Economic value of sustainability


Sustainability matters are not limited to environmental, philanthropy and other matters of social consciousness, they extend to the mainstream issues that include company financial performance, product quality and governance.

A proactive approach such as adopting sustainability operating strategy (SOS) can strengthen the business by increasing cash flows and profits which are the business primary objectives. Further, SOS sustains the increased financial returns to its investors in the form of higher stock prices and dividends.

The economic business value of SOS has both qualitative and quantitative outcomes that benefit both the business at its investors. By adopting SOS, the business reputation is inevitably enhanced. Reputation is measured by the perception of customers.

It is the net result of customer interactions and experiences, impressions, beliefs, feelings and knowledge about the performance of the company. Though reputation does not reflect expressly on company accounts, goodwill has a monetary value relating to the qualitative measure of SOS.

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By adopting SOS, companies can measure the effects on profitability and cash flows, stock prices and the dividend to shareholders. The three are the SOS quantitative measures. They all have a financial weight expressed in currency and trends can be effectively monitored. Literary, company results before and after adopting SOS can be compared assessing the two financial periods on the investments and its related revenues.

In simple terms, SOS has an element of investment that can be translated to the costs of adopting it. On the other hand, such investment is expected to translate into some level of output in terms of sales that should demonstrate profitability, which in turn influences company cash flows, stock prices and dividend. The qualitative measure of reputation is, thereby, enhanced by increased value from adopting SOS.

Reputation has a direct effect on sales. The cost of advertising is absorbed easily by the level of sales that reputation attracts. It does not mean that companies with good reputation do not advertise. They advertise maybe more than or equal to companies with less reputation. The difference is on the offset of the cost of advertising compared to the sales achieved.
Companies without a reputation have the same or more costs of advertising when the related sales are low impacting negatively on profitability, cash flows, stock prices and dividend. The reputable companies are competitive, effective offering desirable products and services making it easy to enter into new markets.

It is, therefore, critical to track back the causes of loss of competitiveness, effectiveness and non-desirable products and services that affect the company reputation. Material inputs average between 40 – 80% of the cost of production depending on the processes and industry. The manager of material inputs is procurement. This then means that the effective driver of SOS is the procurement manager. How then can the procurement manager drive SOS when the organisational structures are not effectively aligned? How then can a company adopt SOS in managing inputs when the system relegates the procurement manager to clerical work of converting requisitions to purchase orders?

To achieve SOS, a paradigm shift on the perception of procurement in organisations is necessary. Future discussions shall focus on the role of procurement in managing input costs that have a direct impact on costs that affect profitability.

They will shed light on why it is important to strategically position procurement in the organisation. Strategic positioning of procurement will not by itself achieve results when the skills are in adequate. A review of the quality of procurement skills necessary to drive the SOS is, therefore, urgent.

●Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity. Feedback: Skype: nyasha.chizu