Recent developments in integrated thinking aim to strengthen the emphasis on the unique qualities of an organisation. Business strategies containing merely a standard set of social, environmental and economic aspects fail to add real value. The International Integrated Reporting Council (IIRC) and the Global Reporting Initiative (GRI) nudge organisations to include aspects which are material and have an actual impact on the organisation. Besides including material aspects in the strategy and report, it is important to establish the actual added value of your organisation.
Integration is key
When it comes to sustainability the focus is often put on the (integrated) report. Although the report is an excellent tool to communicate to your stakeholders, it is merely a tool and not the goal. As the IIRC explains, the purpose of integrated reporting is “to explain to financial capital providers how an organisation creates value over time”. In order to actually reap the benefits of integrated reporting and creating actual value, an integrated strategy is required. Organisations should be able to clearly answer the following questions: how does your organisation distinguishes itself, how does it add value to your stakeholders, and how will your business model sustain in the future. Answering these questions and defining the value creation process can help your stakeholders to understand your value proposition, legitimises your business and smoothens the process of strategy setting.
The struggle continues
Many organisations however struggle with the value creation process. A common practice is to solely add a visual of the value chain in the report. Unfortunately, this approach fails to fully capitalise the value creation process into an integrated, profitable long-term strategy. Not to mention that it ignores to provide stakeholders with the ‘bigger picture’. In the end, the current practice might have the opposite effect of what was intended to be a helpful tool to strengthen businesses.
As the struggle continues this raises the question, how to integrate the process of value creation optimally? Below we describe a couple of important actions which are helpful in creating and integrating the process of value creation in the decision making process of an organisation:
· If you reflect on the inputs,…
Which inputs are essential to your organisation, what do you need to keep your organisation running? Financial instruments are the first aspects that come to mind, but usually these are only a small fraction of the total inputs. A financial institution such as ING, depends most on human and financial assets. A chemical manufacturer such as AkzoNobel, on the other hand, dependents utmost on natural resources and innovation. Most organisations employ several assets simultaneously (both tangible and intangible). By further specifying and, if possible, quantifying these inputs (e.g. the number of employees, the financial investments or the amount of materials bought), the organisation will be able to internalise the first step of the process of value creation.
· …describe the business activities and the unique properties of your organisation,…
Once established which inputs are needed to keep your business going, it is time to reflect on the business model. The aim is to describe the business model by identifying what distinguishes your organisation from its competitors. In order to do so, one should be able to reflect on the unique properties of the organisation. In other words: what makes your organisation unique? ROCKWOOL for example uses product differentiation by providing a high quality product with better results than competing products, namely non-flammable stone wool as isolation material. Another example is Interface, it differentiates itself by its Mission Zero, which sets out that Interface is to be the first company that is fully sustainable. Interface aims to achieve its mission through innovative thinking such as producing sustainable yarn, using methods to recycle yarn and reinventing its service by also leasing carpets.
· …the outputs and outcomes follow naturally.
Essentially, what goes in, must come out. Thus explaining the outputs i.e. key products and services provided by your organisation. The assets as described in the first (input) stage are retrieved and translated into outputs. Subsequently, these outputs should be converted into outcomes. Outcomes describe the actual (positive and negative) impact the organisation has on its surroundings. This also includes internal and external consequences, and preferably outcomes which are quantified or even monetised. Both TenCate (page 20-21) and Avalex (page 12) provide valuable examples of a translation into (qualitative) outcomes in their latest annual reporting.
· Integrating these insights increases the potential of an organisation
As described above the process of value creation and the corresponding value chain should be internalised and custom made to your organisation. The aim is to specify what distinguishes your organisation from its competitors, and how your business adds value to both its stakeholders and yourself. By focusing on the unique strengths and areas in which your organisation has the most important impact, it can improve its decision making process. Namely, the organisation is better informed on the relevant financial and non-financial indicators. Moreover, being fully aware of the value your organisation creates, will help to create a competitive advantage, may improve the resilience of your organisation as it improves the awareness of its strength and weaknesses, potentially increases sales, and boosts your reputation because now you have a coherent and clear story to tell.
Nick de Ruiter is a partner at Sustainalize and has produced several integrated reports. He is also a specialist in CSR strategy setting and performance monitoring.
Alissa Daurer is consultant at Sustainalize and is a specialist in value creation, the assessment of materiality and GRI G4.
Sustainalize (www.sustainalize.nl) is a global CSR consulting firm that specializes in CSR, CSR reporting, CSR strategy, performance monitoring and external AA1000 assurance. Sustainalize’s client base consists of larger corporations across all sectors.
 Source: The IIRC. (2015). “Get to grips with the six capitals”. Retrieved from: http://integratedreporting.org/what-the-tool-for-better-reporting/get-to-grips-with-the-six-capitals/