Abstract Number: 011-0218

Operations strategy and sustainability: a discussion about their locus and

boundaries

Edson Pinheiro de Lima1, Sérgio Eduardo Gouvêa da Costa2 and

Paula Andréa da Rosa Garbuio3

Industrial and Systems Engineering Graduate Program – PPGEPS

Pontifical Catholic University of Parana – PUCPR

Curitiba – Brazil

Tel.: +55 41 3271 1333

e.pinheiro@pucpr.br1, s.gouvea@pucpr.br2, pauladream@gmail.com3

POMS 20th Annual Conference

Orlando, Florida U.S.A.

May 1 to May 4, 2009

Abstract

Firm theoretical concepts are being redefined in order to match new value propositions,

which are being managed in a multivariable perspective. These multi aspects that define

value cover economic, environmental and social issues and they are the new design

requirements for the operations systems. These new concepts result in new models for

describing and explaining production processes, operations strategy and performance

measurement systems. The main purpose of this paper is to discuss and position these

new drivers of value creation in an operations strategic management framework. A model

is constructed based on literature review and secondary data obtained from enterprise

sustainability reports. Secondary data is used to populate the proposed framework. The

framework proposed in this paper was discussed previously in two research seminars that

took place in Norway and Brazil. Some evidences show how sustainability factors are

related to technical system design, operations strategy decision areas and performance

dimensions.

Keywords: sustainability, production processes, operations strategy, performance

measurement

Introduction

Enterprises’ relationships complexity and between those and their ‘operational’

environment, when referring to aspects related to their services and manufacturing

operations, communication and information technologies, process automation and

resources deployment, are constituting change drivers for designing, implementing and

using their operations strategy. Particularly, the change process development is

contributing for a specific capabilities set creation called dynamic capabilities. These

capabilities allow companies to study and to manage their positions, processes and

trajectories, bounded by a strategic architecture framework. This approach improves

companies’ change process management capabilities (TEECE et al., 1997; HAMEL &

PRAHALAD, 1989).

Companies are improving their consciousness about environmental and social effects of

their operations systems outputs. They are reviewing their technical and management

systems in order to have a sustainable operation. Nowadays, great attention is being paid

to their operations systems’ manufacturing processes, product design and production

management in aspects related to environmental issues, quality of working life and social

responsibility. Enterprises’ strategic agenda is being built upon topics like: business

ethics, local communities development investments, environment preservation, corporate

governance, human rights, markets and competition, workplace, corruption and product

life cycle responsibility (ZUIDWIJK & KRIKKE, 2008; BOYD et al., 2007;

MICHELSEN et al., 2006; PORTER & KRAMER, 2006).

Boyd et al. (2007) state that in a general sense, Corporate Social Responsibility – CSR;

reflects obligations to society and stakeholders within societies impacted by the firm. It is

important to observe the importance to identify companies’ stakeholders.

Porter and Kramer (2006) propose to companies engage in addressing social issues by

creating shared value. This will lead to self-sustaining solutions that do not depend on

private or government subsidies. They also comment that a well-run business applies its

resources, expertise and management talent to problems that it understands and in which

it has a stake; it can have a greater impact on social good than any other institution or

philanthropic organization. This mindset could be used to rethink the ‘enterprise root’.

Margolis and Walsh (2003) argue that we need a better understanding between social

performance and real benefits to society. In their opinion, it should be questioned

corporate social performance and competing conceptions of the firm down to their very

roots.

Based on the presented context, companies are reviewing their management systems.

They want to develop a more ‘balanced’, ‘integrated’, ‘linked’, ‘flexible’, ‘multifaceted’

and ‘multidimensional’ management system. These characteristics will contribute to

integrate social responsibility to the strategic management system redesign (GOMES et

al., 2004).

It could be said that the pointed characteristics had a direct influence in performance

measurement systems design, taking this system as an important part of the strategic

management system. However, those requisites are not fully developed and incorporated

to performance measurement system design. It does not offer proper conditions for

companies to better understand their operations dynamics, and consequently to develop

improvement projects strategically aligned (NEELY & NAJJAR, 2006; NEELY, 2005;

FOLAN & BROWNE, 2005, BOURNE, 2005; SLACK, 2000; PLATTS, 1995).

In this revision process is important to define the social responsibility role, and with this

objective several ‘visions’ are being constructed. These visions are grouped in reactive

approaches or proactive approaches. It is observed that a strategic vision should in its

essence deals with enterprise versus ‘environment’ interaction, and this is the great

challenge for modern enterprises, that is, reinvent their strategies in order to have real

sustainable operations.

Taking the purpose of regulating and establishing standards for environmental and social

affairs, several standards and recommendation are being conceived. Some examples are:

Accountability - AA 1000; Social Accountability - SA 8000; Global Reporting Initiative –

GRI; Environmental Management Standards - ISO 14000; International Guidelines for

Social Responsibility - SR ISO 26000 ( CASTKAA & BALZAROVAB, 2008; MITRA

& WEBSTER, 2008; PORTER & KRAMER, 2006).

Franco-Santos and Bourne (2003) identified that organisations devote time and effort

developing strategic performance measurement systems. Their research is looking for an

understanding about why some organisations are better able to ‘manage through

measures’ than others. This question is related to the strategic dimension of the

organizations’ performance and needs an in-depth comprehension about the interplay

between action and measurement, the performance information use in their decision-

making processes and their subsequently actions. It is not clear what critical factors

enable organisations to effectively use their strategic performance measurement system.

The presented paper furthers this discussion in the level operations management systems,

developing an understanding about the relationships between performance and strategic

management systems. An understanding about social responsibility role in designing,

implementing and managing operations strategic management systems takes a critical

importance, when these themes are worked as strategic ones.

The presented paper intends to discuss a model to improve our comprehension of the

social responsibility role in companies’ operations strategic management systems.

The paper is organised into two main parts, the first one develops a set of

recommendations for performance strategic management, where social responsibility

assumes a strategic importance. In the second part a model for integrating social

responsibility to operations strategy is proposed and social responsibility is treated as a

performance dimensions and also drives the creation of a specific set of capabilities.

Strategic performance management

A well known performance measurement frameworks is Kaplan and Norton’s (1992)

‘balanced scorecard’, which provides a planning technique and performance

measurement framework within the same system. It can be classified as a strategic

management framework since it integrates strategic map processes to performance

dimensions. The system creates customer focused value through the improvement and

development of business processes. The balanced scorecard model is based on

‘innovation action research’ and uses a methodology that integrates design,

implementation and operation of a strategic management system (KAPLAN, 1998).

Through the evolution of performance measurement frameworks, the balanced integrated

approach expands to a total integrated approach, with evidence of an evolutionary or co-

evolutionary process. Some characteristics could be used to define an evolutionary or life

cycle model and they are embedded in the following models:

- The performance measurement matrix integrates different dimensions of

performance, employing the generic terms ‘internal’, ‘external’, ‘cost’ and

‘non-cost’. The matrix enhances the perspective to external factors

(KEEGAN et al., 1989).

- The strategic measurement, analysis, and reporting technique – SMART –

developed by Cross and Lynch (1989) uses a hierarchic, performance

pyramid structure to represent the integration between organizational

vision and operations actions. There is a interplay between external and

internal orientations to improve the internal efficiency and the external

efficacy.

- The performance measurement model proposed by Fitzgerald et al. (1991)

integrates determinants and results of the operations systems performance,

exploring causalities between them. Measures are related to results

(competitive position, financial performance) or are focused on the

determinants of the results (e.g. cost, quality, flexibility).

- The Balanced Scorecard (BSC), proposed by Kaplan & Norton (1992)

constitute a multidimensional framework, based on financial, customer,

internal processes and learning and growth dimensions, which integrates

structural and procedural frameworks for designing a strategic

management system.

- The integrated dynamic performance measurement system – IDPMS –

conceived by Ghalayini et al. (1997) incorporates the performance the

dynamic features and the integrative properties. The integration process

involves the management function, process improvement teams and the

factory shop floor. The system creates a dynamic behaviour that articulates

its specification and the reporting process.

- The dynamics features are presented in the Neely et al. (2002)

performance prism. This is a scorecard based system for measuring and

managing stakeholder relationships. The framework is conceived to cover

stakeholder satisfaction, strategies, processes, capabilities, stakeholder

contribution dimensions. The main objective of the strategic management

system is to deliver stakeholder value.

It could be noted when analyzing the presented models that they are not directly related

to social responsibility issues. The great question is how to integrate social issues to those

management models. Environment issues like resources use and deployment, water, air

and soil pollution, gas emission, energy and material waste e question related to product

life cycle management, as well quality of working life; should be managed in operations

strategic management systems in order to strategically manage social responsibility.

(MICHELSEN et al., 2006, KRIKKEB et al., 2006, KRIKKEB et al., 1999).

To understand processes related to the application of performance measurement systems,

one may refer to the work of Simons (1991) and Henry (2006). They found two patterns

in managing a measurement system: simple feedback control or diagnostic, and

‘interactive control’. Bourne et al. (2005) use Simons’ (1991) framework to compare the

results of average-performing and high-performing business units. In the former, the

logic of the strategic management system is adherent to the simple feedback control

approach. In the latter, the strategic management systems are based on the interactive

control approach, while also employs the simple feedback control approach. The

diagnostic use defines the role of the performance measurements system as a

measurement tool and the interactive use defines the role of the performance

measurements system as a strategic management tool.

Henry (2006) and Simons (1991) models have common approaches that may be used in a

normative way to develop some special dynamic properties as:

- The diagnostic use or the simple feedback control systems represent the

single-loop learning process proposed by Argyris and Schön (1978). They

state that the development of a single loop learning process is a

prerequisite for developing a double-loop learning process. Thus, the

strategic management process combines both types of learning processes.

- The strategic management control system creates a dynamic tension when

jointly using both approaches to manage the performance measurement

system. Dynamic tension is defined by a ‘competitive’ and ‘cooperative’

behaviour stated between interrelated elements (ENGLISH, 2001; LEWIS,

2000).

- Control systems should develop a strategic capability to not be reduced to

an implementation role, but to contribute to the emergence of strategies

(Simons, 1991).

- Strategic performance measurement system could be operated focusing

organizational attention on strategic priorities. In that way, the

organizational model could be seen as ‘knowledge creating company’

(NONAKA & TAKEUCHI, 1995).

- Market orientation, entrepreneurship, innovativeness, and organization

learning capabilities developments are closely related to the strategic

management approach used to manage the performance management

system. Thus, the use of the measurement system could specifically

contribute for capability development (HENRY, 2006).

The management of a strategic performance measurement system defines its use, stating

how the data are acquired, analysed, interpreted, communicated and acted upon the

organizational business processes. The literature indicates that the intensity of

engagement and interaction with the performance measurement processes could have a

great impact on the business overall performance (Bourne et al. 2005).

Operations mode and design recommendations for operations strategic management

systems are suitable and adaptable for managing social responsibility issues. Arasa &

Aksen (2007), Walther et al. (2006), Farahania & Elahipanah (2006) e Fleischmann

(2000) research works illustrate how to built a social responsible operations, however,

they are incomplete solutions as they focus on specific problems as product life cycle

management. It is important to recognize that social responsibility issues should have a

systemic approach and this could be done when analyzing operations strategy.

Strategic management model development

The theoretical development that is presented in this section is founded in a strategic

management system redesign process, applied to a company operations function.

Particularly, sustainability issues as a broad and social responsibility in specific will

incorporated to that construction.

Operations strategy could be defined as a pattern of decisions, both structural and

infrastructural, which determine the capability of a manufacturing system and specify

how it will operate in order to meet a set of operations objectives which have been

derived from business objectives (PLATTS, 2007).

The concept of a strategic control system was presented when performance measurement

systems were introduced. The measurement system is a part of a wider system, which

includes goal setting, feedback, and reward functions (NEELY et al., 2005).

An operations strategic management system may be defined as a system that uses the

information to produce a positive change to organisational culture, systems and

processes. In this sense a performance measurement system should be conceived based

on consensus about objectives definition, resources deployment, priorities definitions and

performance results benefits sharing (AMARATUNGA & BALDRY, 2002).

The initial building blocks of all performance measurement initiatives, as they are

materialized in a performance measurement system, are performance measurement

recommendations. These recommendations define the content and structures of the

measures and they could be organized in a framework that informs the performance

measurement system design (FOLAN & BROWNE, 2005).

A framework for the measures selection process may be founded in the competitive

dimensions of manufacturing or service operations: price (cost/operational efficiency);

quality (process and product); time (dependability and agility); flexibility (process and

product); and innovation (process and product). Sustainability issues could create new

performance dimensions as environment (pollution, sustainability); society (quality of

working life, life quality). Performance dimensions define competitive domains and

patterns (PLATTS, 1995; LEONG et al., 1990; SLACK, 1987).

An operations strategy model based on performance dimensions and decision areas

constitute a basic building block for starting to study sustainability issues and operations

strategy. Environmental and social responsibility could be modeled, defining

relationships with performance dimensions and decision areas, in the same way that

Porter e Kramer (2006) did for the value chain. Figure 1 shows schematically three axes

that represent performance categories, based on simple input-output model. These

categories define sustainability in terms of economic, environmental and social aspects.

Having defined the role of the performance measurement system, in the context of

operations strategic management system, the core ‘functionalities’ associated to that

system are identified next. The association between roles, functions and capabilities of

the operations strategic management system are very useful for its design specification by

establishing causality between roles and organisational resources. Globerson’s (1985)

performance criteria define the system functionalities as: strategic orientation as

performance criteria are chosen from the organization’s objectives; evaluated

organizational unit has control over the performance criteria; and the performance criteria

definition should be a result of a participative interaction of the involved actors (e.g.

customers, suppliers, employees, managers). There may be a strategic realization

function, as the criteria follow the organization’s objectives. Another function emerges

from the management definitions, which state that the system should have a participative

conception process and also have ‘control’ over the evaluated organizational unit. A

strategic management function can be identified based on those assumptions.

Figure 1 – Performance dimensions and decision areas

Source: adapted from Platts (2007)

Structural•Capacity•Facilities

•Vertical Integration•Manufacturing Processes

Infrastructural•Organisation

•Production Control Policies•Quality Policies

•Human resources•New product Introduction

•Performance measurementMarket DemandsFeaturesQualityDeliveryPrice

ManufacturingPerformanceFeaturesQualityDeliveryFlexibilityCost

Environmental DemandsLess material InputLess energy input

Inputs from renewable sources

Environmental DemandsLess material InputLess energy input

Inputs from renewable sources

Environmental PerformanceReduced Greenhouse gases

Reduced wasteReduced toxic output

Increased reuse and recycling

Environmental PerformanceReduced Greenhouse gases

Reduced wasteReduced toxic output

Increased reuse and recycling

Social Responsibility

Demands

? Social Responsibility Performance

?

The synthesis developed by Globerson (1985) states an implicitly role for the

performance measurement system, which is to implement a strategic management

capability.

Maskell (1991) has also developed relevant principles for the performance measurement

system design: a changing nature in measures; measures conceived as part of a fast

feedback subsystem (the performance measurement subsystem); and measures designed

to stimulate the development of a continuous improvement capability rather than simply

monitor the operations strategy. Although a strategic management function is identified

in the implementation of performance measurements, this role is related to continuous

improvement development.

Although a strategic management function is identified by Maskell (1991) in the

implementation of performance measurements, this role is related to a capability

development of continuous improvement.

Blenkinsop and Davis (1991) expand the functional definitions of measurement systems

when they identify properties that the system should have, especially, when those are

related to organizational integration and differentiation. The properties cover

improvements of management system integration and differentiation in both horizontal

and vertical dimensions of the organizational structure. They also emphasise the

importance of covering the long, medium and short term perspectives of the life cycle of

an organization when designing the performance measurement system.

Based on a literature review, Gomes et al. (2004) identify several characteristics of

performance measurement systems:

- Measures must involve relevant non-financial information based on key

business success factors (CLARKE, 1995).

- Systems should be implemented to articulate strategy and monitor

business results (GRADY, 1991).

- Measures and related systems should be based on organizational

objectives, critical success factors, and have a customer orientation. One

of the main tasks should be monitoring both financial and non-financial

aspects of the obtained results (MANOOCHEHRI, 1999a).

- Performance system must dynamically follow the strategy (BHIMANI,

1993).

- Performance system should accomplish the requirements of specific

situations in operations, be long term oriented, and be simple to

understand and implement (SANTORI & ANDERSON, 1987).

- Performance system should be linked to reward systems (TSANG et al.,

1999).

- Financial and non-financial set of measures should be coherent and

consistent with the strategic framework (DRUCKER, 1990; MCNAIR &

MOSCONI, 1987).

It can be seen from Gomes et al. (2004) analysis that there is a changing nature in the

(re)design and management of performance systems. These should be integrated with the

business strategy, adapting to and monitoring its financial and non-financial aspects. The

performance measurement system is an integrative management system that interrelate

business performance dimensions with functions action plans (e.g. strategy of operations,

human resources, technology, marketing, and finance). Hence, the performance system is

defined in an organic way, developing an adaptative behaviour.

Band (1990) indicates that the measures should be useful and relevant for managers and

employees in performing their daily activities. Therefore, the measures must be part of a

feedback loop that links them to manager and employee performance evaluations and

analyses. Such feedback functionality helps the managers and employees to understand

the utility of the performance in conducting their activities and relating them to the

functional strategy. Interaction and participation are properties founded in the feedback

functionality.

Having discussed questions related to performance measurement systems functional

aspects, it is important to have a process view from organisational performance.

There are four main processes related to performance measurement: design,

implementation, operation and ‘refresh’, the latter process being a continuous system

redesign or review (BOURNE et al., 2005; NEELY et al., 2000; BOURNE et al., 2000).

The performance measurement system is the motive power that moves the strategic

management system and social responsibility practices effects should be evaluated by

that system. It should be noted that when an action is evaluated, it could evolved as result

of a learning process. It could be established an evolutionary cycle for social

responsibility as it is being integrated to the strategic management system and their

performance indicators (CASTKAA & BALZAROVAB, 2008; ZUIDWIJK & KRIKKE,

2008; BOYD et al., 2007; PORTER & KRAMER, 2006; MICHELSEN et al., 2006).

Exhibit 1 compares sustainability reports from three companies from Brazilian Energy

Sector. Data was obtained from public domain sources available on internet and are based

on GRI guidelines (COPEL, 2008; ITAIPU, 2008; PETROBRAS, 2008).

Exhibit 1 – Social reports and operations strategy

Determinant COPEL ITAIPU PETROBRAS

Economic Added value approach focused on relative investment or cost indexes. Not directly defining value for stakeholders.

Added value approach focused on relative investment or cost indexes. Stakeholders and defined, but their demands are not individually managed.

Added value approach focused on relative investment or cost indexes. Operations network defined and their strategy is segmented.

Environment Focus on energy and raw materials management. A reactive approach for product and technology processes, looking for operational efficiency improvement and safety.

Environment politics well defined. Energy, raw materials and facilities are managed looking for quality and safety standards. Product and production processes are not directly related to environment policies.

An integrated system manages health, safety and environment. Product and process technology follow environment standards. Operations network follow companies environment standards.

Social Social policies confined mostly to internal aspects. Social value and practices are not integrated to functional strategies, although a integrated management system is being adopted.

Social policies defined to internal and external elements, but not fully coherent. An integrated planning system is implanted and performance measures defined by strategic objectives. Social measures are not fully comprehended.

Social standards define for all operations network. An integrated planning system interrelates social and environmental issues, but not in an economic sense.

Labour Practices Safety standards established.

Safety and motivational standards defined.

Safety, motivational and technical standards defined.

Human Rights Conduct code defined by stakeholders and applied to all operations network.

Contracts with special clauses and focused projects in its local environment.

Internal focus based on universal standards.

Product Responsibility Focus on environmental issues.

Focus on environmental and social issues.

Focus on environmental, social and economic issues.

Exhibit 1 needs an in-dept study and perhaps maturity models could be applied to defined

sustainability development levels.

Kaplan and Norton (1992) developed a procedural framework to manage the organization

strategy, through the processes of design, implementation, use and refresh. The proposed

four stages to implement the balanced scorecard could be stated as follow:

1. ‘Translating the vision’ is closed related to the design process, developing and

‘operationalizing’ the organization’s strategic vision.

2. ‘Communicating and linking’ is the process associated with implementation,

linking the vision to functional objectives.

3. ‘Business planning’ is the process of assessing the value creation through the

integration of business and financial plans. The process of managing and

‘using’ or realizing the vision.

4. ‘‘Feedback and learning’’ process develops the capability of strategic

learning, and it could be used to refresh the conception of the strategic

management system.

The recent literature on performance measurement systems is looking for an in-depth

understanding of why performance measurement initiatives fail, in order to improve the

understanding of the main role of a performance measurement system, which is in the last

instance the development of a strategic management system (BOURNE, 2005; NEELY,

2005).

A performance measurement system may lose its effectiveness over time if it is not

redesigned to better attend new environmental and organisational demands (BOURNE et

al., 2005; FRANCO-SANTOS & BOURNE, 2005).

The strategic management of the performance measure system will enable an

organisation to develop continuous improvement and organisational learning capabilities

through continuous reviews of the measurement system (KENNERLEY & NEELY,

2003; KENNERLEY & NEELY, 2002; JOHNSTON et al.., 2002; KAPLAN &

NORTON, 2001; NEELY et al.., 2000; GHALAYINI & NOBLE, 1996).

The measurement system should sustain their importance and utility for the organisation

and its users (MANOOCHEHRI, 1999b). The refreshing process can be settled as an

embedded functionality of a strategic management system. Its main role is to co-ordinate

review or redesign of the performance measurement system as a result of its use and

interaction with its environment.

The presented work is founded in a strategic management system constitued by multiple

feedback loops. This system develops capabilities related to learning process and also

assuring strategy realization. Figure 2 shows the strategic management system that

embraces performance measurement and creates the scenario for strategic social

responsibility management integration.

The strategic management system should be designed and studied in a perspective that

goes far beyond strategic control, that is, it should be able to help organisations

management system to identify and develop change process, using performance results

for that purpose. Historic charts, scenarios and statistical analysis are tools that could be

informed by performance information. This information could also be used to generate

social responsibility reports.

Figure 2 – Operations strategic management system

Source: adapted from Pinheiro de Lima et al. (2008)

It has a special importance for the purposes of this article, understand and figure how to

position social responsibility in management system domain and it could be proposed two

actions. The first one is related to strategic alignment of operations strategic management

system and performance dimensions, as social responsibility could be defined as one of

them. The second action is associated to learning and improvement process and the

capabilities that result from them, as the strategic management system evolves. There are

Strategic Alignment

Performance Measures

Continuous Improvement

Learning

and Innovation

Stakeholders Vision

Operations Strategy Realization –Projects and Processes

Operational Performance Measurement

Performance

Even

ts

Operations System

+ +- +

Operations Strategy

Strategic Performance Measurement

+

-Business Strategy

capabilities that are related to social responsibility practices. These capabilities could be

organised in a maturity model.

Conclusions

A strategic management model proposition is not a trivial task as complexity and

dynamics are strong intervening variables between strategy formulation and environment

demands (or stakeholders demands).

There are many questions to be answered when the subject is sustainability, particularly

those associated to social responsibility and its integrations to operations strategic

management system. In order to develop sustainable operations is important to know

what are the enterprise value creation drivers, defining new performance dimensions or

competitive patterns; rethink and redefine the firm concept, enhancing the economic

approach to focus on benefits for its stakeholders; define the capabilities that an

operations system should develop to be social responsible; develop design

recommendations for an operations strategic management system, based on social

responsibility; standards and recommendations as AccountAbility - AA 1000; Social

Accountability - SA 8000, Global Reporting Initiative - GRI, Environmental

Management Standards - ISO 14000, International Guidelines for Social Responsibility -

SR ISO 26000, they should studied with the objective of extracting fundamentals or

premises for strategic management of sustainable operations.

Finally, it could be concluded that social responsibility strategic management and its

integration to operations system imply: in reviewing the enterprise strategic management

system design; in conceiving a new operations strategy vision; and in renewing

operations capabilities and competences.

Acknowledges

We thank the many contributions made by professor Annik Magerholm Fet (Department

of Industrial Economics and Technology Management, Norwegian University of Science

and Technology – NTNU), Dr. Carlos Mataix Aldeanueva (Grupo de Organización,

Calidad y Médio Ambiente – GOCMA, Escuela Técnica Superior de Ingenieros

Industriales - ETSII, Universidad Politécnica de Madrid - UPM), Dr. Jannis Jan Angelis

(Operations Management Group, Warwick Business School, University of Warwick) and

Dr. Ken Platts (Institute for Manufacturing – IFM, University of Cambridge), that

inspired the presented discussion in several opportunities that the authors had to discuss

operations sustainability issues.

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