The Dynamics of Environmental Responsibility in Management

Markus Schwaninger, Professor of Management

University of St. Gallen, Dufourstrasse 48, CH-9000 St. Gallen, Switzerland

E'Mail: Markus.Schwaninger@IfB.UNISG.CH

1. Environmental Responsibility: Challenge to Organizations

The lack of realism of economic models has led to an increasing conflict between economy and ecology. While a few years ago, a broadly shared view considered ecological concern something personal and private, the environment has become a public issue of high priority. Recently, the postulate of the "green company" has emerged, however on pragmatic grounds. For organizations, environmental responsibility continues to be a controversial subject, because few theoretical efforts have been dedicated to merging the corporate and the public-ecological perspectives.

On one hand, the last decade has bred significant efforts of industrial firms to become more environment-friendly, on the other: „The world today [still] faces many environmental problems that originate from corporate industrial activities. Toxic wastes and acid precipitation created by industry are causing crisis for thousands of communities around the world. ... [etc.] ..." (Shrivastava/Hart, 1995).

Given this situation, managers and organizations should no longer refrain from dealing with ecological issues seriously. They must take an active stance; a mere publicity or public relations approach is insufficient (Espejo/Schuhmann/Schwaninger/Bilello, 1996).

Organizations need to develop a sustainable ecological balance with their milieu.

2. A Conceptual Model for Ecologically Responsible Management

There is still a large gap in organizations, concerning the knowledge and awareness about ecological matters and interrelationships. One of the deficits which have curbed ecological progress in the past has been the lack of an appropriate language for dealing with the environment. (Schwaninger, forthcoming). Of course, managers have started to change their minds; they have become ecologically more sensitive. But they still need better theories and better instruments to deal with the environmental issues effectively. In terms of semantics, a new „language" is needed, because „we read unconsciously into the world the structure of the language" (Korzybski, 1958), and the meaning of the constructs we use. The power of orientation furnished by established theories of management is only strong with respect to the short term horizon;until recently they had little solid to say concerning the long run.

Systems thinking offers new possibilities to solve the conflict between the two domains of interest. A management-cybernetic theory of pre-control in corporate management has been developed, which shows the path leading beyond intuitive claims for an "ecologically responsible management".

Due to the theoretical progress made, an ecological approach to management need no longer be doomed as 'irrational' or 'romantic'. On the contrary, what becomes evident, is the inherent rationality of an ecologically oriented thinking, which transcends the boundaries of the traditional 'business way of looking at things'. I shall outline this briefly along the following model for a comprehensive organizational fitness (figure 1).

Figure 1: Reference Variables at the Three Logical Levels of Management

This is a product of extensive research. It has not only been implemented in real business, but also empirical studies have shown, that it is highly effective as a tool to support conversations a) among managers, and b) between managers and other stakeholders, namely in strategy-making (Schwaninger, 1988, 1989, forthcoming).

This scheme represents a framework with three different logical levels of management (operative, strategic, normative) with the respective goals and control variables relevant at each one of them. Beyond the traditional orientators 'profit' and 'solvency', insights into categories which operate in larger horizons of time and complexity have been gained: Value potentials (or earnings potentials), viability and development.

These are more than just new words, but they represent categories which we have the means to calculate, to foresee their patterns of behaviour and to influence ('control') them. On the one hand, the three logical levels shown in the diagram represent different perspectives, none of which can be set aside for a company to prosper. The subject 'ecological management' has different meanings on each one of these levels; all of which must be taken into consideration, simultaneously.

- On the operational level the criterion of organizational fitness is efficiency, namely productivity and profitability. There are many ecologically oriented measures that directly impinge on profit. Many of them are gains on both sides: Energy savings, for example, relieve the environment and reduce costs at the same time. As the costs of insurance, waste disposal etc. rise dramatically, it is prudent to avoid them from the beginning. In these cases it is simply rational in a financial and economic sense, to manage ecologically.

- On the strategic level, the criterion is effectiveness, which includes competitive and cooperative effectiveness (competition can spur cooperation, and vice versa). A strong market position in an ecologically sensitive market constitutes an excellent prerequisite for good earnings in the future. But sacrifices in the present such as investment in core competencies, for example via R & D and human resources development, which reduce profits (-) in the short term, are usually necessary to build up such value potentials (+). Beyond that, an ecological orientation is also apt to improve the competitive position in human resources markets.

- Again, another logic applies at the normative level, where the ultimate criterion of organizational fitness is legitimacy, i.e. the ability of a company to match the demands of all key stakeholders. Stakeholders include such groups as customers, staff, shareholders, allies, the State, the public and even future generations (represented by those who speak up for them). It would be shortsighted to curtail the ecological aspects to the financial and the market rationality only.

At the normative level, the logic of culture and of social, ethical and aesthetical values applies. Here managers have the widest field to creatively shape the destiny of their company (and of its environment). One option often insufficiently considered is to refrain from detrimental programmes (by the way, more companies went broke from not refraining than from refraining).

If legitimacy is to be attained, normative management has to reconcile internal and external demands as well as the economical and ecological imperatives.

An essential insight - which I owe very much to Aloys Gälweiler - expressed in the framework presented is about the pre-control-nature of the control variables of the logically higher levels with respect to those of the lower ones: Value potentials pre-control values delivered to stakeholders (e.g. profits delivered to shareholders); viability pre-controls value potentials, etc. A process controlled for profits (with revenues and costs) cannot be pre-controlled with these same levers. As outlined in the framework, other variables have to be used for that purpose. In sum, an integral model of management which transcends the dominant logic of financial/economic steering, can be conceived rationally and accurately, not only in an intuitive, fuzzy mode.

So much on the new perspective proposed and needed. In practice, the attainment of a comprehensive organizational fitness requires managing the control variables on all three logical levels - operative, strategic and normative management - simultaneously. Balance must be maintained, even if contradictions between the imperatives of the three levels occur.

Simulation, eventually combined with optimization methods, is a viable approach not only for operationalizing the theory outlined here briefly, but also for helping managers to hone their skills of balancing complex decisions. For this purpose, a system dynamics model has been designed which embodies the core of a „microworld" for managerial training.

This conceptual system of multilevel control variables gives substance to the vague concept of "environmentally responsible management". It has been operationalized in a system dynamics model with approximately 60 variables.

3. Outline of a System Dynamics Model

The model was implemented, with the help of Stephan Büttner, my research assistant, on the basis of the Stella software. It comprehends five modules (figure 2): Marketing, Production & Technology, Human Resources, Ecological Management, Finance.

Figure 2: Layout of the System Dynamics Model

Due to the clear conceptual basis, it was possible to build a fairly comprehensive model, yet from a relatively small number of variables, altogether about 60. We designed a case study around the model, which relates to a producer of chemical products and allows players to take decisions affecting anyone of the modules over a number of rounds (representing quarters of business years).

The set of variables includes:

1. Marketing Module: Market Volume, Market Share, Total Output, Quantity of Sales Volume, Stock of Finished Products, Quality, Price, Ecological Image, Competitiveness, Level of Marketing;

2. Production & Technology Module: Output per Employee, Cost of Labour, Process Maturity, Level of Quality Management, Product Quality, R&D (Research & Development) Intensity;

3. Human Resources Module: Intensity of Training, Qualification Level, Attractiveness as Employer, Quality of Working Place, Level of Compensation, Level of Motivation, Level of Performance, Cost of Defects;

4. Ecological Management Module: Investment in Ecological Consciousness, Level of Ecological Consciousness, Ecological Image, Expenses for Environmental Protection, Level of Environmental Protection, Level of Ecology-Related Public Relations

5. Finance Module: Value of Sales Volume, Value of Debtors, Value of Stocks, Liquid Assets, Fixed Assets, Equity, Foreign Capital, Foreign Capital Ratio, Cost of Production, Marketing Cost, Cost of R & D, Administrative Cost, Cost of Training, Cost of Working Place Quality, Cost of Product Quality, Cost of Environmental Protection, Cost of Capital, Interest Earnings, Profit before Taxes, Taxes, Net Profit, Return on Equity, Return on Sales.

Besides the usual „cockpit" with 5 decision levers for production and marketing, 3 for human resources and 3 for ecology, as well as key financial indicators (capitalization and profitability indices), profit and loss statement and balance sheet, the layout for the simulation game provides warning functions (e.g. whenever a decision leads to an equity/capital ratio lower than a defined treshold, the player is alerted). Furthermore, graphs on the evolution of stock variables, e.g. equity, over time are parts of the standard layout. These devices allowed to increase the scope and number of potential decision levers, in order to help players enhancing their skills for coping with complexity.

The model was submitted to a validation procedure involving structural and behavioral tests, realized in collaboration with a group of doctoral students, specialized in simulation and management cybernetics. These validation procedures uncovered some patterns and issues of concern, e.g.:

1. The output of base runs of an earlier model of the market, society and environment system showed that the variables 'Strain on the environment', 'Social pressure' and 'Environmental protection' follow a pattern of intertwined harmonic oscillators, if there is too little managerial attention to these variables.

2. Sensitivity analysis showed, among other things, that the four modules of production, marketing, human resources abd ecology, all are accurately interrelated and show adequate sensitivities. Measured on a 5 interval scale, the sensitivities ascertained were: 'high' for production, 'very high' for marketing, 'high' for 'human resources' and 'medium' for ecological management.

3. At first, it was too hard to win in the game, for players, - harder than in real life! Therefore, in the correction phase, we relaxed the price elasticity of demand to a small extent. On one hand, this enabled players who combined minimal price increases combined with high quality (in the sense of environment-friendliness of products) to increase their sales volume, while competing only on price led to inferior increases of market share than before.

4. Lessons from Building and Using the Model

Except the authors, also a relatively small number of persons have used the model - most of them involved in the validation procedure. From this limited experience certain conclusions about the model and its practical application can be drawn:

1. Building and using this model has been helpful in eliciting insights, how managerial activity can influence the system-in-focus towards organizational prosperity and positive environmental effects of organizational activity, at the same time. Therefore it promises to be effective as a simulation game in managerial training. Running the model has also led to a corroboration of the conceptual model outlined in figure 1, which has been used for several years to give recommendations for the practice of management: Apparently, this general framework is also useful to guide management in the direction of more environment-friendly decisions. However, the pre-control nature of parameters such as environmental consciousness can only be made „tangible" if formally represented in a model like the one discussed here.

2. In a next round, an application with graduate students or majors interested in the issues of environmentally responsible and responsive management should be realized. It would be indicated to realize this as a systematic experiment: One group would use the model over a number of rounds, following an ecological orientation, while a control group would pursue a „conventional" strategy. A comparison of the results obtained by the two groups would give further evidence if the model is in line with the empirical results of the Meffert/Kirchgeorg studies (see footonote 6). Eventually, this could lead to further improvements of the model.

3. Another valuable experiment would be trying to identify the pedagogical effectiveness of the model. Sophomores who have not had any exposure to lectures about environment-friendly management could use the model. At the end, a survey of their knowledge about this issue could be compared systematically to the knowledge of a control group which has not used the model. Finally, a collection of suggestions from the users could lead to further improvements of the model.

4. In the following step, the application in a seminar for managers could be undertaken. In a survey, users should be inquired about the usefulness of the model, and asked to give suggestions for necessary and possible improvements of the same.

5. In all applications, a thorough debriefing for the users will be paramount, to anchor the lessons gathered by the users. This debriefing should, in principle, precede the surveys.


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