Implications of Sustainability for Current Business Models - Literature review Example

Running Head: SUSTAINABILITY AND CONSUMERS Sustainability and Consumers: Considerations that Consumer Industries should Explore to Develop a Sustainable Business Strategy Introduction According to a report by the World Economic Forum (2009), consumers are more often than not at a loss about the whole question of sustainability in business (p. 4). In most cases, many consumers regard sustainability in business as a key component only during times when factors such as money, convenience and availability are lacking. This essay is based on the general relationship between sustainability in business and the general consumer industry. In the essay, the general question of what considerations consumer industries should explore to develop sustainable business practices is explored. In order for this question to be appropriately answered, the essay is divided into four different sections, each of them containing different information as follows. The first section is concerned with the relevance of sustainability for business organisations. Several factors which make it necessary for business organisations to adopt sustainability are explored. This is done with reference to academic literature and theoretical developments in the issue of the business case for sustainability. In essence, the business case for sustainability is driven by several factors. These include the need to increase sales, reduce risks and achieve long-term strategic goals. In the second section, implications of sustainability on current business models are examined. This is done in relation to how sustainability affects different elements of current models used by manufacturing organisations such as value propositions, business infrastructure, customer relationships and supply chain management. Also, the effect of sustainability on these elements is presented in terms of the extent to which business organisations may be required to make changes in order to meet the requirements of operating sustainably. These changes vary from simple improvements on existing business models to development of completely new models of doing business. In the third section, the relationship between sustainable business strategies and long-term profitability and survival of business organisations is examined. The primary question addressed is whether there is need for business organisations to develop sustainable business practices as a way of guaranteeing their profitability and survival in the long-term. In the last section, an analysis of the impact that adoption of sustainable business practices has on consumers is presented. This is done in terms of the level of loyalty to different products and services, the impact on general perceptions of consumers towards corporations and changes in the demand for goods and services in relation to their attributes. The Business Case for Sustainability There have been a number of studies conducted on the business case for sustainability. Essentially, all these studies seek to develop justification for business organisations to engage in sustainable business practices and strategies for overall financial gain. What is common in all these studies, and has gained increasing attention among consultants and practitioners, is the realisation that there is a close relationship between sustainability practices and the overall performance of business organisations (Salzmann, Ionescu-Somers & Steger, 2004, p. 29). This means that the case for business sustainability arises from the existing relationship between the financial performance of the business and the business’s approach to sustainable management of the physical, social and economic environment. According to Schaltegger, Ludeke-Freund and Hansens (2011, p. 8), for a factor to be considered as a valid business case, it has to fulfil three different criteria. These are as follows: (1) there must be a positive and measurable effect of the factor on the economic performance of the organisation; (2) the factor should be shown to create economic benefit for the organisation through involvement in environmental and social activities; and (3) the factor should arise from voluntary involvement of an organisation in a social or environmental issue as opposed to fulfilling legal requirements. In general, the need for business organisations to adopt sustainable business practices arises from the demand made upon them by several challenges within the global context (Salzmann et al., 2004, p. 28). Globalisation, apart from opening up many opportunities for both businesses and governments, has created volatility in social, economic and environmental conditions. These changes make it necessary for business organisations to adopt sustainable business strategies in order to adapt to rapidly changing business conditions. There are many other justifications for business organisations to adopt sustainable strategies in their operations. These are the factors that make it necessary for firms to adopt sustainable practices. For instance, sustainability strategies are directly associated with reducing the costs of operations of business organisations (International Finance Corporation (IFC), 2012, p. 3). This occurs in different ways. For instance, business organisations that adopt sustainable business strategies are able to save on operational costs as a result of improved performance in operations and overall efficiency. Through sustainability, business organisations are able to optimise their operations and other processes. This way, they are able to save on their bottom line costs, wastage of materials and reduction in errors during the manufacturing process. Another way in which sustainability leads to reduction in operational costs of business organisations occurs in the form of reduction of costs that are associated with different types of risks. Ideally, business organisations run a number of different risks. These arise from the nature of their operations, safety measures taken into consideration and general business risks (Spedding & Rose, 2008, p. 7). On the other hand, corporate sustainability entails adopting policies that reduce the chances of risk occurrence and providing mechanisms for managing them if they occur (Spedding & Rose, 2008, p. 8). Therefore, when business organisations adopt sustainable risk management practices, they are in a position to benefit from a reduced level of exposure to different types of risks. This has the overall effect of reducing the potential costs of risks for the business in the event of their occurrence. The second business case for sustainability arises from the relationship between corporate sustainability and the overall management of human resources within an organisation. Essentially, the success of business organisations depends on how well their human resources are managed (Rompa, 2011, p. 52). This is because several factors which affect the productivity, morale and performance of the employees of an organisation produce negative effects on the overall performance of the organisation. On the other hand, corporate social responsibility entails developing the right policies to manage human resources within the organisation. As such, high levels of morale, motivation and engagement are maintained within the workforce, thus translating to overall business improvement in performance and results. Therefore, the need to effectively manage human resources within organisations by using sustainable business practices provides justification for business organisations to engage in such practices. This not only enhances the performance and morale of the employees but also helps organisations avoid high rates of employee turnover which is usually associated with ineffective human resource management practices. The third business case for sustainability arises from the role of sustainability in enhancing overall brand value and reputation of business organisations and their products and services. According to a report by the IFC (2012), there is a growing demand among both investors and consumers for business organisations to indicate their sustainability report as part of their annual reporting (p. 4). Much as customers are demanding products from companies that are fully sustainable, investors are guided by how environmentally and socially responsible an organisation is in investing their funds. What this means is that there is a rise in the demand for socially responsibility both in terms of consumer demands and investors. Since this is the case, business organisations stand to benefit in terms of enhanced reputation and access to investment capital when they are regarded as being sustainable. Also, with the demand for sustainable products by consumers, business organisations that adopt sustainable business practices in terms of supply chain management and the overall production process of their products stand to benefit in terms of increased customer loyalty (IFC, 2012, p. 6). Therefore, overall brand value, reputation and loyalty acts as a strong business case for sustainability in the current business environment. This is applicable to both consumer and non-consumer industries. In essence, the business case for sustainability is driven by different factors whose existence makes it necessary for business organisations to adopt sustainable business operations. Business organisations adopt sustainable business practices as a way of reducing their overall costs of operations, business risks and other costs associated with ineffective business processes. Also, the desire to increase sales, enhance the value of the brand and attract capital may be the factors driving business organisations to adopt sustainability strategies in their operations. These factors are applicable to both consumer and non-consumer industries. Implications of Sustainability for Current Business Models Sustainability has several implications for current business models. These implications are evident in the changes which business organisations need to implement in their business models in order to meet the needs of their customers as well as other stakeholders in light of sustainability. Theoretically, business models fail to optimise their operations because of two key inefficiencies which occur in the course of their implementation: inefficiencies in alignment and inefficiencies in information (Girotra & Nettesine, 2013, p. 6). Inefficiencies in information within the context of business models occur in the form of lack of sufficient information needed to make critical decisions that affect the business. Typically, business organisations are required to make critical decisions regarding investments under conditions of uncertainty. When such a circumstance occurs, decision makers are forced to rely on insufficient or incomplete information to make key decisions for the organisation. These conditions are applicable to all industries. For the manufacturing industries, business organisations operate under conditions of uncertainty with regard to factors such as technology, government regulations and market conditions. Since this is undesirable, manufacturing organisations need to address the issue of information inefficiencies in their business models as a way of ensuring that they deliver products that meet the standards of sustainability in the market. On the other hand, inefficiencies in alignment occur when decisions that are made are not in line with the objectives of the entire organisation or the entire supply chain of the organisation (Girotra & Nettesine, 2013, p. 7). In many cases, business organisations find that their objectives may be contradicted if they make certain decisions in their operations. This occurs in the form of decisions that may threaten their present market position, profitability or overall financial position. This scenario is common within the context of sustainable business practices where a manufacturing organisation may find that the demands of operating sustainable business strategies threaten its primary business interests. Because of this, there is need for manufacturing organisations to realign their objectives to the requirements of sustainable business strategies in order to fully realise their long-term objectives. Therefore, alignment inefficiency, just like information inefficiency, is one issue that business organisations need to address when adopting sustainable business practices. Apart from addressing these inefficiencies in their business models, manufacturing organisations are required to generally develop innovative models of doing business. According to the World Economic Forum (2009, p. 29), sustainability has made it necessary for business organisations to make fundamental changes in their models. These changes, which are innovative in nature, are intended to help organisations realign themselves in the rapidly changing business environment so that they are able to effectively compete in the current business environment. The changes are discussed next. To start with, business organisations in the manufacturing sector are required to develop new products and do away with products that are old and unsuitable to the current consumers who are driven by sustainability. By doing so, organisations may take advantage of sustainability to develop products that will give them future competitive advantage in the market. Additionally, as a way of completely reinventing their business models, manufacturing companies may be required to change their focus from generally delivering products to meeting the changing needs of customers. By focusing on meeting the changing needs of consumers, the organisations will be able to leverage on the changing patterns in consumption necessitated by sustainability. Therefore, as manufacturing organisations seek to maintain a competitive advantage in the current business environment which is characterised by the need for sustainability, there is need for them to make innovative changes to their business models. This will enable them to take advantage of sustainability in the market in different ways. Apart from the need to make innovative adjustments to their business models, manufacturing organisations may be required to develop wholly new business models as a response to sustainability. According to Schaltegger et al. (2011, p. 18), sustainability may make it necessary for organisations in the manufacturing sector to develop wholly new and innovative business models. Essentially, innovativeness in a business model takes place in four different dimensions. First, a business may be required to make minor adjustments to its business model. Small changes in elements such as the relationship with the customers as well as the infrastructure used in the business may be the changes necessary as a response to sustainability. Secondly, changes resulting from sustainability may make it necessary for a business organisation to adopt certain elements of the business model from those of its competitors in the industry. This is in contrast with a complete redesign of the business model of an organisation as a result of the need to adopt sustainable business strategies. In the latter case, a business may be required to completely change its operations methods, products and business logic. Such changes result into development of a completely new model of doing business in a sustainable way. Another key area in business models used by manufacturing organisations that is affected by sustainability is the supply chain. The need for business organisations to take into consideration environmental, social and economic sustainability in their practices affects the supply chain adopted by the organisations in several ways. For instance, Okongwu, Morimoto and Luras (2013, p. 837) identified three key ways in which the supply chains of business organisations in the manufacturing sector are affected by requirements to develop sustainable business practices. The first one is the need to make continuous improvements and changes on the supply chain based on assessments of its performance. Although continuous improvement on all elements of a business model is regarded as a necessity for competitiveness, within the context of supply chain, business organisations are required to factor social and environmental factors in developing their supply chains (World Economic Forum, 2011, p. 19). The second key change in the supply chain resulting from sustainability regards changes in the measurements and performance of the supply chains of organisations. As a result of sustainability, business organisations may be required to indicate issues to do with sustainability as part of the overall way in which they manage their suppliers. This is important since, by indicating that their suppliers are managed in a sustainable manner, business organisations may find it easy to convince consumers about how sustainable their final products are. This applies to products for which preference is based on how environmentally friendly they are. Lastly, as a result of sustainability, manufacturing organisations may be required to incorporate all needs of the stakeholders in their supply chain as part of an overall sustainability strategy (Okongwu et al., 2013, p. 9). When this is done, business organisations in the manufacturing sector will be able to address societal requirements for corporate sustainability. The Need for Companies to Develop a Sustainable Strategy in order to Guarantee Long-term Survival and Profitability There are several reasons that make it necessary for business organisations to develop sustainable strategies in order to guarantee their long-term survival and profitability. Essentially, companies engage in corporate social responsibility as a way of ensuring that they achieve optimum results indicated by the triple bottom line measure (Hussen, 2012, p. 40). This approach is based on the premise that for businesses to survive and grow in the future, long-term profitability is necessary. On the other hand, there is a close connection between profitability and growth of corporations. This implies that when corporations adopt socially and environmentally responsible practices and strategies, their long-term profitability, and hence growth and survival, is enhanced. Sustainability, which takes into account social, economic and environmental considerations in the practices of a business organisation, is an important element for the future survival of business organisations. In this regard, there is an important need for businesses to factor all these aspects of sustainability into their strategies as a way of guaranteeing their future survival and profitability. According to Doane and MacGillivray (2001), the reason for business organisations to develop sustainable strategies arises from the importance of economic sustainability for their future survival and profitability. Theoretically, economic sustainability takes into account several aspects of a business organisation. These include management of intangible assets, overall financial performance of the company, the place of the company within the context of the wider economy and strategies used to manage social and environmental impacts of the company. There is a direct relationship between the economic sustainability of corporations and their expected length of survival in the market (Doane & MacGillivray, 2001, p. 23). Financial activities such as mergers, acquisitions and bankruptcies have an impact on the overall economic sustainability of corporations and consequently, their overall survival and profitability. In addition, the nature of markets, which may experience turbulence and other economic cycles, makes it necessary for firms to strategise in such a manner that they are able to survive such kinds of changes. Through economic sustainability, business organisations can plan for and mange economic changes in the market. This ensures their long-term profitability and overall survival. The implication of this is that economic sustainability determines the future profitability and survival of business organisations by determining their capacity to manage changes in the business environment as well as shaping their approach to various financial activities. As well, since different stakeholders use different time spans when measuring the future capacity of business organisations, companies that adopt strategies that ensure their economic sustainability influence the way different stakeholders perceive their future survival and profitability. According to a paper by the Chartered Institute of Management Accountants (CIMA) (2010, p. 22), there are several factors which make it necessary for companies to adopt strategies that are environmentally and socially responsible as a way of ensuring their long-term success and profitability. For instance, with an increase in the level and extent of the use of information and communication technologies, many individuals can easily access reports on the performance of different organisations. With this in mind, many organisations use this as an opportunity to create public awareness about their corporate social responsibility initiatives. This means that with the increasing value that is placed on reputation, business organisations find it necessary to create and maintain strategies that incorporate corporate sustainability. This is because sound ethical practices affect the reputation of corporations. This is an important way of ensuring that the future sustainability and profitability of the business is maintained. Moreover, the need to adopt sustainable strategies as a means of ensuring long-term survival and profitability arises from the growing realisation among business leaders of the link between sustainable practices and long-term survival. According to a research carried out by the Economist Intelligence Unit (2011, p. 16), many business leaders seek to address environmental, social and economic issues in their corporations as a way of ensuring profitability in the long-term. This is represented by 50% of the respondents indicating the need to increase energy use efficiency (and thus address environmental concerns), 38% who prioritise the safety and wellbeing of employees and 33% who indicate the importance of accountability and transparency in the operations of their business as a means of ensuring sustainability in the long-term (Economist Intelligence Unit, 2011, p. 8). The implication of this is that when businesses develop sustainable strategies, the impact is felt both in the short- and long-term. The way business organisations manage their social, environmental and economic environments bears a direct impact on their profitability and survival both in the short- and long-run. With this information, business leaders are implementing sustainable strategies as a means of not only gaining short-term competitive advantages in the market but also safeguarding their position and guaranteeing survival in the long-term. Although sustainable strategies are an important element of ensuring long term success for corporations, there are several factors which organisations need to take into consideration when developing sustainable business practices with the aim of guaranteeing their profitability and survival in the long term. For instance, there is need for the leadership of organisations to ensure accurate and efficient execution of the developed sustainable business strategies for the results to be realised. This is because of the possibility of barriers such as competing responsibilities, shifting priorities and organisational bureaucracy interfering with the way sustainable strategies are implemented (Covey, 2010, p. 12). Also, the use of sustainable practices for long-term business survival depends on how well business organisations balance their priorities. According to Fernando (2012), the best approach is to integrate sustainability into the strategy of the business as a way of leveraging different challenges into increased revenue and profitability (p. 585). This suggests that when business organisations place the concern for social, environmental and economic factors into their strategies, the resulting decision-making framework balances both the short- and long-term needs. This approach combines sustainable practices with the needs of the organisation to create a strategic corporate sustainability. This takes into account social, environmental and economic responsibilities of organisations in aligning their short-range and long-term objectives. Potential Impacts on Consumers due to Companies Adopting Sustainable Strategies In general, the adoption of sustainable business strategies by corporations results into social, environmental and economic impacts (Organisation for Economic Co-operation and Development (OECD), 2010, p. 21). Furthermore, these strategies affect all stakeholders in the business process who include consumers, the business organisation and the overall society. There are a number of potential impacts on consumers resulting from companies adopting sustainable strategies. To begin with, the adoption of sustainable business strategies by firms influences the level of loyalty that consumers have on the businesses and their products. According to Raman, Lim and Nair (2012, p. 72), the direct link between corporate social responsibility, which is a sustainable business strategy, and overall consumer loyalty, is as a result of positive relationships between consumer loyalty and factors such as brand equity, company identity and consumer- company identification. This denotes that companies that enhance their corporate social responsibility strengthen their unique identity among consumers. This consequently affects the extent to which consumers develop and maintain loyalty towards the identity of the company. Also, when business organisations adopt corporate social responsibility, feelings of identification with the ideals of the company are enhanced among the consumers (Lim & Nair, 2012, p. 73). This results into feelings of interest towards the company among the consumers, hence enhancing their loyalty. Additionally, corporate social responsibility enhances the loyalty of consumers by increasing the level of brand equity of the organisation. Since customers tend to associate themselves with brands that are perceived to be performing well, adoption of corporate social responsibility by an organisation has an impact on the overall level of loyalty towards the organisation among consumers. The second impact of business organisations adopting sustainable business practices on consumers is increased consumer engagement through new marketing strategies. According to a report by Nielsen (2013, p. 6), it is observed that many business organisations in the current business environment have adopted sustainable business practices in two major forms: traditional corporate philanthropy and shared-value ideals. Through these strategies, business organisations seek to use cause-marketing opportunities as a platform of aligning their corporate and social interests. This approach by business organisations may affect consumers in different ways. For instance, many consumers are willing to pay more for goods and services produced by business organisations that have aligned their social and corporate interests. This indicates that the trend of business organisations adopting sustainable practices in the form of combining traditional, corporate philanthropy and cause-marketing opportunities by aligning their social and corporate goals has a direct impact on consumers. Many consumers show increased engagement in terms of the willingness to pay more for products from organisations that are deemed socially responsible. Also, adopting sustainable business strategies in the form of aligning social and corporate interests leads to high expectations of the consumers about corporate social responsibility (Nielsen, 2013, p. 7). This may lead to a decrease in cynicism of the consumers about the inherent ability of business organisations to improve the overall welfare of the world. Another point is that the way consumers value sustainable products varies depending on the kind of attributes that consumers use to select the products (Luks, Naylor, Irwin and Raghunathan, 2010). For instance, consumers are more inclined to judge the sustainability of products that are purchased based on gentleness and other related attributes. This is in contrast to what the situation is when it comes to other products that are chosen based on attributes such as strength and versatility. For such products, consumers make their choices and preferences without regarding how sustainable or environmentally friendly the products are. This suggests is that consumers’ preference for sustainability varies with different kinds of products and services. For products in which consumers value sustainability, their loyalty and engagement is enhanced when manufacturers emphasise the sustainability attribute of these products in their marketing. It has already been pointed out that consumers have indicated increasing interest in companies that are regarded as being environmentally and socially responsible. This interest extends from both increasing identification with the brands of the business organisations to an increase in the level of loyalty that consumers show towards such companies and their products. With this trend has been an increase in the way business organisations seek to develop and market products that are regarded as sustainable and environmentally friendly (Nielsen, 2013, p. 3). Although this is the case, there is an important dimension which is represented by the growing interest for sustainable products by consumers. The approach by corporate organisations to manufacture goods that are regarded as environmentally friendly has increased the level of sustainability consciousness among consumers. According to a report by PricewaterhouseCoopers (PWC) (2010, p. 3), many consumers in the world have a high level of expectations about the level of safety to the environment that the products they purchase have. Because of this, consumers, when making purchases, seek information about several attributes of the products. These include the manufacturing process, materials used in the manufacturing process and how the products are packaged (PWC, 2010, p. 4). Since this is a permanent shift in the attitudes of consumers, the approach by business organisations to tap into the growing market for environmentally friendly products has resulted into a change in consumer behaviour to one that shows a high level of sustainability consciousness. Apart from increasing the level of sustainability consciousness among consumers, adoption of sustainable business practices by corporations may lead to changes in the way consumers perceive the whole subject of sustainability. Generally, consumers perceive sustainable business practices in terms of four key areas: sustainability, the impact of the products, attraction for investment and advocacy (Earthsense, 2009, p. 4). These aspects are of relevance to all aspects of the way business organisations do business in the current business environment. For instance, consumers judge business organisations as being sustainable by expressing their feelings about the extent to which the business organisations carry out their operations sustainably. This suggests that if a business organisation develops its image as a generally sustainable organisation, this affects the perceptions of consumers towards it in terms of the specific areas in which the organisation is perceived to be sustainable. As well, the adoption of sustainable business practices by organisations affects the perceptions of consumers towards the products offered by these organisations (Earthsense, 2009, p. 5). This is shaped by the extent to which consumers perceive the main products and services of the corporation as being harmless to the environment. Besides, the way corporations adopt sustainable business practices and strategies shapes the perceptions of consumers about how good the businesses can be to investors as well as whether or not their products can be recommended to other consumers. This indicates that the attitudes of consumers towards business corporations are shaped by the sustainability practices adopted by the corporations. These attitudes are expressed in terms of the safety of the products, how profitable a company is expected to be, advocacy to other potential consumers and overall sustainability. Conclusion In this paper, the question of what considerations consumer industries should pursue in order to develop sustainable business strategies has been addressed. From the foregoing discussion, several conclusions can be drawn. To begin with, the business case for sustainability arises from the many potential benefits that businesses stand to gain by adopting sustainable business practices. For instance, the need to effectively compete in the current globalised economy requires that business organisations show consideration for environmental, social and economic issues. This means that business organisations have to integrate these considerations into their practices as a way of leveraging on the changes brought about by globalisation. Further, the attractiveness of reduced costs, market growth and enhanced brand value make it necessary for business organisations to adopt sustainable business practices. Since these advantages can help business organisations to achieve and maintain competitive advantages in the market, it is necessary for them to adopt sustainable business strategies in their operations. The second conclusion regards the impact of sustainability on current models used by business organisations. Essentially, business organisations are required to make several changes on their business models. These changes are made as a response to shifts in consumer demands for products as well as general changes that have emerged in the market as a result of sustainability. There are several changes that business organisations may be required to implement on their models. These include modifications on different elements such as business infrastructure, customer service and value proposition. In addition, as a result of sustainability, businesses may be required to adopt wholly new models from their competitors in the industry. When such new business models are adopted, the products, value proposition and business logic of the businesses undergo complete changes. The third conclusion is that there is need for companies to adopt sustainable business practices in order to have their profitability and survival in the long-term guaranteed. This is because of the direct relationship between sustainability and long-term profitability, which is a necessity for business organisations to survive over a long period of time. Also, it can be seen from the discussion that by developing sustainable business strategies, business organisations are able to be insulated against various kinds of risk in the market. Since such risks pose a threat to the profitability of a business, their minimisation, through adoption of sustainable strategies, is an effective way of ensuring that business make profit and survive over a long period of time. References CIMA (2010). 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