Integrating Sustainability with Business Excellence

“One of the greatest lessons I have learnt in my life is to pay as much attention to the means of work as to its end. …. I have been always learning great lessons from that one principle, and it appears to me that all the secret of success is there;”

Swami Vivekananda

Introduction

Business Excellence is all about good practices leading to superior business results. Business Excellence has its genesis in the Total Quality Management (TQM), Lean Thinking and other approaches of Operations Excellence. The common undercurrent was Quality – Product Quality. Then in 1970s the imperative of exercising prudence in use of natural resources, and consumption of materials and services was formulated leading to the sustainability movement. The various initiatives and approaches like Sustainable Development Goals (SDG); Global Reporting Initiative (GRI); Environment Sustainability Governance (ESG) Reporting and Circular Economy has created a perception that Sustainability needs to be addressed exclusively from Business Excellence.

This article gives an overview on how Sustainability could be integrated under the umbrella of ‘Business Excellence’. The article begins with an introduction of Business Excellence, Sustainability & Circular Economy and then European Foundation for Quality Management (EFQM) Business Excellence framework. Thereafter, the article details the broad model requirements (EFQM model) pertaining to Sustainability.

This article is author’s interpretation of the TQM philosophy and his understanding of Deming Prize and the EFQM frameworks of Business Excellence.

TQM <=> Business Excellence

EFQM defines Business Excellence as ‘Outstanding practice in managing the organisation and achieving results based on a set of Fundamental Concepts.’ I.e., the methods deployed for satisfying the expectations of all stakeholders in an organisation and the results achieved by them. Although, the definition of Business Excellence was coined by EFQM in late 1980s, the genesis was in the Quality Movement in Japan in the aftermath of World War II.

After the war, the US Government and Japanese industry started working towards reviving Japanese economy. The US Government created a separate Civilian Communication Section (CCS) of General MacArthur’s Headquarters and was entrusted with rebuilding Communication infrastructure. In 1949-50, under the aegis of the CCS, engineers from US, trained engineers from Electronics industry for capability building. The training also focused on quality & reliability building. The Japanese were introduced to Shewhart's concepts of Statistical Quality Control (SQC) and control charts.

Parallelly, the Japanese proactively took upon themselves to learn from the US industry. As a part of this initiatives, the industry created JUSE (Japanese Union of Scientists & Engineers) in 1946.  The JUSE took several steps to promote Quality like - developing concepts of Statistical Quality Control; inviting external experts to train and lecture supervisors, engineers, and managers. Shewhart, who was an engineer in Bell Labs, developed the concepts of SQC and PDCA improvement cycle in his 1931 work – “Economic Control of Quality of Manufactured Product”. His theory of SQC describes two sources of variation – Assignable cause and Non-assignable (Random) cause. Shewhart also emphasized that almost 80% of the total variation is random and its control is the responsibility of the Management (Leadership).

Management of Japanese companies extended the scope of SQC to longevity of business through’ improvement of quality, which is depicted in the figure below:

JUSE organised lectures by Deming & Juran to train Management personnel. These two proponents of Quality propagated concepts of SQC and Quality Management among Management leaders, Engineers, and Foremen. Between 1950-1970, they covered 14,700 engineers and several thousand Foremen. Deming not only propagated Shewhart’s SQC tools, like Control Charts and Plan-Do-Check-Act (PDCA) loop; but elevated process thinking as Management’s top job. The author has depicted his understanding of Management’s job using the P-diagram concept of Taguchi, in the figure below:

For the Japanese industry, this was the job of Management (Leadership), and they called it ‘Total Quality (Management) [TQM]’. More than a product quality improvement or process excellence, JUSE’s interpretation of TQM is quality of leadership! As a mark of respect and gratitude for Deming, JUSE constituted the Deming Prize in 1951. This is an annual award presented to an organisation that has implemented TQM. The award recognises the TQM implementation in an organisation and TQM promotion by an individual or group.

Businesses applying for the award, present a review of an organisation's activities and results referenced against the model of business excellence.  The applicant gets feedback in form of:

1.      What must change in the organisation? (Results and Approaches)

2.      How to prioritise the change initiative in line with business strategy?

3.      How to align every one’s action in the organisation to achieve Business Excellence?

4.      How to measure the pace and direction of the change?

The Deming Prize looks at how the leadership seeks to build a vision for the organisation and steers the stakeholders towards manifestation of the vision. In doing so the leadership is expected to anticipate, plan, and respond to change, as depicted in figure below:

The TQM frameworks were also adapted by the US and Europe in the form of different models like Malcom Baldrige Award (1987) and EFQM (1991). The EFQM rebranded the TQM as Business Excellence. The exercise of applying for the award is a learning exercise for the leadership, where they benefit from self-assessment (against the model requirement) and feedback from industry experts.

Sustainability, ESG and Circular Economy

The Sustainability Development (SD) movement has come a long way from a macro-level (nation) awareness campaign to a firm-level (business) initiatives and reporting. The SD movement has a broad theme of respecting the expectations of other stakeholders (employees, society and regulations) along with profits. The following sections presents an overview of these initiatives of the SD movement.

The United Nations Conference on the Human Environment in 1972

With the recognition that the developmental policies primarily focusing on economic growth increased the frequency of serious environmental problems, the United Nations held a world summit in Stockholm, Sweden in 1972. The conference was the first human environment conference and symbolized the beginning of the Sustainability Development (SD). The summit urged all countries in the world to strengthen environmental management policies while developing their economies.  In 1987, the World Commission on Environment and Development (WCED) drafted a report on human development, “Our Common Future”, which was the first time to systematically stated the definition of SD. SD was defined as “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their needs”

Origins and rise of ESG

The story of ESG investing began in January 2004 when former UN Secretary General Kofi Annan wrote to over 50 CEOs of major financial institutions, inviting them to participate in a joint initiative under the auspices of the UN Global Compact and with the support of the International Finance Corporation (IFC) and the Swiss Government. The goal of the initiative was to find ways to integrate ESG into capital markets. A year later this initiative produced a report entitled “Who Cares Wins,” with Ivo Knoepfel as the author. The report made the case that embedding environmental, social and governance factors in capital markets makes good business sense and leads to more sustainable markets and better outcomes for societies. At the same time UNEP/Fi produced the so-called “Freshfield Report” which showed that ESG issues are relevant for financial valuation. These two reports formed the backbone for the launch of the Principles for Responsible Investment (PRI) at the New York Stock Exchange in 2006 and the launch of the Sustainable Stock Exchange Initiative (SSEI) in the following year.

Circular Economy and Circular Business Model

The Circular Economy and Circular Business models were different from the 'call for action' initiatives. Circular Economy Business models attempts to guide business to weave sustainability thinking in the value chain. The circular economy potentially overthrows the take-make-break or the linear economy by adhering to its principles which entirely focus on returning the material to its initial point which in turn closes the loop of materials. The reliance on principles like reuse, recycle, refurbished, remanufacture, rethink etc. along with some frameworks like ReSOLVE (Regenerate; Share; Optimise; Loop; Virtualise; Exchange), waste generation, pollution and their adverse effects can be controlled and reduced to a great extent. The coupling of a circular supply chain and the construction of circular business models is significant from a firm standpoint. Circular economy has extended business perks such as strong supply chain network, large base of suppliers, emergence of new alternative resources, new customer base generation, customer loyalty and new streams of cleaner profit generations, employment generation etc.

EFQM Model and Sustainability

The EFQM model was the first semi-prescriptive framework to show a path towards Excellence. It was launched in 1991 by EFQM in Europe and adapted in India as ‘CII-Exim Bank Award’ in 1994. The model is regularly reviewed to incorporate new ideas, concepts, and learning. The last revision was published in 2020. Through its evolution the model has sustained focus on core attributes:

• The primacy of the customer
• The need to take a long term, stakeholder centric view
• Understanding the cause-and-effect linkages between why an organisation does something, how it does it and what it achieves as a consequence of its actions.

The EFQM model draws inputs from the following UN goals and principles for sustainable and socially responsible business:

1.      The United Nations 17 Sustainable Development Goals are a call for action by all countries to promote social equity, sound governance and prosperity while protecting the planet.

2.      The United Nations Global Compact (2000). Ten principles for sustainable and socially responsible business.

The EFQM Model structure asks the applicant organisation questions in three areas:

Why? (Direction)

• Why does this organisation exist?
• What Purpose does it fulfil?
• Why this particular Strategy?

How? (Execution)

• How does it intend to deliver on its Purpose and its Strategy?

What? (Results)

• What has it actually achieved to date?
• What does it intend to achieve tomorrow?

The model is organised into seven criteria distributed as per the table below.

In the following section, all the seven criteria are covered in terms of their emphasis on sustainability. Specific details are provided against the relevant sub-criteria.

Criteria 1 evaluates the excellence in Strategy formulation and Performance Management System

Conventionally, the terms Purpose, Vision and Strategy are used in context with customer value proposition or competitive advantage. But Strategy could be formulated to address the challenges/imperatives posed by external environment or demands from any stakeholder group. Thus, strategy formulation process starting with Purpose and Vision statement and leading up to Mission or Roadmap of objectives, can be an integrated approach to address profitability and sustainability. The strategy framework by Prof Ganesh Prabhu and Prof P D Jose of IIM-Bangalore best depicts this integrated approach.

In the EFQM model, the criterion 1 pertaining to Purpose, Vision, and Strategy (PVS) assesses the company on leadership’s Purpose, Vision, and Strategy. This criterion addresses sustainability through:

1.3 Understand the Ecosystem, Own Capabilities & Major Challenges

1.3.1. Researches and understands the ecosystem, including Megatrends, and the consequences on it of the United Nations Sustainable Development Goals and Global Compact ambitions. (Study and analyse)

1.5 Design & Implement a Governance & Performance Management System (PMS)

1.5.3. Defines and implements a governance review schedule that matches the speed of the ecosystem, monitors progress with Strategy implementation and guides performance and transformation priorities.

1.5.5. Makes sure that, as a minimum, it meets all relevant government, legal and regulatory requirements.

Criteria 2 evaluates the leaderships role in building a conducive culture that is aligns with the long-term plans.

This criterion assesses the company on the leadership’s initiatives for culture building and aligning the stakeholders behind its PVS. This criterion addresses sustainability through:

2.1 Steer the Organisation’s Culture & Nurture Values

2.1.1 Demonstrates the desired behaviours for acting ethically, with integrity and a social conscience, making sure its People demonstrate these desired behaviours in their own actions.

2.1.2 Expresses an promotes concern for the environment and the scarcity of resources, raising awareness of the importance of adopting a responsible approach to the environment.

2.1.3 Identifies, recognises, and promotes other role models from within its ecosystem that are leading the way to a more sustainable future for everyone.

Criterion 3 evaluates the holistic approach of the strategy formulation process to address the needs of various stakeholders.

This criterion assesses the company on the leadership’s initiatives for engaging with various stakeholders, including Employees, Governing Authorities, and Society. This criterion addresses sustainability through:

3.3. Business & Governing Stakeholders – Secure & Sustain Ongoing Support

Governing stakeholders can include government departments, regional or local bodies (statutory & regulatory), public authorities or parastatal institutions (Autonomous/ semi-autonomous)

3.3.1 Identifies the Key Business and Governing Stakeholders that have a financial, legal, and general stewardship interest in the organisation and understands their expectations.

3.3.2 Involves Key Business and Governing Stakeholders in the development of its improvement & transformation ambitions and overall strategic direction.

3.3.3 Makes sure the relationships established with Key Business and Governing Stakeholders are mutually beneficial.

3.3.4 Makes itself transparent and accountable to this Key Stakeholder group, establishing and maintaining high levels of trust at all times.

3.4 Society – Contribute to Development, Well-being & Prosperity

3.4.1 Uses its PVS to develop a clear understanding and focus on how it will contribute to its Society.

3.4.2 Establishes, develops, and maintains a relationship with the Key Stakeholders in its Society, leading to mutual benefit for both the organisation and its Society.

3.4.3 Utilizes communication channels that make it easy for its Society to interact, give feedback on their experiences and for the organisation to react quickly and appropriately.

3.4.4 Makes itself transparent and accountable to this Key Stakeholder group and establishes and maintains a high level of trust.

Criterion 4 evaluates the process of value (product/ service) creation, delivery and acting on customer feedback.

This criterion assesses the company on the practices of Value creation, Value communication, Value delivery and Value ownership. This criterion addresses sustainability through:

4.1 Design the Value & How it is Created

4.1.1 Designs the value and value creation approaches to reflect their lifecycle in a responsible way, considering impacts on public health, safety, and the environment.

4.3 Deliver the Value

4.3.1 Delivers its products, services and solutions in a way that minimizes negative social and environmental impact.

4.3.2 Advises its target groups of the responsible use of its products, services, and solutions.

Criterion 5 evaluates the approaches deployed to strike a balance between managing the present and preparing for future.

This criterion assesses the company on the practices of Performance Management, Risk Mitigation, Transformation Management, Competing on insights from Data and Assets Management. This criterion addresses sustainability through:

5.1 Drive Performance and Manage Risk

5.1.1 Develops and implements plans to manage risk from different perspectives such as cultural, strategic, operational, financial, legal, regulatory, societal, and technical (including risk from IT and cyber security challenges) dimensions.

5.3 Drive Innovation & Utilise Technology

5.3.1 Evaluates and manages, based on circular economy principles, the full lifecycle of existing and emerging technologies, to maximise the benefit for all.

5.5 Manage Assets & Resources

5.5.1 Determines the assets and resources it no longer needs (for current or future business) and, based on Circular Economy principles, disposes of them responsibly.

Criterion 6 evaluates excellence in outcomes from the business which are the expectations of the various stakeholders.

This criterion concentrates on results based on feedback from Key Stakeholders about their personal experiences of dealing with the organisation – their perceptions.

Criterion 7 evaluates excellence of results of an organisation as envisaged in its strategy and capabilities built for future.

This criterion concentrates on results linked to the organisation’s performance in terms of 1) The ability to fulfil its Purpose, deliver the Strategy, Create Sustainable Value; 2) Its fitness for the future.

Summing Up

The European Union (EU) has been at the forefront of the SD movement. Socio-economic factors like slow population and economic growth, has made it imperative for the EU industry to chart their growth path by striking a balance between profits and planet. The EFQM model has evolved in lines with the renewed focus on stakeholders' satisfaction as against just profits.

Businesses can consider using the EFQM model to envisage a Vision; plan and manifest the growth and transformation journey. It gives generic guidelines for planning, process design and management leading to superior and sustainable results that meet expectations of all stakeholders.