter's terms, this is not very differentiating. You won't make a strategic difference, other than improving yourself.
- If the arrow has a negative angle (goes down), your decision improves your own performance, but at the cost of others. This is not sustainable as you extract value from your stakeholders, instead of adding value.
- If the arrow has a positive angle (goes up), your decision is sustainable, and is differentiating. You're benefiting not only yourself, but also increasing external performance. This is adding value for yourself as well as your stakeholder environment.
If you only assess the internal business performance for strategic decisions, you can't see if the improved performance is based on adding value or extracting value. Using this simple visualization shows how taking stakeholders into account, managers indeed take better decisions. By including external performance, it enables a discussion on how to differentiate from the competition in providing a certain added value for your stakeholders.
John O'Rourke came up with the perfect term for this style of thinking: he called it Sustainable Performance Management.
--frank
