Value creation redefined: Using products and supply chains to generate more than just profit
This article was published in “Verantwortung Zukunft” in 2014. It was translated by shared.value.chain.
By Dr. René Schmidpeter and Michael D‘heur
Sustainable value creation as maxim of action holds great potential for companies to support the creation of economic, ecological and societal value. The key to use this potential lies in the core business. For this, it is vital to reconsider and to reorganise products and supply chains in particular.
The topics of sustainability and corporate social responsibility (CSR) are well established in our economy as well as in public dialogue. Especially in the aftermath of the financial crisis of 2008, the increased awareness that arose from changed circumstances with which companies have to deal in the global market, has become visible.
Most economic activity now is globalised and highly interdependent. Business actions, client relations and respectively supplier relationships have changed profoundly. Complex production or manufacture networks prevail to be operational reality. Here external engineers and product developers, suppliers of multiple tiers, logistics providers, trade partners as well as the company’s own staff have to be coordinated through complex agreements. While companies used to be in control of their own value creation in the past, now even mid-size companies have to manage global supply networks. In this setting, all companies have to adapt themselves to the competitive constraints, to new technologies and to changing consumer requirements.
At the same time, both the number and the impact of – often manmade – crises increase: growing shortage of resources, scandals concerning the suppliers’ working conditions, severe natural disasters, as well as global financial or currency crises. The transparency of entrepreneurial activity and the expectations of the stakeholders (clients, staff, non-governmental organisations [NGOs], etc.) on companies increases. It becomes clear that the immense ecological and societal challenges and new possibilities resulting from innovative technologies and economic specialisation require a new integrative management approach. However, accepting the responsibility (CSR) and sustainability had been a purely defensive concept for too long and has therefore been discussed as a mere cost factor in practice. The entrepreneurial perspective on social and ecological aspects and the associated entrepreneurial chances were regularly underexposed.
It may be common knowledge that there is an interdependence of economy, environment, and society, but most of the companies still position themselves towards the mere satisfaction of monetary aims. People in charge of supply chain only rarely conceive sustainability as an aim. The CSR departments often lack understanding the business connections respectively of understanding the required organisational powers to work towards necessary changes. When it comes to implementing and communicating facts, many approaches are reduced to vague statements like “we already do more than the legislator demands us to do” and to professionally edited reports. Only being “less harmful”, however, does not create sustainable values for company, environment, and society. Companies can generate more than just profit when they understand sustainability in the core business (i.e. in products and value chains) as a chance and take that chance.
From a conviction to the implementation
Since the beginnings of economic activities, value creation has been a crucial topic for companies. They are in a way designed for efficient organisation of value chains. CSR or sustainability should draw on where it has the best effects: in the company’s “DNA”, i.e. in the core processes of entrepreneurial value creation. “Core business” means those divisions of entrepreneurial value creation that are responsible for a company’s turnover and profit creations. It embraces products, services, and the value chains through which resources are purchased, and products manufactured and later delivered to the clients. The term “supply chain” is still often used here.
Implementing sustainability into a company’s core business means to design all aspects of products and value chains so that economic, ecological, and societal value is created. Against this backdrop, value chains have to be reconsidered and reorganised.
The implementation of sustainable and profitable value creation for all people involved has to be designed actively within the entire company and in cooperation with the relevant stakeholders. This calls for active management, a clear aim, and periodical controls of the progress achieved in strategy, product development, purchase, production, and distribution logistics. This brings about complex challenges for the companies, one of which is to clearly define the aim: “What values does our company want to create? Who is going to benefit of our business activities and in what way?” To acknowledge sustainability as a chance for the company primarily is an executive function. Long-term company alignments can be helpful here. No wonder that many examples for successful implementation of sustainability into a company’s core business can be found in the small and medium-sized business sector. Especially family businesses are often guided by concepts that serve for the construction of future-oriented economic and value systems.
Value creation strategy as operating mechanism
Active dialogue with stakeholders and clear and transparent internal and external communication is essential for cooperating with other organisations. The value creation strategy and the communications strategy therefore have to be geared to each other. Value creation emerges from the interface between companies and their stakeholders. Therefore, it is essential that all parties involved share the same understanding of shared value creation.
Companies that aim at sustainable success integrate all economic, ecological, and societal dimensions into acting. A sustainable value creation strategy rarely is created at the green table. Even with sheer new product concepts like Fairphone, various entrenched ways of thinking have to be overcome and sceptics to be persuaded; if not within the company itself, then regarding clients and suppliers. To implement shared value into organisations it is important to know that it is a multi-step process that requires patience, a clear aim, and commitment. This can only work out when it is implemented into the company’s ‘DNA’, i.e. into product area, operations area, and communications.
Product development as starting point
Product concepts that are based on sustainability over their entire life cycle are not only ecologically and societally fit for the future but are also economically reasonable. Companies that want to embed sustainability into the core business cannot do otherwise but start at product development. This is because at the beginning of a product life cycle important courses are set.
But what is it that characterises sustainable products? A catchword here is cradle-to-cradle. This concept describes a form of cyclical resource utilisation. At the end of a life cycle, one should be able to decompound the product into its basic materials for it to re-enter biological or technical cycles as new raw materials or components. This principle, which was inspired by nature, means that materials should not only be ‘down cycled’ (i.e. it is thrown away in the end) but should be reused indefinitely. For product development, this means that products must be designed so that they can be produced out of recycled raw materials and that they themselves can be recycled after utilisation. This way, neither cost nor environmental pollution of primary raw material production arises. This is a huge goal and cannot be achieved for every product group, but the principle guides the right way.
If an existing product portfolio shall be changed sustainably, it is best to start with an evaluation of the situation. The following questions help:
- What environmental effects do particular products have during their entire life cycle?
- Where do positive and negative effects arise, and how can they be intensified or diminished?
- Is it thinkable to change from finite resources to renewable resources?
- What product components can be either fully or partly recycled into biological or technical cycles?
- Can specific production forms and methods create societal added value?
Design concepts that integrate sustainability and aspects of value creation can also help to reduce operative costs. Design does not only mean a product’s style but also refers to the choice of components, decisions on suppliers, and production site. At the beginning of a product’s life cycle, huge parts of a product’s economic, ecological and social impacts are set by that. Implementing sustainability into product development is therefore an important first step to take.
Cross-company supply chain
It is necessary to increasingly cooperate with suppliers and consumers in the field of sustainability for the entire value chain to be economically, ecologically, and societally successful. This is because companies influence not only their own value creation processes but also those within the supply chain. This becomes even more important now that not only companies globally compete with each other but also entire value chains compete directly. It is not sufficient to manage a competitive company that, unfortunately, has been positioned in the “wrong” – i.e. not sustainable – value chain. Collaborations with other organisations in order to create sustainable value chains turn into a competitive factor for economic sectors (e.g. automotive industry, energy sector, IT, and communications technology).
Similar to product development, the impacts of the supply chain on economy, ecology, and society have to be evaluated at every touch point between supply chains and clients, stakeholders, the environment, and society. At this point, the so-called externalities play an important role. These costs cover all services and performances a company uses in the context of its activities but does not include in its accounting, e.g. costs for the usage of environmental performance, the societal environment and impacts on the communities. The companies Puma and Unilever exemplify this, because they both accept their responsibilities for the entire supply chain and actively incorporate all partners involved in value creation. Usually, more than 50 percent of the company’s cost base can be found in the supply chain. Therefore, future decisions on supply chain related issues will certainly consider the needs of all partners and all costs will be internalised.
Sustainable value creation makes sense
Companies’ motives to implement sustainability in the core business, i.e. in products and value chain, are as diverse as the economic, ecological, and societal value that can be created. There is a long list of advantages shared value creation has to offer, some of which will be named as follows:
- Improving a company‘s reputation.
- Differentiation of competition: an innovation culture and the chance to break new ground help the company to realise market potential earlier. Furthermore, increases in turnover can be expected due to customers being willing to pay higher prices for sustainable products.
- By collecting and recycling products procurement costs, energy costs, and environmental costs can be reduced and important raw materials for production can be reclaimed.
- Reducing operative cost in the supply chain.
- Avoiding scandals in the supply chain.
- Risks and costs arising from supply shortages, production delays, and client supplies are reduced by building strategic partnerships.
- Improved possibilities of capital procurement through new investment opportunities (investors and government programmes).
Furthermore, sustainable shared value creation provides the basis for ecological and societal innovations.
The transition from an industrial society to an information society increased the meaning of competition of social and technological innovations. Social innovations find new solutions for societal problems. They open new markets that break existing growth limits or respectively the missing scalability of pure redistribution approaches. The competition for future business models therefore lead to even more social innovations. Thus, the depicted societal progresses not only lead to market distortions and rising societal pressure, but also enable new competitive solutions. Due to increasing shortage of resources and societal pressure the existing business models become more and more uneconomical and the competition on new entrepreneurial solutions increases. At the same time, the financial crisis and the economic pressure with its still sinking transaction costs reduce the chances for governmental solutions or respectively for pure philanthropic solution approaches. The importance of entrepreneurship, competition, and ownership does not decrease but increases in situations like these. The current crisis creates new economic chances when supply chains and the strategic positioning of the core business are consequently positioned towards sustainability.
Companies that only work to maximise their profits without taking into account the possible ecological and societal consequences are fundamentally non-sustainable – and are no longer compatible. Especially visionaries are stipulated at the companies’ management levels to widely encourage the required alterations in the direction of sustainable value creation. But for the implementation, they need new economic knowledge. Companies can organise value creation only as well as they their tools and management concepts for it. NGOs and politics may hint at challenges and co-create societal circumstances, but it still is with the companies to organise the necessary value creation.