Business Value and Sustainability: An Integrated Supply Network Perspective
Sustainability is garnering ever-greater levels of public attention. Issues of ecological and social sustainability are high on the legislative agendas of several governments, and media coverage of the topic has proliferated over the last decade. After two decades of fraught climate talks, during the 2015 Paris Climate Conference over 190 nations reached an agreement signalling a shift from fossil fuels to renewable energy sources. This agreement will hold governments accountable for their greenhouse gas emissions targets. Therefore, the implications of sustainability issues for business are particularly important in an era of globalization (Lee 2014). Business sustainability requires a managerial approach in order to integrate environmental, social and economic sustainability into core business activities and the value chain. In particular, the way corporations manage their value chains and supply networks has changed dramatically during the past decade. Today, organizations adopt a broader perspective in relation to their core strategies and approaches to economic, environmental and social sustainability issues in their supply networks. Increasingly, many corporations are seeking out the business cases for sustainability in their supply chains, enhancing business value through these supply chains, investigating the expectations of stakeholders, the risks their business partners face and the opportunities these partners can gain. It is important to understand the external landscape of ‘business sustainability and the supply network’ from the perspective of high sustainability demands and regulatory pressure, in order to become competitive in a globalized business environment. Despite many anecdotal cases detailing businesses’ sustainability and supply networks, several fundamental questions remain unanswered. Will the issues of sustainability change the competitive landscape and reshape corporate value chains and supply networks? If so, how? What are the impacts on the corporate bottom line of efforts to improve sustainability?
Many companies have already adopted corporate sustainability practices to improve the social and environmental performances of their businesses, yet these efforts are not easily diffused in corporate value chains or in supply networks. For example, Apple, a leading electronic company, is well known for orchestrating the supply chain network, but in regard to its production of the iPhone series, Apple has gained a bad reputation and adverse publicity due to Foxconn, one of the key suppliers’ poor working conditions in its factories in China.1 The Swedish fashion retailer, Hennes & Mauritz (H&M) suffered reputational damage due to its suppliers using Uzbekistan as an importer of cotton. Since Uzbekistan is known for its abuse of child and forced labour, bad working conditions and low wages, in 2012 the anti-slavery international cotton campaign accused H&M of violating human rights, informing the public that there is no certainty that their products are free from state-sponsored forced labour.2
Box 1.1. Corporate Vale Chain Versus Corporate Supply Network
A corporate value chain is the sequential chain of a firm’s main activities. Porter’s (1985) generic value chain distinguishes between primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and support activities (infrastructure, human resource management, technology development, and procurement). The corporate value chain helps firms to identify the relative importance of each activity, and to identify which activities should be undertaken by the firm, or which activities should be outsourced. Typical benefits of value chain include:
- Improved productivity
- Improved quality
- Improved profitability
- Cost savings
In a traditional corporate supply chain, a supply chain is defined as a set of three or more entities (organizations or individuals) directly involved in the upstream and downstream flows of products, services, finances, and/or information from a supplier to a customer (Mentzer et al. 2001, p. 4). Supply chain management focuses mainly on the upstream and downstream relationships with suppliers and customers, delivering superior customer value at least cost. In a globalized marketplace, corporations work closely with multiple suppliers and multiple customers in a broad system. In this book, we call this the ‘supply network’.
In a corporate supply network, connected and interdependent business organizations work collaboratively to manage the flow of goods, services and information from suppliers to end users. Several key benefits of supply network include:
- Secured supply
- Improved logistics and distribution infrastructure
- Improved communications with suppliers
- Improved procurement to increase quality and yield
- Improved profitability
When organizations expand their business scope to include global operations, supply network management becomes an increasingly critical function in achieving corporate sustainability. The internationalization of the supply network brings into play a more complex system, one which is necessary in order to control the managerial challenges created. It also brings companies the greater risk of being associated with poor sustainability-related management practices. Although many organizations have improved their sustainability performance significantly, most efforts and success stories were organization-centric based essentially on internal initiatives. Most of these successful organizations have not considered their partners and other stakeholders in the value chain and supply network.
Given their power and centrality to the global economy, large multinational corporations (MNCs) are pressured to adopt global sustainability practices and policies. As David Korten (2001) argued in his book, When Corporations Rule the World, the prosperity of large companies and multinational enterprises is coming from the benefits of globalization. In today’s business environment, globalization seems to be a core element of corporate competitiveness, and all opportunities and threats from globalization must be considered. Worldwide challenges to sustainability, such as climate change, pollution, human rights, child labour, and health and safety issues, now face corporate executives and decision makers on a daily basis (McKinsey & Company 2010; GlobeScan and Sustainability 2015). The issue of why companies should ‘do more’ about their environmental and social sustainability and the impact of their activities on their stakeholders is no longer up for discussion. These issues have become central in the creation of business value and the management of both multinational and local organizations. The challenge inherent in the integration of corporate economic, environmental, and social performance (corporate sustainability) into management decisions at both corporate level and supply network level has shifted from the question of ‘why’ to the question of ‘how’.
The value chains and supply networks of large corporations have many business partners and suppliers, all vying for greater market success and higher financial gain. When it comes to implementing sustainability strategies beyond the corporate value chain, larger challenges loom (Carter and Easton 2011; Lee and Wu 2014). For example, according to the Carbon Risks and Opportunities in the S&P 500 report (Trucost 2009), more than 80% of companies face carbon risks resulting from emissions in their supply chain. Within companies which have successfully implemented corporate sustainability management, top executives and CEOs are the main drivers. Corporate leaders and top management teams are, however, often challenged by how best to manage their performance sustainably (i.e. simultaneously improving social, environmental, and financial performance) with their business partners and suppliers beyond their supply chains. It is often difficult to align directions, strategies, structures, and systems to effectively implement sustainable solutions beyond the supply chains. It is also often difficult for companies to share resources and capabilities in order to successfully manage the diverse sustainability challenges with their suppliers and other business partners.
The challenges in understanding how businesses can contribute to the solutions remain huge. As many studies point out (Pagell and Shevchenko 2014; Bansal and Desjardine 2014), corporations seem to focus on short-term based, ‘low-hanging fruits’ without making any innovative changes or long-term commitments to sustainable business practices. That is, most corporate managers look for short-term financial benefits to justify sustainable business practices. Since environmental and social sustainability practices require short-term efficiencies in the hope of bringing prosperity in the long-term, it is important to consider corporate relationships within their broader natural and social environments. Not only are businesses often large and complex social organizations in their own right, they are also often embedded in supply structures that cover the globe. In the 1980s and 1990s, a plethora of definitions and frameworks relating to sustainability were developed. In particular, the notion of sustainable development,3 defined in the Brundtland Report by the World Commission on Environment and Development (1987), gained prominence and popularity. In response to the fast growing interest in corporate sustainability, the Dow Jones Sustainability Index (DJSI) explicitly refers to corporate sustainability as ‘embracing opportunities and managing risks deriving from economic, environmental and social development’.4 In differing contexts, organizations’ sustainability-related risks include such hazards as financial risks, carbon risks, safety risks, reputational risks, organizational risks and supply chain risks. In this book, chapters relating to environmental management and social management will provide examples of different types and levels of risks which need to be managed in order to provide sustainability in the context of supply networks. Leaders in corporate sustainability harness the market’s potential for environmentally sustainable products and services, while at the same time successfully reducing and avoiding the associated costs and risks. For example, companies will seek to ensure that their products and services carry a minimum level of health and safety risks; their supply chains are fully aware that ethical sourcing and appropriate labour conditions are in use; and operational practices are transparently focused on the least possible environmental risk (for example, the third party assurance, NGO partnerships). These companies are likely to have in place good quality management system, sound investment strategies, and strong supply network partnerships (Beske and Seuring 2014; Khalid et al. 2015). Their motivation is not simply altruistic concern for social and environmental sustainability; rather it is the desire to achieve higher performance at the lowest risk possible. Using the ten universally accepted principles of human rights, labour, environment, and anti-corruption, the Un...