Article by Isabel J. Barreto
Having a business strategy is essential to a company’s success. However, developing and implementing a strategy that contributes to both short- and long-term success is not an easy task. Operating in uncertainty such as climate change, global supply chain disruptions, an energy crisis and rising inflation makes building a resilient business and strategy development even more challenging. However, creating a sustainable business strategy can generate innovation and growth opportunities for your company while also improving risk management.
Shortcomings of traditional strategy development
A business strategy outlines the specific ways in which a company plans to position itself, achieve its short- and long-term goals, grow over time, and generate a competitive advantage. Traditionally, however, the key objective of business strategies is producing economic value for a narrow set of stakeholders (primarily owners and shareholders) in the short- to medium-term.
Considering the recent layoffs in the tech industry which started at the end of 2022, layoffs are a good example of how traditional strategic decisions may be effective to solve short-term problems to quickly cut costs and increase profit, but are not sustainable in the long-term. There is some evidence that layoffs can decrease profitability in the post-layoff period, with lower profitability lasting up to three years after layoffs. In addition, the psychological effects that such strategic decisions can have on the remaining employees (e.g. reduced trust and loyalty and withholding effort) can be associated with negative economic consequences for the company.
Offshoring and outsourcing are other examples of company strategies that aim to cut costs while increasing production and maximizing profits. More often than not, though, these practices result in the displacement of environmental and social impacts through international trade from developed to developing countries. Companies may cut costs and increase profit by sourcing materials and labor in countries that provide cheaper alternatives. However, companies often do not account for negative environmental impacts when extending their global supply chains and subsequently increasing their transportation’s CO2 emissions nor for producing materials in countries where environmental regulations are more relaxed or non-existent. These practices are under pressure: with the recent increase of new environmental and supply chain regulations, companies will have to integrate more sustainability practices into their strategies.
Making business strategies sustainable
Developing a business strategy can be like aiming at a moving target. In today’s context, a good strategy needs to consider many moving parts, including increasing environmental, social and economic risks. Developing a sustainability mindset, understanding sustainable development and how sustainability dimensions (social, environmental, economic) impact a business are, therefore, essential.
After analyzing data from more than 3,000 companies between 2012 and 2017, researchers came to the conclusion that strategic sustainability practices are significantly and positively correlated with both return on capital and expectations of future performance. Companies that adopt strategic sustainability practices and take social and environmental issues into account in decision-making and operations, rather than treating them as externalities, often outperform companies that do not.
By integrating social, environmental and economic aspects into all business policies, processes and decisions, sustainable strategy development uses a holistic approach to sustainable development in the core business strategy. It ultimately means that sustainability is not treated as a project but rather as a key aspect of the business as a whole. Sustainable strategies enable companies to create value for their stakeholders while contributing to a sustainable society. In turn, a sustainable society is one that is able to meet its own current needs without sacrificing the needs of future generations.
Traditional business strategies are not enough. Incorporating sustainability into business strategies is necessary for any company that aims to survive and flourish. In order to do that, businesses need to shift towards a sustainability mindset throughout the company’s operations and decisions. Shifting mindset takes work. It requires senior leadership commitment and employee engagement. It involves sustainable leadership skills and capacity building in both strategy and sustainable development.
Many social and environmental risks manifest themselves over a longer period and affect businesses in many aspects. Therefore, when defining a strategy for a business challenge, companies need to go beyond looking for easy, short-term solutions and consider long-term impacts on the company, the environment, and society. Strategies should be adaptive and simultaneously positively contribute to business growth and to the world. They need to be sustainable.