Comparative Advantage: Using the Reporting Process to Amplify Differentiation in the Value Chain
By Lloyd Macfarlane
Michael Porter, one of the world’s most respected management theorists, argued that there are only two ways for firms to compete: by charging a lower price, or by differentiating their products or services from those of their rivals.
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The modern value proposition increasingly incorporates factors that are not just related to the product or the service (such as price, quality or relevance) but to factors associated with the organisation itself, such as reputation, transparency, accountability and corporate performance against sustainability targets, for example.
Companies that have embarked on a sustainability journey can use the reporting process to distinguish themselves in the value chain by targeting and marketing points of differentiation.
Differentiation – Product, Service and Company
Companies spend time and money trying to differentiate their offerings under the abovementioned headings, in order to be more attractive to their target markets. Differentiation is a basic economic principal that promotes competitiveness, and one that has been focussed on by many of the classic theorists, such as Edward Chamberlin (Theory of Monopolistic Competition, 1933).
Customers make purchases based on the value propositions presented by their suppliers. A value proposition (in this context) is quite simply the unique value offering that the customer will receive from a transaction (as compared to value propositions from others).
A number of factors go into the assessment of value and in the first instance the product or service is usually assessed for relevance (or usefulness), desirability, price and quality. However, the product or service is delivered by a company whose profile is of increasing importance in the procurement process. This means that the assessment of value is being broadened to include factors that relate to environmental, social, governance or empowerment (SA) credentials. Far more opportunities for brand and company differentiation are emerging in the value chain.
Drivers of differentiation
Forces and pressures are usually responsible for innovation and creativity. If there is no need to change, re-package or improve then there is unlikely to be much differentiation.
Some of the forces/ circumstances in which differentiation is more likely to occur:
Mature markets or sectors:
Companies in mature markets or sectors are more evolved and value propositions are more similar, so there is a greater need for differentiation, particularly with service providers that have less opportunity for tangible innovation.
Take established cellular service providers for example – call costs and network coverage of competing companies can be almost identical and yet these companies spend millions letting you know how different they are by building a corporate identity that you can relate to. Conversely, in new markets or new sectors (and in good economic times) less differentiation is apparent – there is less need for differentiation when there is no threat from competition.
Economically stressed markets:
When margins are tight and procurement budgets have been cut, buyers look more closely at the value proposition and sellers tend to increase levels of innovation and differentiation. The world has been on a tough economic treadmill since the collapse of the financial markets in 2008/9 and this has seen the emergence of new ideas and not surprisingly corporate sustainability has enjoyed prominence in this regard.
Regulated markets or sectors:
Regulation or supply chain policies can elicit forced (e.g. tax or incentive) or voluntary (e.g. reporting) responses from suppliers. Government can use incentives to speed up change and perhaps the best example of this is carbon taxation which will be introduced in South Africa in January 2016.
Carbon tax will see the need for more measurement and management of carbon across value chains and this will bring about procurement policies that require suppliers to measure their carbon footprint. These policies may further evolve to specify an acceptable range of carbon emissions per unit of output or per square metre of operations in any given sector, for example.
Supply Chain Sustainability
The real power of the economy lies in procurement. The quantity and availability of products and services is directly affected by demand and because demand is affected by supply chain/procurement policies, the supply chain can be a most powerful agent of change.
Companies are introducing sustainability into their supply chains not only because it’s the right thing to do, or because they are under pressure to do so, but because they see the value of doing so in the context of their medium to long term strategies.
The United Nations Global Compact (UNGC) is encouraging corporate leadership in this regard and many businesses use the ten UNGC principles to inform their supply chain policies. Similarly, the recently launched Global Reporting Initiative (GRI) G4 Guidelines contain much emphasis on supply chain sustainability, traceability and chain of custody.
The next big opportunity – supply chain differentiation
The most significant recent step up in corporate sustainability is the increased emphasis being placed on sustainability in the supply chain.
Procurement policies that encourage and even enforce certain key sustainability principles can meaningfully affect markets and should be noted by suppliers looking for opportunities to differentiate.
Importantly, supply chain policies take a closer look at indicators relating to companies and not simply their products or services.
This is placing more emphasis on environmental, social and governance issues and represents an exciting new opportunity for differentiation for those companies that are first to move.
Risk, reputation and leadership
Large customers are auditing suppliers using various criteria, but generally these audits will seek to establish:
• Whether there are any risks in an association, based on how the supplier’s business is conducted.
• Whether the supplier has a reputation that could cause any harm.
• Whether the supplier’s reputation could add value
• Whether there are any examples of leadership that could be amplified for mutual advantage.
Supply Chain Differentiation – Strategic Approach
Any random approach to differentiating under sustainability indicators is unlikely to succeed in the medium to long term. This is mostly because customers are beginning to use sustainability frameworks and systems to determine a holistic and materiality- based set of procurement indicators in their supply chains.
Therefore, an authentic approach must be driven by a sustainability plan that includes clear statements of objective and vision, where these have been informed by a process of identification and assessment of material issues for the company.
Companies are increasing the degree to which they report on sustainability in their supply chains. They are reporting on the sustainability impacts of their suppliers and on the influence that they have had in changing the sustainability performance of their suppliers.
This means that an opportunity exists for suppliers (and potential suppliers) to:
- Target (or report on) internal interventions that will be acknowledged by customers as meaningful to report on.
- Package sustainability information for large customers and other stakeholders.
- Strategically target key customers and new prospects using this information.
- An authentic sustainability/integrated reporting process will adhere to certain principles that are important in the identification of real opportunities for performance and therefore differentiation. The process of identifying and reporting on material indicators, particularly if inculcated in functional centres, will:
• Highlight data for comparison with competitors
• Highlight opportunities for intervention and performance management
• Establish targets, which can form the basis of future differentiation
Internal capacity and stakeholder engagement
Key stakeholders are engaged by various employees in various ways. Many of these engagements can be opportunities for communication of the company’s primary points of differentiation.
It is therefore necessary that key employees in functional centres of the business are familiar with the terms and tenets of corporate sustainability, the company’s sustainability plan and the role that they can play in the strategic approach.
Building this capacity in the organisation is important to the success of the overall plan.
Sales and marketing
Any sales and marketing plan should incorporate a customer needs analysis. As the needs and the requirements of the customer begin changing to incorporate sustainability indicators, it is important for suppliers to be ahead of this process.
This is only really possible with an engagement process that elicits information that can be used to for innovation and differentiation. This engagement process will ensure that targeted areas of differentiation are aligned with customer requirements.
After the requirements are known, a marketing plan should consistently reinforce messages that are directed at the
establishment of the desired ‘profile’ for the company. A multi-media approach can be effective to leverage packaged information to establish a desirable corporate image – one that is aligned with the ideals and requirements of the targeted customer.
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