In order to get objective assessment results of a company's sustainable efforts Epstein recommends enterprises to attach every single sustainability activity with "a specific sustainability performance indicator" (Epstein, M.J., 2008, Making Sustainability Work, Page 168) depending on the activity. But the intention, goals and accordingly the measurement of those activities depend on the company's sustainability strategy. The company has to define clearly if the financial efficiency is not connected to social and environmental aspects or if its strategy aims to an improvement in social, ecological and economical areas. "In this case, sustainability performance is an output, rather than the final outcome" (Epstein, M.J., 2008, Making Sustainability Work, Page 171).
After defining a suitable sustainability strategy companies have to implement their individual evaluation system before starting their sustainability actions. Absolutely necessary to control the development and outcomes of sustainability actions is to determine a status quo in the field which should be improved by the action. Epstein gives an example of evaluating the effectiveness of a modified waste treatment management (production and recycling) by measuring "environmental and financial impacts" (Epstein, M.J., 2008, Making Sustainability Work, Page 171) and comparing these figures to the waste treatment before. This shows that every single sustainability action needs autonomous control processes and reference numbers. But they should have at least "leading and lagging indicators" (Epstein, M.J., 2008, Making Sustainability Work, Page 171) which makes it easier to figure out a trend by comparing expected figures to actual and old figures.
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Some important fields which should be considered to help measuring the global sustainability performance of a company are mentioned in the following:
Volume of hazardous waste
Volume and cost of energy use
Frequency of Audits
Number and type of human rights and labor violations
Rate of defective products
etc. (Epstein, M.J., 2008, Making Sustainability Work, Page 173)
Beside an improvement of process and product efficiency as a reward from a working sustainability strategy which means cost effectiveness and higher revenues it is also an obvious boost for the company's reputation. Stakeholders, including customers, suppliers and employees, are attracted by high sustainability performance which means long-term shareholder value and stability. This can be seen as a reason for confirmation or expansion of the market share and as a strategic advantage in the tough competition of the market.
Q2: The sustainability process in a company begins with the development of a sustainability strategy. Epstein identifies three different stages of sustainability strategies.
Explain the different stages and identify internal and external factors?
Managing regulatory compliance: Depending on local governments companies have to stay inside environmental and social laws if they want to prevent destroying their reputation and very expensive court proceedings. So in this stage enterprises put their efforts in founding a "corporate environmental policy statement" (Epstein, M.J., 2008, Making Sustainability Work, Page 65) and implementing a framework inside the company to manage environmental and social issues.
Achieving competitive advantage: Companies in this stage realize that running a successful sustainability system offers them strategic advantages in the market (see above, A1) and increasing cost effectiveness of products and processes during production and life cycle.
Completing social, economic, and environmental integration: Corporate strategies and actions inside of step 3- organizations are in line with sustainability issues. There is a strong sustainable awareness within the company and social, economical and environmental efforts are fully merged into every-day business.
Internal and external factors combined are the inputs for a corporate sustainability strategy. Those are the follows:
Internal factors: "Corporate culture, Competitive positioning, Sustainability performance"
External factors: "Regulations, Market factors, Geographic factors"
(Epstein, M.J., 2008, Making Sustainability Work, Page 69)
Why is the sustainable strategy important?
It is important for a company to found a clearly defined and systematic sustainable strategy to ensure that all yields are earned. Especially organizations which act in step 3 (see above, A2a)) need to focus on their long-term sustainable goals and the way to reach them in order to bring those ideas closer to all employees and stakeholders and to implement sustainable issues in corporate processes. It increases the acceptance for the new program.
Always on Time
Marked to Standard
Furthermore a well defined sustainable strategy makes it possible to measure and evaluate sustainable actions as mentioned in A1. It helps making the sustainable performance more objective and gives the company the ability to be active instead of reactive.
What role do the CEO and the Board play in this process?
Implementing a sustainable strategy in a company often means big changes in every-day business and sometimes new investions. So first of all the CEO and the Board have to support those ideas and visions because they are responsible for the company's profile, strategy and values which includes controlling and managing the company's resources and defining the goals. It is absolutely impossible to launch a running sustainable system within the whole company without legitimation of the highest management level which can be seen as the highest executive decision maker.
Moreover they represent the culture of the organization in a dialogue with employees and stakeholders. Consequently a full support and engagement of the Board and the CEO is necessary for a sustainable profile of the organization.
What is the role of the corporate mission statement?
According to A2c) the corporate mission statement is a formal verbalization of the company's top management visions and goals for the near future often highlighted on the company's website or in the beginning of annual and sustainable reports and connected to characteristic slogans to describe the culture of the organization and its strategy. Epstein gives an example: If sustainability issues are mentioned and emphasized in this statement, the company shows that a corporate sustainability is deep-rooted in the company's strategy. (Epstein, M.J., 2008, Making Sustainability Work, Page 71)
Q3: What is the purpose and use of the balanced scorecard?
The balanced scorecard is an effective controlling tool to combine performance measurement with the company's strategy and visions. Traditional balanced scorecards consist of four characteristic subject areas. Those are the follows:
Financial perspective: "focuses on the shareholders' interests and shows the link between strategic objectives and financial impacts"
Customer perspective: "focuses on measures that reflect how the company is creating customer value through its strategy and actions"
Internal business processes perspective: "contains measures that indicate how well a company performs on key internal dimensions"
Learning and growth perspective: "stresses measures of how well the company is preparing to meet the challenges of the future through leveraging its organizational and human assets"
(Epstein, M.J., 2008, Making Sustainability Work, Page 137)
It is possible to integrate sustainability issues in these subject areas (typically one or two in each field) or define a fifth category which focuses on social and environmental impacts. It depends on the company's strategy and the corporate importance of sustainability issues.
The use of balanced scorecard is different. On the one hand there are scorecards relevant for the whole company, so called "corporate-level scorecards" (Epstein, M.J., 2008, Making Sustainability Work, Page 139) and on the other hand there are specific scorecards for single SBUs (=strategic business units) which contain the tasks and goals for the proper business area of this SBU. But even updated scorecards including social and environmental impacts should go hand in hand with the corporate strategy because there is no room for controversies.
Successful balanced scorecards highlight all the important business sectors and claim objective figures to measure performance in the proper field at the same time. This tool is often used in a dialogue with all kind of stakeholders to show the company's action fields, strategy and to confirm that all those performances are counted, measured and monitored.
Q4: Define the concept of use value and non-use value and how they can be measured!
The concept of use value and non-use value is a way to classify the intentions of environmental and social efforts including market and nonmarket impacts. The method is based on stakeholder's value-definition and customer's consuming behavior which reflects the importance and priority of single values.
In this case values are properties of goods and services. We have to distinguish between use value, defined as "the economic value associated with human use of a resource" (Epstein, M.J., 2008, Making Sustainability Work, Page 146) and non-use value, which can be any kind of values not corresponding to "human uses of natural resources".
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Going more into detail the term "use value" is an umbrella term for the two categories "consumptive value" and "nonconsumptive value". The difference between those subcategories is that "consumptive value" refers to the act of consumption nonrenewable, limited resources such as water in a specific river, which is measurable, and "nonconsumptive value" refers to interventions into the environment without touching a limited amount of a resource, e.g. "bird watching or photographing" (Epstein, M.J., 2008, Making Sustainability Work, Page 146).
Analogous to "use value" the term of "non-use value" has also two subcategories. "Option value" describes a long-term plan to protect a particular resource with the aim to use it anytime in the future, maybe. It is an indicator for unsureness and shows the approach to future risk management. In contrast to that a high "existence value" is the consequence of a high environmental responsibility and the wish to keep some resources for the future and the next generations without planning to consume these resources at the moment or in the near future. It is a selfless ideal to save something because "it has a right to exist and should be protected". (Epstein, M.J., 2008, Making Sustainability Work, Page 146)
As a result of this, the total value of a resource is defined as:
"Total value = use value + option value + existence value"
(Epstein, M.J., 2008, Making Sustainability Work, Page 146)
To measure these values and make them accountable it is common to estimate following parameters:
WTP (Willingness to pay):
What is the maximal price a customer agrees to pay for social or environmental enhancement?
WTA (Willingness to accept):
What are the minimal compensation claims from a customer in case of disadvantages "in the environment, the society, or in ethical values or practices" (Epstein, M.J., 2008, Making Sustainability Work, Page 147) caused by a new development.
How big is the difference between the actual price of a good or a service and how much is the price, a customer agree to pay for it? A consumer surplus occurs if customers are attached with a profit from a product, Epstein mentions the example of "a reduction of pollution in the environment" Epstein, M.J., 2008, Making Sustainability Work, Page 146), and are willing to pay more than the actual price.