Impact of Climate Change on Business Strategy and Its Implications for Performance Measurement - Essay Example

IMPACT OF CLIMATE CHANGE ON BUSINESS STRATEGY AND ITS IMPLICATIONS FOR PERFORMANCE MEASUREMENT Student’s Name Course Tutor Date Impact of climate change on business strategy and its implications for performance measurement Introduction For a number of decades now, people have been witnessing changes in climate resulting from ocean and land temperatures, rising sea level, and the levels of snow and ice reducing. These climatic changes have a direct linkage to the activities of man and their effects include changes in the supply of water, ecosystem and extreme events resulting in occasional destruction to buildings, infrastructure, livelihoods and human health. (Wade and Recardo 2001 p. 37) both show that the business people are aware of the effects that climate change has on their activities. As a result many business people are voluntarily trying to cut down their emissions of green house gases. Many of them are considering the impacts of changing climate such as potential federal and state regulations, perceptions of share holders, and changes in supplier and consumer markets for instance current and future costs of business operation. However only a few businesses incorporate the opportunities and risks associated with climate change in planning those businesses (Wade and Recardo 2001 p. 40). The challenge of climate change becomes complex because of the uncertain and diverse projections of the changes in extreme events, temperature, precipitation patterns and patterns of precipitation. This article outlines the impact of climate change on business strategy and the implications it has on measurement of performance. Risks and opportunities Hoffman, (2002 p. 14) observes that the impacts of climate change are many and they affect the strategy of various businesses in different ways. Many businesses are faced with both opportunities and risks coming from change in climate. Risks are those occurrences that threaten the survival of the business while opportunities are new avenues for growth and expansion. Risks can disrupt or impede the activities of a business but opportunities offer chances of furthering the business course. In certain places for example, the construction industry can have its activities in construction sites disrupted as well as the transportation of materials because of extreme events and the damage done on the infrastructure used for transport. High temperatures can reduce the time used by workers to do their tasks like roofing. On the other hand change in climate may bring about opportunities when work stoppages resulting from frost are reduced and therefore the period of time for working within a year is extended. Adaptation can also create new markets for products like materials for climate proofing and building designs or cause market shifts by making materials sourced locally more attractive so as to reduce the distance of travelling (Hoffman 2005 p. 30). Examples similar to these can be found for several other businesses. This is an indication that when climate change takes place business may turn into losers or winners prompting the change of strategy for the losers. For the agricultural sector the change occurring in the patterns of precipitation and temperature can change the viability of crops in various locations. This will ultimately create the incentive for developing new strains of crops and adoption of techniques of farming that suit the new climatic conditions (Hoffman 2004 p. 44). A mixed picture can also be seen in tourism where there are opportunities for tourism in winter with a decline in some ecosystem uses but in some cases getting replacement from extended spring and recreation opportunities for summer. There are risks that occur in the insurance industry as well caused by the physical impacts of changing climate. Among them are increased claim volumes and a lower underwriting reliability because of losses in the past. However there also exists opportunities for the industry to develop and sell new products, help businesses and home owners to cut down losses through the right actions and taking proactive positions to enhance the reputation of the business. The high temperature that comes with climate change can also present risks for laboratory processes that deal in biotechnology and production of chemicals. Climate change however has opportunities for such industries because they need to deliver new products for health, agriculture and many other sectors in response to changing climate (Hoffman 2006 p. 22). Sustainability, Climate change and business strategy Sustainability in businesses is a very defining and powerful area. A sustainable organization is that which makes profit for the shareholders and at the same time protects the environment and improves the lives of the people it interacts with. The business operates in a manner that its interests, those of the society and the environment intersect. A business that is sustainable has a better chance of succeeding in the future than in the present day. It can then remain successful for several years or even generations (Cokins 2003 p. 10). Sustainability therefore gives back to the business what has been invested into the society and the environment. In the present situation of climate change businesses are supposed to look for ways in which they can be solutions to the social and environmental problems facing the world. When this happens businesses become part and parcel of the activities that cause development and the health of the society and the environment. The best companies are searching for ways through which they can turn this huge responsibility into an opportunity. When the interests of the society and those of businesses overlap victory is realized for both. The society is an important component whose interest must be safeguard. This is so because the society comprises the clients of any business and these are important because without them the business does not need to exist (Simons 1999 p. 76). The pressing desire for a society that is sustainable has forced businesses to start considering their impact on the environment and the world communities through their business related activities. To add to this, businesses have discovered that the sustainability issues present new opportunities for other new services and products. The pressing need for a sustainable society is forcing businesses to consider the impact they have on the environment and communities through their business activities. In addition, businesses are recognising that these issues also offer opportunities for new products and services (Neely 2002 p. 88). Climate change in the business world represents a market shift that is so impeding in the sense that it alters the available markets and creates other new ones. It is similar to those shifts that have been witnessed in the past when the needs of the consumer changed or there was advancement in technology and certain companies went down while those rising occupied their place. During the 1980s the typewriter industry was eliminated by the computer, phonograph records took the place of compact discs and the death of the Bell system caused structural changes within telecommunications. New environments with a lot of competition present opportunities and risks as well as losers and winners. Simons (1999 p. 78) notes that the shift in the market creates new demand and supply for technologies dealing in the reduction of emissions, new financial instruments for trading in emissions, new mechanisms for the transfer of technology globally and renewed pressure to retire the long time green house gas producers. The shift has an impact on all the companies to different degrees. All these companies have a fiduciary and managerial obligation of assessing the exposure of their businesses and making a decision on whether it is wise to take action. As the climate change market shift approaches it becomes harder to make an argument against action. Many businesses prefer to act now since in the future the world is carbon strained. Companies that have this perspective in mind have already started their green house reduction strategies. As the market shift approaches resistance against action is turning out to be an extremely risky strategy (Hoffman, 2004, p. 55). In the business world of today many companies have the experience of working with issues of climate change. Climate change as shown above is a source of so many risks to different types of businesses. When businesses are challenged because of change in climate many of their activities are affected and this may necessitate a change in strategy for them to continue with successful business operations (Hoffman, A., 2001, p. 09). Risks caused by change in climate may require the company to adapt to the new environment or change its mode of operation and ways of doing things. At the moment many companies are shifting their climate related strategy from that which is based on bottom line protection and managing of risks to that which puts emphasis on top line enhancements and business opportunity. Although all of these initiatives may not be caused by change in climate, there happens to be a market shift for the enhancement of the initiative’s value proposition. Goldman Sachs suggests two ways related to climate through which value can be added to the portfolio of a company. They are; protection of reputation, enhancement of a competitive position and the development of new products (Semans & Juliani 2006 p. 45) A good example of a business being impacted by climate change and the integration of new strategies can be seen in oil companies. Shell Group has found out that its operations and products are heavily affected by the controversy of climate change. The company cannot afford to ignore this issue. In the year the operations of Shell produced carbon dioxide weighing 105 million metric tons. The combustion of the fuels it produced generated another 763 million metric tones. Together these emissions make up 3.6% of carbon dioxide emissions produced globally form the combustion of fossil fuels. A major source of green house gas emissions is the refining operations and exploration. Shell has changed its strategy. It is trying to stop the practise of flaring by capturing the gas to be bumped back to underground for well production and directing it to facilities nearby to be used in producing power. When economic conditions are suitable methane could be made into liquid gas which is an important growth area. The efforts of Shell to step up its production of natural gas are justified because in the future the businesses of the world will face high prices for carbon. The investments made in solar, wind, coal gasification and bio-fuel are also justified (Cogan 2006, p. 29). Certain companies decide to direct their attention on changes in technology. For example DuPond has found very promising markets for growth where it can make use of feed stocks and biomass. These could be useful in the creation of new bio-materials like chemicals, fuels and polymers, bio medical materials and applied bio-surfaces. The strategy of the company aims at having 25% of its total revenue coming from these resources that are non-depletable (Hoffman, 2006 p. 56). Swiss Re the insurance underwriter is also searching for ways through which it can augment the existing activities of climate change and to create new opportunities for business. Insurance happens to be an industry that suffers most from climate change effects since it is involved in underwriting property loss and natural catastrophes (Margolick and Russell, 2001, p. 94). Climate change has direct effects on the core business of Swiss Re. Because of this the company is in the course of integrating all of its related concerns in its activities of underwriting. The company is channelling significant investments into certain impacted sectors among them alternative energy, waste management and water or recycling. Another corporation that has experience is Alcoa. It believes that the climate policies of the future will bring about market opportunities for them through the expansion of the recycling of aluminium. Since the company knows that aluminium made from recycled materials needs only 5 percent of all the energy required to make primary aluminium and that the prices of aluminium are poised to continue rising, the company pledges that by the year 2020 50% of all its products will come from aluminium that has been recycled. According to Alcoa, increased recycling is one of its important long term strategic opportunities. The company also expects a boost in aluminium demand as the material for making light weight vehicles. The current data held by Alcoa indicates that a 10% reduction in the weight of the vehicle results in a 7% reduction in green house gas emissions (Neely 1996 p. 12). Business performance measurement Performance measurement in business deals with the measuring of the effectiveness and efficiency of actions, standardizing and aggregating information and the setting of appropriate targets (Simons 1999 p. 23). Developing performance measures is important in the formulation and clarification of strategies and plans and putting in place targets for project teams, business units and employees. Performance measures need to be part of an elaborate and consistent system of performance measurement which links measures for various business units, top management, lower and middle management and at times employees and individual projects. The most common framework for performance measurement is the Balance score card by Kaplan and Norton. A performance system that is well balanced helps to develop, to discuss and to formulate the strategy of the company. It also aids in the communication of that strategy in the whole organization. It defines objectives and specifies targets for the business units, employees and project teams. It helps in the motivating and monitoring managers and employees and guides their actions. It keeps the managers, share holders and employees informed about the effectiveness and the efficiency of the strategies and actions used in the past and the possibility of succeeding in the future (Neely 2002 p. 100). In the case of climate change and its impact on business strategy, performance measures will be important in formulating as well as clarifying the change in strategy that may result due to the impact of climate change. The strategy cannot successfully be altered and changed in cases of climate change without comprehensive application of the performance measures. Conclusion This article has examined sustainability in business and the impact of climate change on business strategy and the implications it has for performance measurement. Sustainability is an important aspect that should keep a business in operation. Sustainable businesses take care of the interest of the society, the environment as well as those of the business. Sustainable businesses ensure that the causes of climate change such as green house gases are kept at very low production. Climate change is becoming an important topic in business circles because of its impact on those businesses. Businesses are forced to employ new strategies that can fit the changing climatic conditions. A few examples have been given in this paper of companies that are already changing their strategies because of climate change. Among them is Shell and Alcoa which are ahead of the others in strategizing in response to the challenges of climate change. Issues of climate change and sustainability present both negative and positive impacts on a business. As much as they present challenges, they may also present opportunities that a company needs to grab and grow. Strategy also needs performance measurement for it to be successful. A performance system that is well balanced is important in discussing, formulating and developing the strategy of any company. If a change in strategy will help a company it has to be executed hand in hand with the measures of performance. Bibliography Cogan, D., 2006. Corporate Governance and Climate Change: Making the Connection. Ceres Inc., Boston, MA Hoffman, A., 2001. From Heresy to Dogma: An Institutional History of Corporate Environmentalism. Stanford University Press, Stanford, CA  Hoffman, A., 2002. ‘Examining the Rhetoric: The Strategic Implications of Climate Change Policy’ Corporate Environmental Strategy, 9(4):329–337. Hoffman, A. 2004. Winning the greenhouse gas game" Harvard Business Review, April: 20-21. Hoffman, A., 2005. ‘Climate Change Strategy: The Business Logic Behind Voluntary Greenhouse Gas Reductions’. California Management Review, 47(3):21–46. Hoffman, A., 2005. ‘The “Carbon Cartel” or Wise Capitalists: What is Going on with Voluntary Greenhouse Gas Reductions?’ American Bar Association Air Quality Newsletter, 9(1) (November):3–7. Hoffman, A., 2006. Getting Ahead of the Curve: Corporate Strategies that Address Climate Change. Pew Center on Global Climate Change, Arlington, VA Margolick, M. and Russell, D., 2001 Corporate Greenhouse Gas Reduction Targets, Pew Center on Global Climate Change, Arlington, VA Semans, T. and Juliani, T., 2006. ‘Succeeding in a Carbon-Constrained World’, Corporate Strategy Today, July, pp.21–37  Neely, A. D., Mills, J. F., Gregory, M. J., Richards, A. H., Platts, K. W., & Bourne, M.C.S., (1996), Getting the measure of your business, Findlay, London. Neely, A. (ed.) (2002) "Business Performance Measurement – Theory and Practice", Cambridge University Press, Cambridge. Simons, R. (1999) "Performance Measurement and Control Systems for Implementing Strategy", Prentice Hall, Upper Saddle River, NJ Wade, David and Ronald Recardo, Corporate Performance Management, Butterworth-Heinemann, 2001 Cokins, G. (2003) Performance Management: Integrating Strategy Execution, Methodologies, Risk, and Analytics Read More