Chapter 3STRATEGIC MANAGEMENT FOR SUSTAINABILITY

Learning objectives

• Express the relationship of sustainability and strategic management• Describe the association between stakeholders’ management and

strategic management • Examine the role of corporate governance in strategic management• Identify the contribution of social responsiveness to strategic

management

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Sustainability

• Sustainability is the responsibility of everyone including the organisations involved in business.

• Sustainability is a wider concept but when applied in the context of organisations, corporate sustainability implies the challenge to simultaneously improve social and human welfare while reducing the ecological impact of organisations and ensuring the effective achievement of organisational objectives.

S. Sharma, “Research in corporate sustainability: What really matters?” in Research in Corporate Sustainability: The Evolving Theory and Practice of Organizations in the Natural Environment ed. S. Sharma and M. Starik (Cheltenham: Edward Elgar, 2003): 1-29.

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Stakeholders and Strategic Management

• Stakeholders are the individuals and groups who can affect, and are affected by, the strategic outcomes achieved and who have enforceable claims on a firm’s performance.

• The stakeholders’ association with the organisation is a two-way relationship.

• Stakeholders can be divided into internal and external stakeholders. • Internal stakeholders such as shareholders / owners, managers or

employees• External stakeholders such as customers, suppliers or government.

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Triple Bottom Line

• A term coined in 1998 by John Elkington, consists of aiming to achieve results for people, planet, and profit.

• By people is referred the social sustainability under which the aims of the organisation are to adopt fair and beneficial policies towards all people who come under its sphere of influence such as employees, customers and communities.

• By planet is meant the natural environment in which we exist and includes the earth, water, air, plants and animals. An organisation should adopt sustainable environmental practices that benefit rather than harm the natural environment.

• By profit is meant the economic objectives of the organisations that results after deducting all costs it incurs.

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Three types of Capital

• Social capital is the outcome of stability in society that arises when there is safety and security for people, effective educational system, caring and affordable healthcare system, effective governance and fair distribution of wealth.

• Natural capital is continued availability of fresh air, clean water, stable climate, renewable energy sources and sustainable eco-systems that enable the economy to survive and prosper.

• Economic capital is the most commonly understood form of capital as it is expressed in terms of money but actually it includes both financial and physical assets as well as intangible assets such as reputation and knowhow

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Sustainable Strategic Management

• Long-term sustainability of organisations aim at optimising profit in such a way that they do not cause harm to the natural environment and leave it in a shape that would continue to be useful to the coming generations. This is the underlying idea behind sustainable strategic management.

• The balancing of different aims of profitability with sustainability can be done through the adoption of the principles of triple bottom line. These principles underline the philosophy that an organisation’s responsibility is towards all its stakeholders rather than only shareholders.

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Stakeholders’ relationship management 

• Stakeholders can be divided into internal and external stakeholders:– Internal stakeholders such as shareholders /

owners, managers or employees– External stakeholders such as customers, suppliers

or government

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The Organisation-Stakeholder Relationship

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External stakeholdersCustomersSuppliers

Government regulatorsBanks / creditors

Trade unionsEmployers’ organizations

Mass mediaNGOs/activists

Local communitiesGeneral public

Internal stakeholdersShareholdersEmployeesManagersDirectors

CONTRIBUTIONS / SUPPORT

EXPECTATIONS/ CLAIMS

Stakeholders’ Analysis• Stakeholder relationship management requires that stakeholder analysis be

done to identify the relative importance of various stakeholders and to ensure that the claims of the more important stakeholders are satisfied first. Usually, the stakeholder analysis follows the steps below:–  Identify the stakeholders – Identify the stakeholders’ expectations, interests and concerns– Identify the claims stakeholders are likely to make on the organisation– Identify the stakeholders who are more important from the organisation’s perspective– Identify the strategic challenges involved in managing the stakeholder relationship

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Stakeholders’ Analysis Map

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Power of the stakeholder over strategic decision

Unknown Little / no power Moderate degree of power

Significant power

Unknown

Little or no effect

Moderate effect

Significant effect

Effect of strategy on

the stakeholde

r

Source: Adapted from R. E. Freeman: Strategic Management: A Stakeholder Approach (Boston, M.A.: Pitman, 1984)

Engagement Tactics for Stakeholders

• The process of fostering effective relationship with the stakeholders is termed as stakeholders’ engagement and is the most critical part of stakeholders’ relationship management.

• In a situation where the organisation is doing well and highly profitable, the challenge of effectively managing stakeholder relationships is lessened substantially.

• The value of open and honest communication and transparency in dealings with the stakeholders, building trust and engaging in activities designed to foster cooperation are crucial for success.

• The role of the top management of the organisation and particularly the chief executive is extremely important in stakeholders’ relationship management.

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Corporate Governance and Strategic Management

• The management of relationship between the directors and managers and the other stakeholders of the organisation is called corporate governance.

• The relationship between the stakeholders and the managers of the organisation is called an agency relationship and is explained by an influential theory in financial economics called the agency theory that was developed in the 1970s. In general, when a person delegates decision-making authority to another an agency relationship is created.

• In contrast to the agency theory, stewardship theory proposes corporate governance mechanisms that support and empower the managers’ behaviours rather than monitor and control them.

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Journal of Financial Economics 3, no. 4 (1976): 305-360; E. F. Fama “Agency Problems and the Theory of the Firm,” Journal of Political Economy 88, no. 2 (1980): 288-307 and K. M. Eisenhardt, “Agency Theory: An Assessment and Review,” The Academy of Management Review 14, no. 1 (1989): 57-74.

Agency Theory and Stewardship Theory 

• When a person delegates decision-making authority to another an agency relationship is created. The person delegating the authority is called the principal and the person to whom the authority is delegated is the agent. The relationship between the principal and agent is agency relationship.

• An alternative approach to explaining the relationship between the owners and managers of the organization is called the stewardship theory. This theory takes a positive view of the managers considering them as ‘stewards’ whose interests are aligned with that of the owners. These managers identify with their organisations and derive satisfaction from behaviours that support the organisational interests rather than their own

J. H. Davis, F. D. Schoorman, and L. Donaldson, “Toward a stewardship theory of management,” Academy of Management Review 22, no. 1 (1997): 20-47.

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Corporate Governance• Corporate governance and practices around the world suggest several

mechanisms that are used to ensure good corporate governance such as:  – Having an effective board of directors– Fostering transparency through disclosure of information related to the organisation’s

financial and operational performance– Framing code of governance and committing the organisation to its implementation– Designing sound internal control systems– Instituting effective auditing and evaluation systems within the organisation– Having proper risk management procedures in place– Encouraging whistle-blowing policies within organisation– Designing fair compensation policies for managers

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Board of Directors and Strategic Management

 • The functions of the board are defined in many different ways. For

instance, Garrat defines the function of the board as a collective responsibility to:  – determine the company’s purpose and ethics;– decide the direction, that is, the strategy;– plan, monitor and control managers and CEO; and– report and make recommendations to shareholders.

B. Garrat, The Fish Rots from the Head. (London: Harper Collins, 1997)

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Relating Corporate Governance to Strategic Management

• Corporate governance and strategic intent The strategic intent of the organisation deals with its vision and mission, business definition, business model, and objectives.

• Corporate governance and strategy formulation Deciding on the specific corporate and business strategies of the organisation is the responsibility of the top management of an organisation.

• Corporate governance and strategy implementation The arena of strategy implementation is almost fully under the control of the managers of the organisation.

• Corporate governance and strategy evaluation The shareholders and directors have an effective role to play in helping the organisation evaluate the effectiveness of its strategies.

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Corporate Social Responsibility and Strategic Management

• Corporate social responsibility (CSR) deals with the corporate activities designed to discharge the responsibilities of the organisation to the society.

• Corporate sustainability has got to do more with the relationship of corporate activities with the natural environment.

• The intersection of these two concepts takes place where the social responsibility includes the responsibility of the organisation to the natural environment. CSR would also deal with the social, economic, stakeholder and voluntariness dimensions.

• CSR is a well-established tradition in the Indian corporate sector particularly in the family-owned organisations that have had a strong social orientation to community through charity and philanthropic activities.

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Corporate Social Responsibility and Sustainability

 • Corporate social responsibility is not the same as corporate sustainability though sometimes it is considered as synonymous.

• Corporate sustainability has got to do more with the relationship of corporate activities with the natural environment.

• Corporate social responsibility deals with the corporate activities designed to discharge the responsibilities of the organisation to the society.

• The intersection of these two concepts takes place where the social responsibility includes the responsibility of the organisation to the natural environment.

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Social Responsibility in the Indian Context

• The behaviour of organisations corresponds to the social and economic systems in which they are embedded and the social and cultural norms prevalent at a given point of time.

• Corporate social responsibility (CSR) is not a new concept in India. It is a well-established tradition in the corporate sector particularly in the family-owned organisations that have had a strong social orientation to community through charity and philanthropic activities.

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Models of CSR

• Some authors identify four models of CSR operating in India as below.– Gandhian model: Voluntary commitment to public welfare based on ethical

awareness of social needs– Nehruvian model: State-driven policies including state ownership and

extensive regulation and administration– Milton-Friedman model: Corporate responsibility primarily focused on owner

objectives– Freeman model: Stakeholder responsiveness which recognises direct and

indirect stakeholders’ interests

• R. Kumar, D. Murphy and V. Basari: Altered Images: The 2001 State of Corporate ,Responsibility in India Poll (New Delhi: Tata Energy Research Institute, 2001)

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Drivers of corporate social responsibility

•  Market-based pressures and incentives: The pressure on Indian organisations to respond to global standards of CSR so as to present a good image to prospective international partners, to aspire for achieving globally-accepted certification in achieving social and environmental and to compete with global companies within India prompt them to adopt CSR.

• Civil society pressures: Traditionally, non-governmental organisations and businesses have had a weak or even an adversarial relationship. But the power and acceptability of NGOs and increasing pressures from the civil society has made business organisations respond to them more favourably.

• Regulatory environment in India: Legislation in India, related to social issues, work, and wages, and environmental regulation have tended to impose restrictions on the business organisation making them respond in terms of compliance as well as self-imposed codes of conduct.

• A. Sood & B. Arora, The Political Economy of Corporate Responsibility in India Programme Paper No. 18, November 2006, United Nations Research Institute for Social Development, Geneva. The paper is available at http://www.unrisd.org/unrisd/website/document.nsf/ab82a6805797760f80256b4f005da1ab/a00e0ff825fc59aac1257258002ffc1e/$FILE/Sood-Arora-pp.pdf Retrieved Jan 21, 2008

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Social responsiveness and strategic management

• Social responsiveness is the level of interest exhibited by an organisation in discharging social responsibility.

• The top management takes the major decisions regarding the choice of social concerns to be addressed, definition of the scope of social responsibility activities, and resource allocation to social responsibility programmes.

• These decisions are based on the views, opinions, personal values, and the disposition towards business ethics of the top management.

• Alignment with social responsiveness with strategic management means the reflection of social responsiveness in all the phases of strategic management.

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