Performance Prism, a new approach to Corporate Social Responsibility

MASTER THESIS Performance Prism, a new approach to Corporate Social Responsibility By: Juan José Costa Chillida Msc. Business Performance Management...
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MASTER THESIS

Performance Prism, a new approach to Corporate Social Responsibility

By: Juan José Costa Chillida Msc. Business Performance Management Supervisor: Kai Kristensen August 2009

MASTER THESIS ............................................................................................................. 1 1.

Introduction .......................................................................................................................... 4

2.

Structure of the thesis........................................................................................................... 5

3.

Problem Statement ............................................................................................................... 6

4.

Objectives.............................................................................................................................. 8 4.1.

5.

Secondary Objectives .................................................................................................... 8

Literature review on Corporate Social Responsibility........................................................... 9 5.1.

Definition of Corporate Social Responsibility................................................................ 9

5.2.

Theoretical Background of Corporate Social Responsibility ....................................... 10

5.2.1.

Carroll’s Organizational Social Performance Model (1979) .................................. 11

5.2.2.

Wartick & Cochran (1985) ..................................................................................... 12

5.2.3.

Wood's model of Corporate Social Performance (1991) ...................................... 13

5.2.3.1. 5.2.4.

Critics of Wood’s model................................................................................ 14

Freeman’s Stakeholder Theory ............................................................................. 14

5.2.4.1.

Stakeholder Theory and Corporate Citizen .................................................. 15

5.2.4.2. Benefits of a stakeholder approach. Nexus between CSR, stakeholder theory and financial performance .............................................................................................. 16 5.2.4.3. 5.3. 6.

Future concerns on the stakeholder approach ............................................ 18

Lack of common agreement of a universal CSR approach.......................................... 19

CSR and SMEs...................................................................................................................... 20 6.1.

Motivations and Benefits of CSR for SMEs.................................................................. 21

6.2.

Barriers of CSR on SMEs .............................................................................................. 23

6.3. Understanding SMEs’ intrinsic organizational competitive advantages to overcome barriers .................................................................................................................................... 25 6.4.

Recommendations ...................................................................................................... 26

7. Background of International Reporting, Verification and Certification of Social and Environmental Issues .................................................................................................................. 28 7.1. The need to include International Reporting Systems into a holistic Management approach. ................................................................................................................................ 30 8.

9.

Evolution of Total Quality Management towards Total Responsibility Management........ 31 8.1.

Ethical foundations of Quality..................................................................................... 32

8.2.

Towards Total Responsibility Management................................................................ 32

Analysis of the existing PMS................................................................................................ 33 9.1.

Objective of the analysis ............................................................................................. 33

9.2.

Methodology of Analysis............................................................................................. 34

9.3.

Sample......................................................................................................................... 34

9.4.

Delimitation................................................................................................................. 34

9.5.

Analysis of Excellence Models..................................................................................... 35 2

9.5.1.

European Foundation for Quality Management (EFQM)...................................... 35

9.5.1.1.

Analysis of CSR theories on EFQM................................................................ 37

9.5.1.2.

EFQM’s arguments for SMEs ........................................................................ 41

9.5.2.

Malcolm Baldrige National Quality Award (MBNQA)............................................ 42

9.5.2.1.

Baldrige and CSR theories............................................................................. 44

9.5.2.2.

Arguments on Baldrige ................................................................................. 45

9.5.3.

Deming Prize.......................................................................................................... 48

9.5.3.1. 9.6.

Balanced Scorecard ..................................................................................................... 49

9.6.1. 9.7.

Arguments on Deming Prize ......................................................................... 48

Arguments on BSC ................................................................................................. 51

The Performance Prism............................................................................................... 53

9.7.1.

Stakeholder Revolution ......................................................................................... 54

9.7.2.

Start with Stakeholders not strategies. ................................................................. 55

9.7.2.1.

Stakeholder Satisfaction ............................................................................... 55

9.7.2.2.

Stakeholder Contribution ............................................................................. 55

9.7.2.3.

Linking Strategies, Processes and Capabilities ............................................. 56

9.7.2.3.1.

Strategies ................................................................................................. 56

9.7.2.3.2.

Processes ................................................................................................. 57

9.7.2.3.3.

Capabilities............................................................................................... 57

9.7.3.

Success maps to help in the aligning process........................................................ 57

9.7.4.

Cause-and-effect implicit implications of Performance Prism.............................. 59

9.7.5.

Analysis of Performance Prism and CSR Theory.................................................... 60

9.7.5.1.

Descriptive justification ................................................................................ 61

9.7.5.2.

Instrumental justification ............................................................................. 61

9.7.5.3.

Normative ..................................................................................................... 62

9.7.6.

Performance Prism and SMEs ............................................................................... 65

10.

Discussions ...................................................................................................................... 67

11.

Conclusions and Suggestions .......................................................................................... 69

12.

Bibliography .................................................................................................................... 71

13.

Appendix ......................................................................................................................... 79

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1. Introduction The business industry has seen the evolution of Measurement during the last decades. Organizations, at first, normally focused on financial measures, measuring independent activities; but this fell short quickly because other factors were soon identified as important drivers of organizational performance. The later inclusion of Total Quality Management Systems (TQM) into the Business Industry created a great leap forward into the Measurement field, as these systems measure performance as a whole integrated process. TQM related Management and Measurement, embracing both social and technical dimensions aimed at achieving better corporate performance. Singhal (2003) showed the importance of the TQM practice due to its power to increase financial performance in the long run. Then, there is a clear need to implement holistic frameworks which may help managers in taking decisions for organizations. However, implementing correctly a PMS could be a complex task. Despite the improvements in TQM with the inclusion of new models along with time, TQM practice needs to be put into practice through a specific framework (Bou-Llusar et al., 2006). Unfortunately or fortunately, there is no common agreement yet on a general Performance Measurement System (PMS) to be used among organizations worldwide. In addition, measurement cannot be conceived nowadays without the concept of Corporate Social Responsibility (CSR). In the past, being responsible was associated with bringing income to the organization or focusing on high productivity. Nowadays, the concept has evolved, and such past trend is no valid any more. Organizations must take care of other social actors to truly become sustainable organizations concerned with economic growth, social progress and preservation of the environment. Thus, organizations have to adapt their business models to the new requirements, where environment, communities, customers, employees, shareholders, regulators, and others interest groups are more sensible to companies’ activities. Although the common thinking was, and in some cases is, to relate CSR with higher costs, researchers have demonstrated that CSR can bring several benefits to organizations, creating a new interest for managers to introduce CSR into the organization’s decision-making process and with strategic purposes. Also, it has been thought that only large organizations are able to include CSR into their management models as they are the ones having excess of resources (especially financial and human 4

resources). Such fact may be dangerous because the reality is that the majority of the organizations in the markets are Small and Medium Enterprises (SMEs) (European Commission, 2003). It is then necessary to convince SMEs that CSR is compatible with their businesses; that SMEs have certain characteristics (which I will later address), that may make them cope with CSR requirements. They must be aware that introducing CSR in a proper way may create benefits instead of costs (i.e. organizations can gain better reputation, key in today’s business industry) Besides, bad reputation in one place of the organizations’ activities can influence in other places of the world almost instantly due to Internet and the Media’s ability to spread the information. For that reason, managers shall watch out for the risks that could affect the company in order to avoid them or minimize them, as reputation is hard to win and very easy to lose. Some SMEs have already incorporated CSR practices because they are becoming more concerned with the increasing demand and exigencies of consumers and other groups in this field, but there is still a long path toward achieving full CSR practices and benefits in the business industry.

2. Structure of the thesis The thesis consists mainly of four parts: The first part will concentrate on the theoretical background of Corporate Social Responsibility, the different conceptions it had during the last decades and its actual definition. The Second part includes the analysis of the main Performance Measurement Systems mostly used, the Balanced Scorecard (BSC), and those trying to create standards: the European Foundation for Quality Management (EFQM), Malcolm Baldrige National Quality Award (MBNQA), and the Deming Prize. At this part I will go through each framework in respect of SMEs and CSR to try to find the gaps on the topic. On the third part I will introduce and analyze the Performance Prism framework, a different approach of measurement, which is the center of analysis of my thesis. The fourth and last part includes the discussion, conclusions and some brief suggestions

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3. Problem Statement The past has seen the widespread utilization of different Performance Measurement Systems (PMS). Research has helped in reaching new approaches serving managers with new and better PMS. These have evolved from different backgrounds and perspectives, such as the TQM’s Excellence Models, or The Balanced Scorecard among others. While large organizations have enough financial and Human Resources to carry out practically all PMS available, SMEs need especial PMS which best fit their particular and especial organizational characteristics. The implementation of the right framework is a key factor for their survival and success, at the same time that it will be very important for SMEs to address their improvements efforts on those fields that really create value for the company or organization. It will be necessary to raise the awareness of the benefits of holistic managerial models/PMS on SMEs because, as figure 1 shows, 75,6% of large Danish organizations use PMS, while SMEs are still way behind, falling short to get all the benefits PMS have on organizations. Figure 1.The use of models as a function of year and the number of employees in Denmark

Source: Kristensen, Juhl Eskildsen 2003

Mr. Kai Kristensen, Mr. Hans J. Juhl and Mr. Jakob Eskildsen (2003) carried out a study with the objective to analyze the state-of-the-art of the PMS used in Denmark. They found out that the PMS mostly used was the Balanced Scorecard (BSC) and also showed that while Balanced Scorecard and EFQM models demonstrated good financial results for large organizations, only Balanced Scorecard proved positive financial performance for Small and Medium Enterprises (SMEs). On the other hand, EFQM did not show good financial performance at SME. 6

Figure 2.The financial effect of using holistic management models in Denmark (companies with less than 50 employees)

Source: Kristensen, Juhl & Eskildsen 2003

The findings, shown on figure 2, are of great importance because, as I will analyze later, there exists a huge gap in SMEs wanting to approach Corporate Social Responsibility. Furthermore, SMEs form the majority of the enterprises worldwide1, and this fact could create a big sustainability problem in the near future. Besides, the sentiment of Society towards social and environmental issues is much stronger day after day, and hence, people are becoming more concerned with organizations’ activities. Then, SMEs must become aware of it and try to gather more information of the available PMS concerning CSR. The last trend of Corporate Social Responsibility shows that it is a recommendable for organizations to engage in a multiple stakeholder management. Excellence Models have shown great improvements in responding to such new societal and environmental requirements, in a way that they can even be considered closer to Total Responsibility Management (TRM) than to Total Quality Management. But, despite their improvements, figure 1 might lead to think that Excellence Models have some problems of implementation on SMEs, reason why SMEs may prefer to use other existing frameworks instead.

1

The European Commission 2001

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On the other hand, Balanced Scorecard (BSC), the mostly used PMS worldwide, despite its good fit for SMEs, may not be the right tool to approach CSR because it only focuses on three stakeholders: shareholders, customers and employees2. Then, there is clear need to accommodate CSR on a PMS which may lead SMEs create positive results. Otherwise, organizations activities, not concerned with CSR, may create a future sustainability problem. Some researchers like Neely et. al. (2002) support the importance of a new approach of Performance Measurement Systems. They think that PMS must evolve from strategybased PMS toward Value-based PMS. While BSC, for instance, focuses in the first, Performance Prism is based on the second, which aims at delivering value to all the stakeholders of the organization (Green & Jack, 2004). On this paper I will analyze the problematic of the existing Performance Measurement Systems and I will analyze as well the Performance Prism, which, despite it has not been implemented in practice, it may bring new input to improve the actual problematic.

4. Objectives The objective of my thesis is to suggest that Performance Prism is, theoretically, a better Performance Measurement System for SMEs wanting to take an approach of Corporate Social Responsibility3.

4.1.

Secondary Objectives

I will analyze the theoretical background and current status of the Corporate Social Responsibility’s conception, and how the existing Performance Measurement Frameworks approach CSR and how they fit SMEs. I will also analyze in depth the Performance Prism, the Performance Measurement System (PMS) created by Adam Neely et al. in 1999, to show how the model may fill the existing gaps up on the topic.

2 3

I will later analyze this framework more in depth Compared to the EFQM, Baldrige, Deming Prize and Balanced Scorecard.

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5. Literature review on Corporate Social Responsibility 5.1.

Definition of Corporate Social Responsibility

Before starting the analysis, it is necessary to introduce the concept of Corporate Social Responsibility (CSR) to have a better understanding of the topic and establish the basis of the present analysis. Corporate Social Responsibility (CSR) is created due to the conflict between organizations’ objectives of maximizing benefits with their consequent actions for that purpose, and the need of being responsible with the Society and the Environment. See the role of organizations in Society on next figure 3: Figure 3: Sustainable Development & CSR

Source: Avlonas, N.: Adviser of EFQM

Although CSR has been and it is a very subjective concept, being subject of extensive research and arguments over the last decades (Jamali, 2008), I will try to gather the main concepts of CSR in order to have a better understanding. The World Business Council for Sustainable Development (WBCSD) defined CSR as ‘‘the commitment of business to contribute to sustainable, economic development, working with employees, their families and the local communities and society at large to improve their quality of life.’’ (WBCSD, 2002). The European Commission4 named CSR as the voluntary integration of social and environmental concerns in the enterprises’ daily business operations and in the interaction with their stakeholders: employees, shareholders, business partners, suppliers, consumers, public authorities, NGOs, and the environment (Green Paper 2001). The latter is strongly linked to Elkington’s “Triple Bottom Line” (TBL) approach (1994), whose main idea was that for an organization to be Sustainable must be 4

See how the European Union approaches CSR on Appendix: Item 1

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financially secure; it must minimize its negative environmental impacts and it must act in conformity with societal expectations. Waddock et al., (2002) agreed with this last definition as they termed CSR as the obligations that businesses have towards meeting the needs of a wider array of stakeholders, which lets organizations reach the objective of becoming Corporate Citizens. Also, CSR can simply be understood as the business contribution to sustainable development. Despite these concepts’ good fit in narrowing the concept CSR, it is necessary to go beyond the several definitions of CSR and study intensively the different CSR theories that researchers have brought out during the past decades.

5.2.

Theoretical Background of Corporate Social Responsibility

The growing interest of CSR has caused researchers study the firms’ socio-economical managerial practices to achieve new theories which could help businesses in coping with such new societal behavior. The rejection of the Friedman Model (1970), which said that enterprises only worked for the benefits of their shareholders, has been the trend during the last decades, where the demands of all stakeholder groups implied that organizations should not only care for the financial benefits of the shareholders. Researchers argued that Friedman’s economic model was not consistent with the long-term economic growth because it did not pay attention to the rest of the stakeholders, like consumers, suppliers, authorities, environment, non-governmental organizations, and other institutions. To sum up next points, Carroll (1979), Wood (1991) and Wartick & Cochran (1985) advocated that defining Corporate Social Responsibility in itself was not enough. They thought that to really implement social issues in the organizations, the term Corporate Social Performance fit better, as it integrated Corporate Social Responsibility, Corporate Social Responsiveness and Corporate Social Performance, the three perspectives organizations had to look at to really implement a Social Responsible System. Next I introduce the main theories which start from Carroll’s (1979) economic, legal, ethical and discretionary responsibilities, and moves along with the years towards the term of good corporate citizen (Waddock, 2004). 10

5.2.1.

Carroll’s Organizational Social Performance Model (1979)

According to Carroll, the idea of Social Responsibility supposes that the corporation has not only economic and legal obligations, but also certain responsibilities towards Society which extend beyond such obligations. He designed a tool which helped in integrating all dimensions of CSR into organizational management. His Organizational Social Performance Model presents three dimensions: • First dimension: Attitude towards CSR (Corporate Social Responsiveness). According to Carroll's continuum, a firm's approach to its environment may vary from “do nothing” to “do much”: a) The Reactive Attitude means that organizations react to external forces which oblige them to act. Among these, the model includes laws or other obligations. b) The Defensive Attitude: a way of escape for organizations towards other external forces. c) The Well-off Attitude means that organizations act on CSR because they know it exists but they do it without caring for the result. d) Pre-active or Productive Attitude: organizations try to anticipate with the right strategies of CSR without being forced by any institution, or other interest group. • Second dimension: Category of responsibilities that organizations must undertake on CSR. (Corporate Social Responsibility) a) The first Responsibility of the organizations is to be sustainable in economic terms. b) In second place organizations must accomplish all the legal regulations. c) In third place organizations must be ethically responsible to respond to the demands of all the interest groups, nationally and internationally. d) In last place, the actions organizations want to take voluntarily, to the discretion of the organization, like extraordinary benefits of their employees for instance. Organizations take these actions because they think they can improve the Society in itself. • The third dimension concerns Issues organizations take to become responsible organizations. (Corporate Social Performance) a) Consumption 11

b) Environmental c) Product security d) Shareholder security To highlight Carroll’s definition of CSR, its most important issue concerns the economical, legal, social, ethical and discretional expectations of Society with respect to the organizations. Managers are challenged to take decisions and actions to be profitable, but following the demands of the legislation and the ethics Society demands. Although Carroll’s model is the basement of CSR, it is criticized in a way that the model does not approach environmental issues as responsibilities. To overcome this fact, John Elkington coined the Triple-Bottom-Line (1994), with the aim to formulate strategies to achieve the economic results throughout economic, social and environmental sustainability, the actual baseline for today’s conception of CSR. 5.2.2.

Wartick & Cochran (1985)

Wartick & Cochran (1985) criticized that Carroll’s third dimension only consisted on Issues and Strand’s vision (1983) of the third dimension was simply based on responses (Strand modified the third dimension of Carroll’s model). They claimed that previous models introduced individual categories instead of processes and principles, failing to create an integrated model. Wartick & Cochran’s model can be shown on the next table: Table 1.Wartick & Cochran’s model Principles

Processes

Policies

Corporate Social Responsibility

Corporate Social Responsiveness

Social Issues Management

1.Economic

1.Reactive

1.Issues Identification

2.legal

2.Defensive

2.Issues Analysis

3.ethical

3.Accommodative

3.Response Development

4.Discretionary

4.Proactive

directed at:

directed at:

directed at:

1. The social contract of Business 1. The capacity to respond

1. Minimizing surprises

2. Business as moral Agent

to Changing Societal Conditions

2. Determining effective

2. Managerial Approaches

corporate social Policies

to developing responses Philosophical orientation

Institutional orientatIon

Organizational Orientation

Source: Wartick and Cochran (1985)

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They defined Corporate Social Performance as the integration of the principles of Social Responsibility, the processes of Social Responsiveness, and the Policies developed to address social issues. Wartick and Cochran’s modification of the third dimension responds to Issues Management, a method to manage Social Responsiveness trying to integrate all the processes, consisting of three stages: (a) Issues Identification; (b) Issues Analysis; (c) Response Development. 5.2.3.

Wood's model of Corporate Social Performance (1991)

Wood defined Corporate Social Performance as an organization's configuration of Principles of Social Responsibility, Processes of Social Responsiveness, Policies and Programs, and observable Outcomes as they relate to the firm's societal relationships. This model is based on previous studies, as it introduces Carroll’s four part categorization of Social responsibility, and improves Wartick and Cochran’s model in a way that she thought that their model was too restrictive for the following reasons: o It used Policies to address social issues, meaning that there could be informal behaviors not seen by the model. o Identifying criterions is not the same that implementing principles. Categories may be approached with different principles. o Wartick and Cochran’s model addressed Social Responsiveness as a single process rather than a set of processes. Table 2.Wood’s Corporate Social Performance Model (1991)

Principles of Corporate Social Responsibility o Institutional principle: Legitimacy. o Organizational principle: Public Responsibility o Individual principle: managerial discretion. Processes of Corporate Social Responsiveness o Environmental assessment o Stakeholder assessment o Issues management Outcomes for Corporate Social behavior o Social Policies o Social Programs o Social impacts Source: Wood 1991.

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According to Wood, to assess a company's social performance, the researcher would examine the degree to which Principles of Social Responsibility motivate actions taken on behalf of the company; the degree to which the firm makes use of Socially Responsive Processes, the existence and nature of Policies and Programs designed to manage the firm's societal relationships, and the social impacts (i.e., observable Outcomes) of the firm's actions, programs, and policies. See previous table 2. The three main elements of her model represent the overall structure of the framework and must be integrated. The three facets of responsiveness: environmental assessment (context), stakeholder management (actors), and issues management (interests) must be connected, so that stakeholders are involved in issues, issues involve stakeholders and their interests, and information about the environment is necessary for responses to be made. The inclusion of stakeholder perspective in the model, following freeman’s research in 19845, identifies the groups who can affect or are affected by the organizations’ actions. Wood’s model6 is considered as a good starting point to create a framework to analyze the social, environmental and economic activities of an organization. 5.2.3.1.

Critics of Wood’s model

According to Waddock (2004), Wood’s model pays only limited attention to stakeholders in his responsiveness model. Jamali (2008) agreed with Waddock on the fact that to really cope with the changes of the needs in Social Responsibility Management, a stakeholder approach model is needed so they could be continuously monitored and addressed in a dynamic manner.

5.2.4.

Freeman’s Stakeholder Theory

Freeman defined the term stakeholder on his book, Strategic Management: A Stakeholder Approach (1984) as any group or individual who can affect or is affected by the achievement of the organization’s objectives. Freeman considers a new managerial model which goes beyond the traditional shareholders’ point of view with the new incorporation of other internal and external stakeholders. This approach has

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See next point Freeman’s stakeholder theory See figure 18 Principles of Corporate social Responsibility and figure 19: Corporate Social Outcomes on Acting on CSR Principles within CSR Domainson on Appendix. 6

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been followed by many authors. For instance, Uhlaner et. al., (2004), on a study on small Dutch organizations defined CSR in its broadest sense with respect to stakeholders within and outside the organization. Freeman’s stakeholder analysis improves the frameworks of Corporate Social Performance of Carrol (1979), Wartick and Cochran (1985) and Wood (1991) because by managing the wants and needs of all the stakeholders, the required dynamism is accomplished as stakeholder theory focuses on what the organizations should act upon. There are several classifications of stakeholders. The original Freedman’s model of the stakeholder theory included the following stakeholders:

Figure 4.The original stakeholder Model –Freeman (1984)

Source: Fassin (2009)

Among the several classifications, Waddock & Graves (2006) classified stakeholders in primary and secondary. Primary such as owners, employees, customers, and suppliers; those without whom, the organization could not survive. Secondary stakeholders include the non-governmental organizations (NGOs), activists, communities, and governments, those who can affect the firm or be affected by it. They also include, independently, general societal trends and institutional forces.

5.2.4.1.

Stakeholder Theory and Corporate Citizen

The concept of Corporate Citizen, despite its resemblance with the concept of Stakeholder Theory, must be cited as well. Waddock (2004) defined the concept of Corporate Citizen as "the strategies and operating practices a company develops in operating its relationships and impacts with stakeholders and the natural environment". This term also introduces Elkington’s 15

Tripple Bottom Line (environmental, social issues and governance) into organizations’ business models. It may be argued that Corporate Citizen and Stakeholder Theory are basically the same concept because in the adaptations of the original version of Freeman’s Stakeholder theory, environmentalists are included as stakeholder (Fassin, 2009). Also, if organizations take future generations as stakeholders, both concepts may be the same thing because to maintain the future resources of future generations, organizations shall act in an ethical manner with the Society, Economy and Environment.

5.2.4.2.

Benefits of a stakeholder approach. Nexus between CSR, stakeholder theory and financial performance

While CSR’s concept still may be seen as an abstract concept, it is necessary to approach it to businesses, by trying to show that there is a relationship between stakeholder theory on organizations and corporate financial performance. It is clear that organizations with higher financial performance are prone to carry out more CSR activities (McGuire, J. et. al., 1988). This study support “the theory that slack resource availability and CSP are positively correlated” (Waddock & Graves 1997). Such findings are of significant importance, but it would be more interesting to find the opposite direction; whether carrying out CSR activities lead to better financial performance. Although there has been much research on the topic, there is not common agreement yet on the results of researchers’ studies. They have tried to confirm that organizations may use Corporate Social Responsibility as an instrument to get an objective trying to corroborate the instrumental version of the Stakeholder Theory of wealth creation (Donaldson & Preston 1995; Garriga & Mele 2004) For instance, Alexander & Bulcholz (1978), Cochran & Wood (1984) and Abbott & Monsen (1979) are among the researchers who could not find any connection between CSR and positive financial performance. On the other hand, some other researches defended that a stakeholder approach allows the firm to maximize shareholder wealth, while also increasing total value added (WBCSD, 2002; Orlitzky, et. al., 2003; Waddock & Graves, 1997).

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To clarify this, some researchers argue the validity of previous studies as some of them were based on different indexes of Social Performance, or carried out in different environments, countries, etc. For instance, the Fortune ranking was used to base studies on CSP and Corporate Performance. Such ranking contained the opinions of senior executives, directors and analysts who were asked to rate the ten largest companies in their own industries on eight different aspects of reputation (one of which was social performance). Abbott & Monsen (1979); Harrison & Freeman (1999) and Waddock & Graves (1994) argued that Fortune rankings had certain limitations. Waddock & Graves (1994) agreed that biggest weakness of the Fortune rankings is that they provided only one summary measures of social performance covering the opinion of only the 10th largest companies. To sort this problem out, Waddock & Graves (1997) used the KLD7 index, which rated all the Standard & Poor’s 500 companies, representing a big sample of the business community. Besides, they generated, as an independent variable, an index of CSP which gave a single numerical CSP value for each company on the analysis. On such new Index, elements such as Community impact, diversity, employee relationships, environmental impact, and product safety are assessed, making it more complete, valid and a trustable baseline than the Fortune Index. Waddock and Graves’ (1997) study showed the fact that the heavier weights in the CSP index were those that mostly represented critical stakeholders, such as employees, customers, and community. This finding is of great importance that may corroborate Stakeholder Theory as an effective and valid theory because their research lead to think that there is a positive linkage between managing stakeholders, and obtaining positive financial results. Another benefit was found by Aragón-Correa et. al.(2006), who confirmed the hypothesis that a capability of stakeholder management will be positively associated with the development of proactive environmental strategies by SMEs. Also Clarkson (1995) supported the idea that stakeholder theory causes organizations to understand easily their obligations and responsibilities with their stakeholders.

7

Kinder, Lydenberg, Domini & Co., Inc.

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Hence, Stakeholder theory has been widely accepted as a management tool to develop corporate strategy (Fassin 2009) and it is considered a value driver to incorporate as business strategy (Freeman 1984).

5.2.4.3.

Future concerns on the stakeholder approach

It will be necessary to manage trust among stakeholders, as this is one of the values of the company to achieve a competitive advantage and reach the objectives. To do that, organizations will need to demonstrate activities, participation, and dialogue with the stakeholders of the company to understand their wants and needs. Maybe the biggest problem for organizations when trying to implement a stakeholder approach is to prioritize which stakeholders are the most important, and to whom assign the scarce resources organizations may have. In an attempt to do so, Agle et al. (1999) studied the characteristics of the stakeholders which affect on their salience. The research methodology was based on the KLD index (which includes S&P 500), making the model very representative. They found out that that in the minds of CEOs, the stakeholder attributes of power, legitimacy, and urgency were related to stakeholder salience. This finding suggests that such stakeholder attributes affect on how CEOs give priority to competing stakeholders. Milena and Deephouse (2007) identified power as the most important quality of the stakeholder, followed by urgency and legitimacy. Waddock & Graves (1997) found owners, employees, and product/customers as the most significant stakeholder; less significant communities and no significant at all environmental issues in the relation of stakeholder management and financial performance. The last (the environment) may be due to the possible lack of awareness of organizations. Still, these balancing priorities are not easy to establish and further research will be needed on this topic, as there exists the necessity to find the links of stakeholder attributes, stakeholder salience, CEO values and corporate performance (Agle et al. 1999)

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5.3.

Lack of common agreement of a universal CSR approach

Although the last CSR models presented are very important and basic to show the great advance of CSR, there is a lack of common understanding due to the many different theoretical approaches on the topic and the subjectivity of the concept in itself. In an attempt to have a better understanding of all the existing theories, Garriga and Mele (2004)8 gathered the following: • Descriptive theory: organizations carry out CSR activities in a descriptive manner, to simply follow the law, or to simply show to the public opinion that they carry out specific practices (Donaldson & Preston 1995) • Instrumental Theories: CSR is an instrument towards wealth creation o Maximizing the shareholder value o Cause-related marketing • Political Theories: concerns about the power of corporations in society and a responsible use of this power in the political arena o Corporate constitutionalism: the role of power that business has in society and the social impact of this power o Integrative social contract theory: an implicit social contract between business and society exists o Corporate citizenship: sense of belonging to a community. Focused on rights, responsibilities and possible partnerships of business in society. • Integrative Theories: in which the corporation is focused on the satisfaction of social demands o Issues Management: processes to respond to social and political issues. (See Wood’s and Wartick and Cochran’s model) o Stakeholder Management: is oriented towards stakeholders or people who affect or are affected by corporate policies and practices o Corporate Social Performance. (Outcomes for Wood, Issues for Carrol, and Policies and Issues management for Wartick and Cochran) • Ethical Theories: based on ethical responsibilities of corporations toward society o Normative stakeholder theory: a socially responsible firm requires simultaneous attention to the legitimate interests of all appropriate 8

See Annex Figure 20 Corporate Social Responsibilities and related theoretical approaches

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stakeholders and has to balance such a multiplicity of interests and not only the interests of the firm’s stockholders o Universal Rights: it is based on UN Global Compact principle, and concerns the areas of human rights, labor and the environment. o Sustainable development: it requires the integration of social, environmental, and economic considerations to make balanced judgments for the Elkington’s long term ‘‘triple bottom line’’ (TBL) o The common good approach: it is based on the founding principles of the popular The Caux Roundtable Principles for Business9 (similar to sustainable development and Universal Rights) Garriga and Mele gathered some of the theories, but as I noticed, some of them might represent the same thing some of the others theories do (i.e. The Caux Roundtable Principles for Business, sustainable development and Universal Rights could have similar characteristics). Such summary is not prescriptive, as there exist many more approaches on Social and Environmental issues10. Even though, Garriga and Mele’s simplification is needed to gather and narrow the main theoretical approaches of CSR, which will be the basis of the analysis of my thesis.

6. CSR and SMEs Once seen the theoretical background of CSR and its potential benefits in general, it is necessary go further and study the relationship of CSR and Small and Medium Enterprises (SMEs). Knowing how SMEs take care of CSR activities and the effects CSR has on them is key to better understand the problematic of the thesis. To begin with, it is necessary to categorize and determine SMEs. The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euro, and/or an annual balance sheet total not exceeding 43 million Euros. 11

9

www.cauxroundtable.org 10 See Background of International Reporting, Verification and Certification of Social and Environmental Issues on pages 28 and 29 11 Extract of Article 2 of the Annex of Recommendation 2003/361/EC

20

So far, CSR in SMEs is an area which has not attracted much research in the past. Such little attention was due to the common thinking that CSR was simply a matter for large organizations, being the ones with enough resources. This might have caused SMEs refrain from taking a CSR approach, creating a huge gap to cover, as SMEs represent the majority of enterprises across industries (Kusyk & Lozano, 2007). A study of the European Commission in 2001 revealed that in Europe, 90% of all companies were SMEs, contributing majorly to countries’ GDP and labor markets12 The fact that CSR may not be on SMEs’ agenda is dangerous as it may create a big sustainability problem in the near future. For that reason, this thesis aims at trying to facilitate CSR on SMEs. Also, Institutions like EU13 will play a key role in Business society. Such Institution has taken several steps forward during the last years, including small businesses in its goals of the European Commission’s Growth and Jobs Strategy14.

6.1.

Motivations and Benefits of CSR for SMEs

Despite the problem that some European SMEs are still considering CSR as a threat to competition (Morsingand & Perrini 2009), and that 60% of SMEs are content simply with survival, having no necessity of incorporating CSR activities, the situation is changing.

Aragón-Correa et. al.(2006) found out that size of firms is important but not a deterministic condition for developing environmental strategies and achieving better financial performance. Moreover, there is a recent trend showing that CSR is growing among SMEs (EC and Observatory of European SMEs, 2002). Some of the few studies carried out in the past showed, for instance, that Norwegian SMEs are beginning to think about CSR as an opportunity to create a new platform for competitiveness (Hockerts et al. 2008). Also, another study done on 261 German SMEs by Hammann, Habisch and Pechlaner (2009), showed that socially responsible behavior or management practices towards employees, customers, and to a lesser extent society, are positively correlated with economic performance15.

12

76 million jobs in the EU See again Item 1 on Appendix 14 http://ec.europa.eu/growthandjobs/index_en.htm 15 Such finding agrees with Waddock & Graves (1997) 13

21

It is a must to conceive CSR, then, not as a burden for SMEs, but as a way to enhance competition and reduce risks, driving companies towards positive performance. Among the immediate benefits of CSR engagement for the SME, Luken & Stares (2005) considered next: •

Financial savings: reduction in water consumption or electricity for instance.



Environmental improvement:

reduction in solid waste generation and

improvement in waste water quantity/quality. • Social improvements: reduced risk of accident, improvement in health conditions. • Product improvements: better quality, reduction in rejection and increase yield. Also, Jenkins (2006)16 approached CSR in the UK’s SMEs and found out that CSR was seen by SMEs as an idea that concerns having an awareness of the impacts of the business. Jenkings showed that UK SMEs wanted to have a positive impact on a wide range of stakeholders through the business decisions made. She also found the following benefits on UK’s SMEs: Table 3.Benefits of CSR in UK’s SMEs

Benefits Improved image and reputation Improved trust and understanding Larger, more prominent profile Better market position More business Increased employee motivation Increased attractiveness to potential recruits Cost savings and increased efficiency Risk management Benefits in company cultura Source: Jenkins 2006

The main reason why all the organizations interviewed took CSR activities17 in the UK was due to ethical and moral arguments. They thought about them as “the right thing to do” because organizations had an internal motivation stemmed from moral values and admitting that CSR needs to be beneficial for Society and the organization itself.

17

See table 7: CSR activities on UK’s SMEs

22

A study carried out on Spanish SMEs18 also corroborated such ethical reasons. The main problem here, though, is that despite the good ethical activities, they are still occasional and not related to their own business activity. Among the Spanish SMEs’ activities stood out collaborating with local festivals, sport events, neighborhood, commerce associations and NGOs. A positive finding was discovered here (as next table 4 shows) because organizations showed that they are beginning to adopt CSR activities with a strategic intent and with the purpose to achieve a better management19:

Table 4.Motivation of Valencian (Spain) SMEs to implement CSR. FIRST MOTIVATION

BUSINESSES

SOCIETY

BETTER MANAGEMENT

50,30%

42, 0%

COMMITMENT WITH SOCIETY

27,90%

23,60%

PUBLICITY

17,70%

29,50%

4%

4,90%

100%

100%

BECAUSE CSR IS THE NEW TREND TOTAL

Source: Consellería d’Industria, comerç i innovació. An ethical approach to Valencian businesses.

This fact shows that CSR is beginning to be used as an instrument, instead of simply supporting an ethical/moral theory. SMEs are starting to realize the benefits CSR can bring. Nevertheless, the situation is far from ideal, as there are many factor that shall be overcome which I next identify.

6.2.

Barriers of CSR on SMEs

Despite the improvements in CSR, there is still a long way for SMEs to get acquainted with the benefits and advantages of CSR. There are still many barriers on their way. Maybe one of the biggest problems is that SMEs do not link CSR with strategy. As I previously noticed, organizations carry out occasional CSR activities for ethical purposes (Jenkins 2006), failing to reach maximum competitive advantage.

18

Etnor, Fundación para la ética de los negocios y de las organizaciones. (2006) RSE. Una aproximación al comercio valenciano. Conselleria d’industria, Comerç i innovació. pp. 1-72 19 Etnor, Fundación para la ética de los negocios y de las organizaciones. (2006) RSE. Una aproximación al comercio valenciano. Conselleria d’industria, Comerç i innovació. pp. 1-72

23

Gadenne et. al. (2009) found out that SMEs owners/mangers are aware that certain environmental practices might lead to benefits in the future. However, only a minority of businesses are actually committed to implement environmental practices. Such finding means that favorable attitudes towards the environment are not associated with taking action to improve the environmental impact of their firm. A reason for this might be the lack of financial resources. Waddock & Graves (1997) showed that CSR’s low implementation on SMEs was due to the lack of financial and human resources, lack of experience and knowledge of the owner (this last from Haksever, 1996), and the lack of time and difficulty to identify opportunities. The Observatory of European SMEs’ analysis (2002) and a study carried out by Seidel et. al. (2009) agreed on the following barriers of SMEs to implement CSR activities: • Negative company culture towards the environment • Unawareness of the environmental impacts of the business. • Skepticism towards the business benefits associated with positive environmental improvements. • The recurrent shortages of time, financial and staff resources, together with a lack of technical expertise and skills. • Lack of public support • Common activities are not related to the business strategy. The previous study on Spanish SMEs carried out by Fundación ÉTNOR20 identified the following problems in the Comunidad Valenciana21 (Spain): (1) Society is much more critic than businesses showing an important fact to be balance. (2) SMEs are not able to communicate their good intentions of CSR. (3) Unlike in the UK, the implementation of CSR in SMEs is scarce. Despite the common acknowledgement that CSR can be a potential factor of businesses, CSR activities are not treated on SMEs with a strategic intent. Jenkings (2006) suggested that SMEs’ lack of resources to carry out CSR, which is considered one of the main barriers, can be overcome by seeing CSR as a challenge. She thinks that to

20

Fundación ÉTNOR, Observatorio de ética y responsabilidad social de la Comunitat Valenciana, ERSE´06, Valencia, 2007 21 Valencian autonomous region

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overcome such barriers, innovation and top management commitment are some of the key success factors. Many other researchers suggest to tear such barriers apart by taking a stakeholder point of view. They state that organizations can reach sustainability by developing good stakeholder relationships, while understanding their own organizational capabilities. The European Commission and Observatory of European SMEs (2002) stated that managing stakeholder relationships help in reducing risk and improving social responsibility. Besides, as my next point includes, SMEs have certain implicit organizational characteristics and capabilities which may help them in fitting CSR.

6.3.

Understanding SMEs’ intrinsic organizational competitive advantages to overcome barriers

SMEs set out certain characteristics which, despite manager’s unawareness, can be useful to carry out a good CSR strategy. Such SMEs’ intrinsic characteristics must be exploited to achieve positive performance. Kuratko, et. al. (2001) stated the following: • SMEs have fewer managerial layers facilitating the involvement of all employees in CSR programs. • An owner-managed firm may spread faster and influence strongly the values and culture of the company incorporating CSR. • Product flexibility addresses the firm’s ability to handle difficult non-standard orders, meet special customer specifications and to produce products characterized by numerous features, options, sizes, and/or colors. • Process flexibility addresses the firm’s ability to accommodate changes in products and other processes. Other characteristics: • Easier communication between decision-makers in small firms • Dynamic capabilities lead to better innovation facilitating competitive advantage (Jenkins 2009) • SMEs have closeness to local community, creating stronger local engagement with stronger relationships with their stakeholders, and therefore a stronger social capital. • Employees are very important stakeholders in small firms and SMEs normally create a good working environment. 25

As I previously stated, Aragón-Correa et. al. (2006) showed that SMEs can have positive performance through the development of environmental strategies by benefiting from certain organizational capabilities. These were easier communication, closer interaction, the founder’s vision and his/her ability to extend his/her views to the rest of the employees, unified culture and especially flexibility in managing external relationships. Also Jenkins (2009) explored the Corporate Social Opportunities (CSOs) in 24 cases of UK SMEs, and found out that there are some positive qualities of SMEs that will help in getting CSOs. She agreed that integrating CSR into the core of a company is crucial for its success and that competitive advantage does not necessarily have to be linked to increased turnover and profits, but may be focused, for instance, on better value for customers, and other stakeholders. The positive qualities Jenkins suggests to achieve Corporate Social Opportunities are next: Table 5. Key characteristics of a company or organization taking corporate social opportunities 1.Organization aligns and articulates explicitly its purpose, vision and values consistent with responsible business practice 2. Leadership fully believes in and lives those values and purpose 3. Purpose, vision and values are continuously communicated throughout the organization and beyond 4. Purpose, vision and values are constantly reinforced through culture, processes and rewards 5. Effective mechanisms for whistle-blowing on any ‘values gaps’ 6. Effective tools and processes for scoping and prioritizing risks and opportunities associated with corporate social responsibility (CSR) and a framework for ensuring consistency of decisions and values 7. Decision-making processes at the top of the organization 8. Effective stakeholder engagement processes 9. Ethical code governing relations with stakeholder partners to determine the fair share of risks and rewards 10. Appropriate measurement and reporting of company’s performance

6.4.

Recommendations

It is necessary to close up the gap between the real situation of CSR in SMEs and the full potential benefits that could be achieved. SMEs need to gather more information and more education on CSR to become aware of the potential benefits CSR can bring. If SMEs can exploit their organizational and operational characteristics to successfully implement CSR practices, they will achieve the desired better performance they are looking for.

26

It will also be needed to raise or create more concern from administrations, or institutions. Local administrations shall look forward to establishing agreements which help relate the local business activity with the development of the local town or cities. Unfortunately, despite this logic and common interest, it must be noticed that only 8 % of European SMEs receive some form of public support (tax reductions, subsidies, information, etc.) when they participate in external socially responsible activities. Only France, UK, Ireland and Italy are the countries where more than 12 % of SMEs have benefited from public support to participate in external socially responsible activities22. A step forward is taken by the EU with the 2008-2012 Lisbon Agenda where one of the objectives is to adopt a Small Business Act aiming at unlocking the growth potential of SMEs. The inclusion of the ESG23 triple-bottom-line is still voluntary, and there are many critics who argue that there is a need of legislation on Social and Environmental issues. Some countries have made a step forward on this issue incorporating legislation. Gadenne, Kennedy & McKeiver (2009) suggest, for instance, that legislation is needed when approaching environmental issues. France, since 2001, obliges its organizations to inform about their practices of CSR. Europe has taken a step forward on this topic as in the next years it will oblige companies to submit a yearly social statement (Avlonas, N.) Jenkins (2009) suggested a strategic framework which could help SMEs in implementing a successful CSR strategy. She argued that organizations wanting to incorporate CSR should have the following elements: 1. A change agent: Changes in processes should be guided by the owner-manager, but operation may be delegated to a team of employees with the support of senior managers. 2. External networks: a willingness to draw on external knowledge sources is crucial to have access to all the skills and information needed to adopt CSR practices and realize CSOs. 3. Internal networks: acquiring new knowledge must be accompanied by mechanisms for dissemination in the company or organization. 4. Flexibility: SMEs have a major advantage in that they are able to respond more rapidly to changing signals in the marketplace. 22 23

Observatory of European SMEs /No 4. European SMEs and social and environmental responsibility ESG = Environement, Social & Governance

27

5. Innovation: is a process rather than a single event; it can be incremental in SMEs and does not necessarily involve the adoption of radical new technology or the introduction of major new products, services or processes. 6. Competitive advantage: this does not necessarily mean getting bigger and making more profit if this is not a company’s main or only goal. 7. Stakeholder engagement calls for ongoing commitment to be made at the highest level and embedded across the whole organization. However, future research is needed on SMEs and CSR as there is still a long way towards the total inclusion of CSR on such types of organization. SMEs’ board of managers must become aware of the potential benefits that CSR can bring to the organization and the fact that SMEs, although they have fewer resources than large organizations, can manage to get benefits from the inclusion of CSR.

7. Background of International Reporting, Verification and Certification of Social and Environmental Issues As being one of the objectives of this thesis, I will analyze the existing Performance Measurement Systems (PMS) to check whether they fit CSR and SMEs, but first, I must analyze the existing Reporting Systems in Economic, Social and Environmental Issues to understand the main differences and their relation. Organizations, like OECD guidelines for Multinational Enterprises (2008), UN Global Compact (2000), the World Business Council for Sustainable Development, Caux Roundtable's Principles or the European Union try to spread Corporate Social Responsibility activities into organizations’ business models. They aim at promoting and creating international standards by following principles for the issues of labor, human rights, system integrity, anti-corruption and environmental practices, based on certain codes of conduct. They are the basis and settlement of the Reporting initiatives created along with the years. The main Social Reporting Systems could be resumed to the following:

28

• Social Accounting Standards: Social and ethical reporting standards. o Global Reporting Initiative (GRI)24: is a long-term, multi-stakeholder governed international institution whose mission is to develop Sustainability Reporting Guidelines, which voluntarily, organizations want to implement and report. o Business & Human Rights Resource Centre25: respect human rights, avoid harm to people, & maximize their positive contribution o Accountability 1000(AA1000)26.

It is an accountability standard,

focused on the quality of social and ethical accounting, auditing and reporting. o Social Accountability Standard 800027. It is created by the Council on Economic Priorities, which is a non-profit public interest organization to research corporate social responsibility. SA 8000 is basically created for labor and social issues. It specifies requirements for social accountability to enable a company to:  Develop, maintain and enforce policies and procedures in order to manage social issues.  Demonstrate to interested parties that policies, procedures and practices are in conformity with the requirements of these standards. • Environmental

Management

System

Standards

such

as

International

Organization for Standardization (ISO)28 14000, Eco-management and audit Scheme (EMAS)29 and Life Cycle Assessment30 have been created to establish worldwide environmental standards for organizations.

24 http://www.globalreporting.org 25 http://www.business-humanrights.org 26 http://www.accountability21.net/ 27 http://www.sa-intl.org/ 28 http://www.iso.org/iso/home.htm 29 http://ec.europa.eu/environment/emas/index_en.htm 30 http://www.epa.gov/nrmrl/lcaccess/

29

7.1.

The need to include International Reporting Systems into a holistic Management approach.

The success of the Standard Reporting Systems has been very important during the last decades. Brown, et. al. (1998) studied the implementation of International Standard Organization (ISO) in European and Australian SMEs and found as benefits, improving internal efficiencies, involvement and commitment of employees, gaining access to markets, greater quality awareness, improved awareness of problems within the organization and improved product quality. However, and despite such benefits, Brown, et. al. (1998) argued that ISO certification does not guarantee success for SMEs, as ISO brings high costs as SMEs have to rely in expensive external consultants. Besides it also means more paperwork, and it does not bring any competitive advantage because most of companies are forced to get certification. Also, the another disappointment for such organizations is when they discover that after having achieved the certification, a non-certified company has been awarded a contract by a customer who, at first, required suppliers to be certified. Another standardization instrument, the Global Reporting Initiative (GRI) has been, and it is, the mostly used framework by companies for the description and measurement of Corporate Social Responsibility. Panayiotou et al. (2009) highlighted the importance of GRI by showing that nearly 90% of the indicators used by Greek companies were derived from the GRI criteria. Although GRI and ISO14000 (among others) offers guidance in standardization of social and environmental issues worldwide, and despite their worldwide acceptance and utilization, such reporting systems cannot be considered holistic managerial systems because they do not connect their activities with strategy, nor they explain how social responsibility can be used to increase the value of an organization. Hence, there is a need to incorporate such CSR issues, previously cited in the reporting systems, into the business managerial systems of the organizations. A good way to achieve organizational and global long-term sustainability may be by integrating those social and environmental elements into a complete Quality Management System. Waddock & Graves (1994) showed the link between Corporate Social Performance (CSP) of organizations and Quality of Management. They found out that the relationship between Quality of Management and Stakeholder Relations has been 30

proved; indicating that overall company performance is better when management practices approach the treatment of the organizations’ stakeholders. Such results lead to the conclusion that there is a clear need to include a multiple stakeholders’ point of view into organizations’ Performance Measurement Systems. TQM models have made great improvement on this topic including many aspects of the previously cited reporting systems, but as my analysis will show, there may be still some topics to be discussed.

8. Evolution of Total Quality Management towards Total Responsibility Management Before starting the analysis of the TQM frameworks, it is necessary to have an overview of the evolution of TQM towards a new concept: Total Responsibility Management (TRM). The appearance of the Quality movement was due to the increasing competition during the last decades, forcing organizations improve their products and services to keep being competitive. Also, factors like the internationalization of the businesses and the social context forced organizations to adapt to the continuous changing environments. For all these reasons, among others, the business industry has seen the evolution of the Quality Movement and the importance to include the word Quality into business models. TQM models were built for that purpose in a way that such frameworks include Quality and strategy into the same framework. TQM is now regarded as one of the most effective ways to improve quality and enhance productivity. The introduction of holistic management frameworks achieved the inclusion of the quality world into business strategy and Industries have seen the proliferation of new models and their increasing usage worldwide. For instance, in Denmark, in the year 2000, holistic models were used by 75.6% of companies with more than 200 employees, 33.3% of organizations with less than 50 workers and 46.2% of organizations with 50200 workers (Kristensen, Juhl & Eskildsen, 2003). Such success is due to positive effect on Corporate Performance of holistic management systems based on TQM (Singhal, 2003).

31

Some researchers consider Excellence models as a good guide for TQM implementation (Bou-Llusar, et. al., 2009; Hendricks & Singhal, 1997), but TQM can be linked to any holistic approach of Management incorporating programs or tools to achieve a better competitive advantage. Among TQM models I should mention the Excellence Quality Awards (EQA), Balanced Scorecard or the Performance Prism among others.

8.1.

Ethical foundations of Quality

TQM have evolved towards a more ethical perspective. “The founders of modern quality management and business excellence, Crosby, Demings and Juran, among others considered ethics, principles and respect for people as key principles of TQM” (McAdam & Leonard 2003). Such principles introduced the word ethic (Wood, 1991) in organizations, in a way that organizations may pursue profit and put emphasis, at the same time, in sustainable performance respecting people and environment. Nowadays, there is a higher concern of the value of natural resources, the environment, health and safety issues, communities and other ethical issues, which forces organizations to become more aware of Corporate Social Responsibility. TQM has seen the inclusion of an ethical approach more concerned with the internal, external stakeholders and environment.

8.2.

Towards Total Responsibility Management31

The new concept of Total Responsibility Management (TRM) goes beyond TQM because it totally includes the concept of Corporate Social Responsibility as a whole new system into the company. Such last generation was termed by Waddock, Bodwell and Graves (2002) as Total Responsibility Management (TRM), defining it as the recognition and integration of the triple-bottom-line (Elkingtong’s Environment, Social and Governance, ESG) into the business organizational models. It focuses on a more complex task of managing stakeholder relationships assuming that at either extreme of the company, management has to take decisions which affect the stakeholders. TRM reduces the gap between organizational and global sustainability in a way that both issues are treated: the firm’s ability to sustain itself, and the firm’s ability to

31

See figure 21 on Appendix and benefits (Item 2 ) on appendix

32

control its impact on communities and ecological environment. Total Responsibility Management includes next characteristics: • Organizations must have a vision including the company’s responsibilities to stakeholders and the natural environment to agree with the triple-bottom-line (ESG32/ESM33). This responds to Inspiration : Vision setting and leadership systems • Stakeholder Engagement or Stakeholder Dialogue. Need of transparency is key. • Integration of Responsibility into strategies and practices. • Assessment, improvement and learning systems. • TRM is based on agreed values of environmental principles34, labor standards of ILO (International Labor Organization), UN’s global compact principles on human rights, general business principles, and anti-corruption (Waddock 2002) TRM is similar to TQM35 in a way that it is an integral and systematic approach to management, inherent to every decision on the product, action, policy etc. (Gatti & Testa 2003). As I next analyze, some TQM have taken very seriously the concept of CSR in a way that some TQM models (although they are still known as TQM systems) are much closer to TRM than TQM. On my analysis, I will check whether TQM systems show enough commitment on such ethical behaviors, with the inclusion of the CSR theories.

9. Analysis of the existing PMS Once introduced the theoretical background of CSR and how SMEs approach the concept, I have the information that it needed to be understood before carrying out the analysis.

9.1.

Objective of the analysis

The objective of my research is to analyze how the existing Performance Measurement Systems include CSR into their models, whether they agree with CSR theories. Also, as 32

ESG= Environment; Society, Governance ESM=Environment; society, Management 34 i.e. CERES(Coalition for environmentally Responsible Economies) or ISO 14000 35 See figure 22: Schematic Comparison Principles and Processes in TRM, the Baldrige Award, Deming Prize, and European Quality Award 33

33

part of my research I will check the fit such PMS have on SMEs. The reason for such analysis is that there could be some gaps in existing PMS approaching the concept of CSR for SMEs, and, hence, I will also analyze whether Performance Prism can be a good tool to fill such gaps up.

9.2.

Methodology of Analysis

I have carried out my analysis based on the previous theories of CSR gathered by Garriga and Mele (2004)36 which better resume the topic in question. The aim of this analysis is to check whether the TQM models analyzed agree with the existing CSR theories, to analyze whether there may be possible gaps on the topic; and to check each TQM system’s fit on SMEs. To analyze the latter I used empirical evidence from previous researches. To analyze the EFQM I used the 2003 version Criteria of the EFQM37, the MBNQA’s last 2009-2010 revision of the Criteria, I used the 2000 Criteria for the Deming Prize, and the Performance Prism (Neely et.al. 2002).

9.3.

Sample

I focused my analysis on the currently TQM approach mostly used worldwide: the Balanced Scorecard; and those TQM Normative models that create standards worldwide and which, at the same time, are ahead in the CSR field: the European Foundation for Quality Management (EFQM), Malcolm Baldrige National Quality Award (MBNQA) and the Deming Prize. I also analyze in depth the Performance Prism, the Performance Measurement System created by Adam Neely et al. in 1999, to try to show whether the model may fill the existing gaps up on the topic.

9.4.

Delimitation

Due to the fact that there are many TQM models being implemented in many countries (that could have been focus of my analysis), I limited the research to the ones mentioned, limiting the validity of my results to the models analyzed. Also, I must admit that research on SMEs and PMS is scarce and I had to face the fact that Performance Prism has not been fully implemented yet, which brought me to carry out such theoretical analysis.

36

See page 18-19 of this thesis As I will show on the analysis, due to copyright policy issues of the 2003 EFQM version, I had to use other sources. I will show the source by making reference of the authors, or organizations. 37

34

It shall be clarified that I based my theoretical analysis of MBNQA on the 2009-2010 last of the model, while all the empirical findings relate with previous versions of the models. This clearly shows that future research will be needed to carry out.

9.5.

Analysis of Excellence Models

Business Excellence Models (BEM) are being used by organizations with a strategic intent to reach excellence performance. These holistic models are normative and try to create standards in Total Quality Management by identifying the best practices and highlighting cause-and effect relationships to achieve better performance. Hendricks and Singhal (1997) showed on a research over a 10 year period (starting 6 years before to 3 years after the year of winning the award), that implementing effective TQM (an Award based model) improves the financial performance of the firms. Smaller companies showed an increasing interest in usage of Excellence Quality Awards but, still, such models have not widely been utilized much by them (Ghobadian & Woo 1996). Also, Kristensen, Juhl & Eskildsen (2003) found some problems when SMEs used Excellence Models, as they did not prove any positive effect on financial performance in Denmark. I will analyze the reasons for this happenings and whether Excellence models and CSR fit in SMEs. With that purpose, I will highlight the distinct attributes of the European Foundation for Quality Management (EFQM) the Malcolm Baldrige National Quality Award (MBNQA) and the Deming Prize, the most well-known excellence frameworks worldwide.

9.5.1.

European Foundation for Quality Management (EFQM)

EFQM was created in 1992 based on a previous excellence model, the American Malcolm Baldrige National Quality Award (MBNQA) excellence model, with the objective to build a European Excellence Quality Award Model. EFQM, like Baldrige, develops the vision and goals for the future; it identifies and understands the nature of the business by bringing different elements together serving as a diagnostic tool to assess the health of the organization. It also identifies and measures the cause-and-effect relationships (Eskildsen, Kristensen & Juhl 2000) that organizations need to follow 35

towards good results; and to do that, it uses a list of best practice38 activities that organizations may benchmark and implant on their processes. The European (EFQM) operates through a simple framework of performance improvement through involvement of people in improving processes. The full Excellence Model is a non-prescriptive framework for achieving good results – customers, people, society, key performance – through the enablers – leadership, policy and strategy, people, processes, partnerships and resources. (Oakland, 2005). EFQM includes 9 fundamental criterions, split up in enablers and results, as it shows the next figure: Figure 5.The EFQM Excellence Model

Source : ASB’s slides.

The framework is based on Key Performance Indicators (KPIs) and gives weight to each criterions and sub-criterions of the enablers and results part; so that companies can have the required feedback on what they are performing correctly or incorrectly. Ekildsen et. al. (2002) tried to get an empirical confirmation that the weights that EFQM used were similar with the ones that organizations in their sample were using, and could not confirm their hypotheses. This topic, then, needs further research, as alignment is of prime importance on businesses, and especially for SMEs because they have fewer resources. EFQM serves as a tool for self-assessment, even for organizations not willing to apply for the award, because it employs a list of “best”39 practices organizations may be

38 39

Despite this, the model is non-prescriptive EFQM is a non-prescriptive model

36

willing to benchmark independently and It also helps organizations in identifying gaps and continuously improve to achieve excellence. The fact that EFQM is a normative model can be positive because it creates standards, so that organizations have the chance to compare themselves with other companies in the same area. Despite this, there is still some controversy on this topic because users and researchers complain that EFQM may not be a good framework to align business strategies. Also, some researchers argue that carrying out the whole established practices of EFQM may not be totally necessary in order to reach the goals of some organizations; that to really accomplish the goals, organizations might need fewer activities and focus on fewer key performance drivers. To try to overcome this problem EFQM created the RADAR40 logic and Pathfinder card41, two techniques which help users assist in implementing the model.

9.5.1.1.

Analysis of CSR theories on EFQM

The Model has a Social Responsibility (SR)42 approach since 1999 introducing a stakeholder point of view aiming at reducing operating costs, enhancing brand value and reputation, achieving long-term sustainability for the company and Society, getting a better risk management, increasing worker commitment, and achieving good relations with government & communities. The Foundation modified the 1999 version in 2003. Such new revision tried to integrate and assure a complete CSR framework for businesses. One of the main modifications was to rename Social Responsibility to Corporate Social Responsibility43. The purpose of EFQM on the new CSR framework is to allow organizations to become excellence organizations successfully integrating international standards into the organization’s business models to accomplish global and organizational sustainability. But the excellence concept in CSR goes even further as “Excellence in Corporate Social Responsibility is exceeding the minimum regulatory framework in which the organization operates and striving to understand and respond to the expectations of its 40

See Item 3 on Appendix See Item 4 on Appendix 42 EFQM’s 2003 version changed the denomination of Social Responsibility to Corporate Social Responsibility 43 See website from Del Palacio y Lirola (Management Consulting organization) http://www.dpyl.com/Doc%20Tec/DT%200401%20EFQM%202003%20040113.pdf 41

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stakeholders in society.” (Avlonas, N.: Adviser of EFQM)44. Such definition of excellence on CSR obliges organizations to exceed with the legal requirements, in a way that organizations will have to prove a pro-active/ productive (Carroll, 1979) attitude towards the stakeholders and environment of CSR. As it is shown on next figure 6 the 2003 EFQM CSR framework includes totally the Elkington’s triple bottom line (TBL) concept through the 22 Enablers and 20 Results Sub-criterions.

Figure 6. Assessment and Scoring tool Integrating the Triple bottom line

Source: Avlonas, N.: Adviser of EFQM

EFQM agrees completely with Garriga and Mele’s paper (2004), as the model includes a descriptive approach and also agrees with the Political theories. In the latter, EFQM used the approach of Corporate Citizen theory, which clearly shows the sense of belonging to a Community focusing on rights, responsibilities and possible partners on the criteria 1c Leaders are involved with customers, partners and representatives of Society: by establishing and participating in partnerships; by establishing and participating in joint improvement activity; by recognizing individuals and teams of stakeholders for their contribution to the business, for loyalty, etc. and by supporting and engaging in activities that aim to improve the environment and the organization’s contribution to Society. Practically all the criteria of the system corroborate this theory (People, Parnership and Resources, People Results, Customer Results and Society Results).

44

See website http://research.shu.ac.uk/cfie/ecop/docs/EFQMCSRFrameworkECOPF.pdf

38

Also the Integrative Social theory and Corporate Constitutionalism are referred to in EFQM. Integrative theories are all included as well because EFQM includes Issues Management, Stakeholder Management and Corporate Social Performance on its Criteria. In respect of the Ethical theories, EFQM also follows the Normative Stakeholder Theory because it includes a normative stakeholder point of view. Also, the 2003 model agrees with the universal principles of the Global Compact offering guidelines for organizations to become global corporate citizenship organizations. Besides, it agrees with other standards like the Accountability 1000 (AA1000), ISO 14000, EMAS, Global Reporting Initiative, or the Dow Jones Sustainability Index among others, making it a good framework which fulfills all of the ethical approaches of Garriga and Mele. (Universal Rights and Sustainable development among them) It must be noticed that 2003 version also modified45 several issues of the previous 1999, in a way that 2003 takes a great leap forward in assuring CSR in the organization by integrating an ethical behavior into the mission, vision statements of the organizations to get a culture of Excellence in respect of CSR (criterion 1a). Such approach is more concern than 1999 version, which did not assure such ethical behaviors. The ethical behavior, then, guarantees that CSR will be present on every decision that the managers and employees take. Another modification concerns criterion 1d of Leadership Item, on which the model includes inspiration and cohesion among the persons in the organization. Criterion 2a of Policy and Strategy Item also introduces future stakeholders into the strategic management decisions of organizations. Sub-criterion 2c adequate and develop continuously social standards and environmental issues with partners. On Sub-criteria 3e of People Item, 2003 version includes the recognition and care for diversity and distinct cultural origins of employees, and exceeding resources and services which satisfy and exceed legal minimum requirements. In Partnership and resources, on SubCriteria 4d, 2003 version introduces the respect with the environment. On Sub-Criteria 5a, it identifies stakeholders of each process; on 5c it introduces customers into the process of development of new products and services. On Sub-criteria 6a of the Item Customers, the new model introduces transparency. 45

See website from Del Palacio y Lirola (Management Consulting organization) http://www.dpyl.com/Doc%20Tec/DT%200401%20EFQM%202003%20040113.pdf

39

Such new revision of 2003 and the introduction of these key new elements confirm the total commitment of the EFQM towards CSR; it fills up the gaps of the previous model, which, although in general it was a complete model, it had some issues to be improved. Among such issues of the 1999 EFQM version, I could identify that CSR was emphasized enough on the Results Criteria, but it did not pay such complete attention on the Enablers side. 2003 overcomes such issues. EFQM 2003 framework could be considered a TRM instead of a TQM, as it embeds Responsibility into the whole model, it introduces inspiration among the persons throughout the organization and it includes stakeholders into the development of products and services, which agrees with TRM’s innovation requirement46. Also, the total integration of the TBL throughout the whole framework makes this Excellence framework become a complete TRM, embedding CSR into the whole business process. Finally, the EFQM CSR framework helps organizations with the introduction of selfassessment tools like the one shown on figure 7.

Figure 7. The way of businesses toward CSR

Source: The EFQM Framework for Corporate Social Responsibility (Avlonas, N) EFQM Adviser.

46

See figure 21 on Appendix

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9.5.1.2.

EFQM’s arguments for SMEs

Despite the evidence of the good financial results of EFQM among large companies (Kristensen et al, 2003; Santos-Vijande, 2007), and the creation of the SMEs category47 of EFQM, which shows that there are excellence SMEs in the business industry, Kristensen et.al’s (2003) research shows that success of the implementation of the EFQM model on SMEs is arguable. Kristensen et al. showed on their study of the stateof-the-art of the PMS on Danish organizations, that SMEs did not prove good financial performance in Denmark; and hence, the validity of the model on SMEs may be controversial for such organizations.Then, it is necessary to investigate more in depth why Danish SMEs did not prove good financial results when they used the EFQM. Some of the arguments lead to think that the reason of such problem on SMEs is that EFQM needs training throughout the organization, as it involves all layers of the organization, and such process may be costly for SMEs. Besides, the adaptation to implement the model may be time consuming, as some researchers consider the EFQM a complex and bureaucratic system that needs careful planning, implementation and evaluation. In many cases, SMEs may lack of time due to the fact that managers may be the own owners of the company, and they may perform different tasks at the same time. Another critical problem was introduced by Eskildsen et al. (2002) who showed that there is disagreement on the weights used by the EFQM on their study among 756 chief executive officers. Their results show that the model may have problems in its alignment power. Although it is very complicated to agree on the weights of an international normative model due to the different nature of different businesses or the different cultures, integration is a key factor for SMEs due to the fact that they have fewer resources than large organizations, and they must carefully allocate their resources. Another possible reason of the failure of the model in Denmark could be that the framework requires organizations to gather a great amount of data from different fields of the organization. Large organizations might have enough resources to do so, but SMEs might not have them (i.e. financial and Human Resources) or are not willing to spend such amount of resources.

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For more information about the categories see Appendix: Item 5

41

Despite EFQM’s appropriateness to identify a problematic situation (Areas for improvement (AFIs)), which includes the description of the present situation and the deviations from benchmarks, the model does not offer any guidance on a structured approach to exploiting strengths, classifying and prioritizing areas of improvement (Oakland, 2005). This step might be difficult to implement because it requires a better definition and clarification of its weighting system (Ekildsen et. al., 2002), as SMEs’ success is highly related with the alignment of their resources and strategy.

9.5.2.

Malcolm Baldrige National Quality Award (MBNQA)

MBNQA was created in 1987 due to the demand of TQM during the 80s. It consists of seven related criteria, divided in 18 items. The categories are next48: -

Leadership: the company’s leadership system, values, expectations and public responsibilities.

-

Strategic planning: the effectiveness of strategic and business planning and deployment of plans, with a strong focus on customer and operational performance requirements.

-

Customer and Market Focus: How the company determines customer and market requirements and expectations enhances relationships with customers and determines their satisfaction

-

Information and Analysis: The effectiveness of information collection and analysis to support customer driven performance excellence and marketplace success

-

Human Resource Focus: The success of efforts to realize the full potential of the work force to create a high performance organization

-

Process Management: The effectiveness of systems and processes for assuring the quality of products and services

-

Business Results: Performance Results, trends, and comparison to competitors in key business areas: customer satisfaction, financial and marketplace, Human Resources, Suppliers and Partners and Operations.

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Source Baldrige Criteria 2009-2010

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The award criteria are synthesized from many quality perspectives and therefore they are not limited to any single viewpoint. Its causal-effect implications can be seen on figure 8. The MBNQA framework reflects the relationships between the various elements needed by managers to improve organizational performance and helps organizations in broadening their focus from quality control techniques and product design processes to a multifaceted view of TQM (Bou-Llusar, et. al. 2006). Leadership Criteria and employees are very important issues as they acts as the driver that creates values, and quality objectives. Figure 8. Malcolm Baldrige National Quality Award

Source: ASB material

The MBNQA tries to get a stronger alignment of the organization around business processes, customers, and results. It tries to strengthen a common language of quality, change management and business improvement, significant management education and a high level of personal growth and development of those involved in the process. A number of studies conclude that financial and managerial performance of companies receiving the Baldrige Award is greater than companies that did not49/50. (Link & Scott 2001)51 The model has been adapted through the years to satisfy different fields, and now it has the categories of Manufacturing, Service, SMEs, Education and Health Centers.

49

http://www.nist.gov/public_affairs/releases/stock.htm ASQ News. Baldrige Stock Index once again outperforms S& P. Anonymous 51 Economic Valuation of the Baldrige National Quality Program for National Institute of Standards and Technology 50

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9.5.2.1.

Baldrige and CSR theories

All CSR theories, mentioned on Garriga and Mele’s paper, are included on the last modification of Baldrige’s Criteria of 2009-201052. Such Criteria modified 2008’s with the objective of embedding totally the concept of CSR into the framework. On such list of Criteria (2009-2010), the Baldrige Award model includes “Corporate Responsibility and Corporate Citizenship” on the Leadership Criteria. Such list, now includes an ethical behavior into the Leadership Criteria Category, in especial on the sub item Vision, Values and Mission of the Item 1.1. (Senior Leadership). It also takes care of the value creation for organizations’ key stakeholders on the sub-item Communication and Organizational Performance of Item 1.1.(Senior Leadership). It incorporates the Item 1.2., Governmental and Societal Responsibilities, where organizations must assure a legal and ethical behavior, protect its stakeholders, fulfill its societal responsibilities and support its key Communities; all this with transparency of governance operations. MBNQA also addresses health and safety of the workforce on Item 5.2. (Working Environment). Environmental issues are introduced on the Item 6.1.b. Key Work Processes53 with the word “Sustainability”. In Process Management Criteria (Category 6), it suggests to include reductions in environmental impacts through the use of “green” technology, resource-conserving activities or other tools, like the incorporation of the ISO normalization system. Also, on Item 7.6.a.54 (Leadership Outcomes), it suggests the inclusion of reduced energy consumption, the use of renewable energy resources, recycled water and alternative approaches to conserve resources. On Item 1.2c (Societal Responsibilities and Support of Key Communities), the model suggests the inclusion of efforts to improve the environment (e.g., collaboration to conserve the environment or natural resources). With all these aspects, Environmental Issues are very much spread throughout the whole model. Summing up to have a clear understanding, the model includes Elkington’s triple Bottom line throughout the whole Criteria, making it a perfect fit agreeing with the theories of CSR gathered by Garriga and Mele (2004).

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www.nist.gov (1) What are your organization’s Key Work Processes? How do these Processes contribute to delivering Customer Value, profitability or financial return, organizational success, and Sustainability? 54 (5) What are your results for key measures or indicators of your organization’s fulfillment of its societal responsibilities and your organization’s support of its key communities? 53

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Baldrige includes the descriptive theory, as it shows the CSR activities organizations may carry out; the political theory, which is clearly represented by the concept of Corporate Citizen. Instrumental theory of CSR is fulfilled also, but future research shall be carried out on SMEs, to check whether the latter organizations use the model successfully as an instrument to achieve better financial performance, as there are certain characteristics and findings which might indicate that SMEs may have some problems with the implementation of the model55. The Integrative theory of CSR is also introduced as it includes a stakeholder management approach, basing strategic decisions with all the stakeholders in mind, and it creates the measures, and processes for them. According to the ethical theories, the model agrees with the Normative Stakeholder theory, which includes the simultaneous attention to the legitimate interests of all appropriate stakeholders; the Universal rights (carrying out practices in accordance to the UN Global Compact and other international Social and Environmental standards, like GRI or the ISO 14000; and the Sustainable Development (with the inclusion of the TBL). Summing up, I shall agree that that Baldrige’s model (2009-2010), like EFQM, has totally evolved towards a TRM system, embedding CSR throughout the model.

9.5.2.2.

Arguments on Baldrige

Although the model has a good fit for large organizations, achieving good financial results (Cazzell & Ulmer, 2008), and that Baldrige has a SMEs category (like EFQM), which may lead to the existence of excellent SMEs in the business industry, some concerns must be taken into account for such organizations. The common issue of SMEs and Baldrige is the few research carried out. Despite that, Hamilton’s research in 2003, on a study carried out for the MBNQA, might help in getting some input about the model’s fit on such type of organizations. Hamilton found out next disadvantages of organizations using Baldrige’s Criteria: (1) the need of cultural and/or operational changes; (2) the complexity of the model or 55

See next point Arguments on Baldrige

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difficulty to understand at first; (3) no disadvantages at all and (4) overmeasurement. A part from these, he also found that those organizations implementing the model had problems of employee/staff acceptance and fit to the organization. A key finding is that only 1 out of 10 small business leaders agreed that Baldrige fit their organizations, and only 6.6% of the SMEs agreed that Baldrige approach fit their organizational needs (Hamilton 2003). The same paper shows the main disadvantages of MBNQA among award-winning organizations: • Due to publicity, internal and external performance expectations are higher • Applying and winning are resource-intensive (costly to HR as well) • The overwhelming response to winning the Award (negative reactions to consultants) • Potential to distract from business at hand (both applying and winning) • Waiting period for feedback On the same study, among respondents’ perceptions of why other organizations may not decide to use Baldrige Criterions, the answers were next: (1) complexity of the Criteria, (2) requirement of resources and investment to learn and use were found as the most significant. (3) lack of adequate awareness of the criteria or understanding the value, (4) criteria may not be needed or may seem to be misperceived, or irrelevant, (5) the language of the criteria is business oriented and (6) Cost. The latter has seen some cases, like Xerox, who spent around US$800,000 to win the award (Ghobadian & Woo 1996). An Online survey of Quest for Excellence XV Conference (Hamilton 2003) showed the following disadvantages which cause organizations not to use the Criteria for Performance Excellence: • Time/effort to understand - 65.6%. • Lack of familiarity - 60.8% • Implementation/application complexity - 50.3% • Requirement of extensive CEO/leadership involvement - 34.4% Respondents’ perceptions of why other organizations may not apply the Baldrige Award: 46

• Perception of the cost and time to apply. • Organizations may see the Award as not worth pursuing; not a quick fix and perhaps just a medal. • Perceived risk of losing self esteem, confidence if they don’t win. • Organizations may only use the Criteria instead of applying for the award. • Award may be perceived as unreachable, considering award winning organizations as the best of the best. The common issue of all these surveys (Hamilton 2003) is that they all agree with the complexity of Baldrige Award Criteria, the need of cultural and organizational change, the time/cost to implement the model, the high need of resources and overmeasurement. Even, organizations which already won the Award corroborate the great number of resources needed, in particular financial and Human Resources; fact which might lead SMEs to think that applying the award is not worth the time and effort as the model may not fit their companies. All these problems might be the reason why the reputation of Baldrige may not be so good among SMEs, as only 48.9% of the SMEs agreed that the model was prestigious. Also, nearly 8 in 10 (79 percent) of Fortune 1000 executive respondents (Hamilton 2003) said their companies were unlikely to apply for the 2004 Baldrige Award56. It is important to highlight, though, the lack of awareness of Baldrige among SMEs leaders. Hamilton’s findings showed that only 40 % of SMEs were familiar with the model. Table 6. Familiarity and use of MBNQA

Familiarity

Education

Health Care

SMES

Moderate or higher familiarity with the award

48.2%

35.4%

40.1%

Familiar with Criteria but do not use them

33%

23.5%

12.2.%

Use the Criteria

13.4%

13.7%

8.2%

Hamilton 2003

Applying for the award means that organizations may have to carry out all the elements of the model, which might indicate that there could be a high need of financial, human resources and time.

56

These companies tend to belong to the service sector. Manufacturing organizations are more aware with Performance Excellence; meanwhile Service Companies are not so much.

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However, there is scarce empirical evidence of Baldrige and SMEs, and further empirical research will be needed with the recent incorporation of 2009-2010’s modification of the Model, which has a complete fit of CSR if compared to last 2008 version. 9.5.3.

Deming Prize

The Deming Prize was created by Union of Japanese Scientists and Engineers (JUSE) in 195157. It mainly consists of 10 Criteria: Policies; Organization; Information; Standardization; Human Resources; Quality Assurance; Maintenance; Improvement; Effects and Future Plans. It has 3 categories58: • The Deming Prize for the Individual: For individuals or groups. Given to those who have made outstanding contributions to the study of TQM or statistical methods used for TQM, or those who have made outstanding contributions in the dissemination of TQM. • The Deming Application Prizes: For organizations or divisions of organizations that manage their business autonomously. Given to organizations or divisions of organizations that have achieved distinctive performance improvement through the application of TQM in a designated year • The Quality Control Award for Operating Business Units. For operations business units of an organization. Given to operations business units of an organization that have achieved distinctive performance improvement through the application of quality control/management in the pursuit of TQM in a designated year The latter two prizes are awarded for the attainment of distinctive performance improvement through the application of Company-wide Quality Control (CWQC)/Total Quality Control (TQC) and statistical methods (Ghobadian & Woo 1994) 9.5.3.1.

Arguments on Deming Prize

Deming Prize advocates social responsibilities in its “Environmental management” and Social Relations” sub-criteria59 (Khoo & Tan, 2003), but it does not introduce the

57

http://www.juse.or.jp/e/ http://www.juse.or.jp/e/ 59 See figure 24: set of Deming Criteria in Appendix 58

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concept of Responsibility throughout all Criteria, putting such Excellence Model in disadvantage in comparison with the previous Excellence frameworks analyzed. Other problem identified is its high cost. In example, the company Florida Power & Light, the first winner of the Deming Prize for Overseas Companies spent $850,000 on fees to Japanese consultants to meet the Prize’s standards (Ghobadian & Woo 1996). Despite such case, the model has had a worldwide success, and foreign organizations have won the Award, which shows the great reputation of the model. The main drawback of the Deming Prize is that it does not link concepts, activities, processes and results together, forgetting about causality (Ghobadian & Woo 1996). In that case, it is similar to ISO standards because it just provides a list of good quality practices, which in the case of Deming Prize, for instance, statistical quality control techniques like Statistical Process Control. Such fact may lead SMEs to think that the Deming Model is not a good fit for alignment purposes, as they need confirmation that the resources they use are the cause for expected outcomes.

9.6.

Balanced Scorecard

A part from the Excellence Models, which are created to set international standards, I next move on to analyze the mostly used TQM framework worldwide, the Balanced Scorecard. Balanced Scorecard (BSC) is a framework introduced by Kaplan and Norton in 1992, which includes four key elements in the system: Financial Perspective; Customer Perspective; Internal Business Processes and Learning and Growth (See figure 9). Figure 9.Balanced Scorecard Model

Source: Balanced Scorecard Institute. Adapted from Kaplan and Norton

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BSC is based on the organization’s strategy, which is set at the start of the process. Once the strategy is determined, with the consent of corporate mission and vision, the right measures are put in place in a scorecard to measure every element of the model to try to accomplish the strategy previously set. Measures should drive change and define objectives. To find the cause-and-effect relationships existing in the business activity, BSC helps organizations with strategy maps, so that organizations can easily align their activities with the strategic goals. Strategy maps help organizations in visualizing the path towards the desired outcomes. Figure 10.Example of BSC’s generic strategy map

Source: Kaplan and Norton 2001

BSC balances lagging and leading indicators (cause and effect relationships), and financial/non-financial indicators to create value for the organization. Kaplan and Norton (2001) stated that “The Balanced Scorecard overcomes limitations of purely financial measurement systems by clearly portraying the value creating processes and critical roles for intangible assets”. Kaplan & Norton (2001) agreed that BSC follows five management principles: • Translate the Strategy to Operational terms; • Align business Units and shared services to the strategy; • Make strategy everyone’s everyday job; • Make strategy a continual process • Mobilize Change through Executive leadership. The model has seen a worldwide acceptance and success. By 2001, the Balanced Scorecard was adopted by 44% of the organizations (57% in the UK, 46% in the US and

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26% in Germany and Austria)60. Next figure 11 shows the wider utilization of BSC in Denmark in comparison with Excellence models. Figure 11.Use comparison of BSC and Excellence Models in Denmark.

Source: ASB’s slides

Such success of acceptance may be due to BSC’s ability to cause a positive effect on corporate performance on both large organizations and SMEs (Kristensen, Juhl & Eskildsen 2003). Such finding puts in disadvantage the Excellence model, which could not show such good performance. BSC also increases the measurement rigor and links strategies with operational processes of SMEs adopting the Model (Mc Adam, 2000). Also, some researchers have stated that BSC might be a more effective and straightforward model compared to the Business Excellence Models (BEM). Some researchers argue that BSC, instead of producing a complex “to do” list61, it achieves the alignment organizations need to accomplish strategies due to the cross functional integration and the use of fewer62 and key measures than the Excellence Models. Hence, BSC may help organizations in focusing on reaching the desired strategic outcomes and helping in aligning the use of the scarce resources that organizations may have. 9.6.1.

Arguments on BSC

The BSC has been criticized for having a too narrow stakeholder focus, arguing that it simply focuses on three stakeholders: Customers and Shareholders; and a third, People (which is included in the Learning and Growth perspective). Then, at first, BSC ignores 60

Andy Neely, Kennerly and Martinez . Does the Balanced Scorecard work: an empirical investigation. Centre for Business Performance, Cranfield School of Management. 61 (this could be arguable because excellence models have evolved to a non-prescriptive approach) 62 It is suggested the use of 15-20 measures (Maltz et. al. 2003)

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all the others stakeholders of the company like Suppliers, Environment and Community (Maltz et. al. 2003). Although BSC has shown empirical evidence of being a good fit for SMEs, it can be noticed that the model does not agree with the theory of Stakeholder Management nor with the Normative Stakeholder theory. Other critic is that BSC gives importance to the top-down management, but little notice is made in the bottom-up initiatives. Besides, BSC approaches customer satisfaction, and it misses the issue of customer contribution, which is also one key issue on every Customer Relationship Management (CRM) strategy, as there is always a trade-off between both concepts. These two last issues show the lack of Stakeholder engagement, which requires more communication and two-direction dialogue between the stakeholders. Another argument is that, in specific cases where environment changes, SMEs may find the BSC as a mechanic and inflexible framework. A survey carried out by Mc Adam (2000) showed that SMEs, having previously considerable training, had difficulties in fast changing markets and rapidly increasing competition. Organizations, if environment changes appear, may be forced to change the strategy, and thus, they are forced to change the whole process based on that strategy. BSC may not be the best fit to generalize the usage among all kind of organizations who want to introduce the concept of CSR into their models. For instance, the non inclusion of other stakeholders into the Model may not make BSC a good fit for public sector organizations because of BSC’s profit seeking nature. Despite the introduction of the element “Be a good Corporate Citizen” (agreeing with the Corporate citizen theory) into the Model, as it shows figure 12, BSC does not achieve a CSR/TRM approach because the model is expressly created to satisfy Customers, Employees and Shareholders, without focusing on other important stakeholders which could, indirectly, deliver value to the organization, and to the stakeholders themselves. Such inclusion by Kaplan and Norton of “Be a Good Corporate Citizen” is seen as a control and risk avoidance tool.

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Figure12. A generic Organization’s Value chain in the Process Perspective

Source : Kaplan and Norton 2001

Such critic would make BSC fail to use CSR as an instrument, because more indirect benefits of using CSR could be achieved. Waddock & Graves (1997) showed on their study that Communities were also a significant factor on achieving better financial performance. Hence, Organizations could act with a better and proactive attitude towards Communities to get as much benefit as possible; not acting simply in a reactive or defensive attitude (Carroll 1979)63. Such fact would put BSC in disadvantage if compared to the Excellence Models, which take a proactive attitude toward Community (NGO’s, environment, etc.). Having a reactive attitude might indicate that organizations may not use CSR as philanthropy, and simply act according to the law or other basic moral rights.

9.7.

The Performance Prism

Performance Prism is a Performance Measurement System created in 1999, which is built on previous frameworks, such as Balanced Scorecard, and Excellence Models (Neely et. al. 2002). After analyzing the advantages and disadvantages of all the previous frameworks, the authors of the model realized the benefits and drawbacks of each framework, and created a new framework which would fit into the new requirements of Corporate Social Responsibility. Instead of criticizing previous frameworks, Performance Prism is created to add more information and to offer organizations a new perspective which could even be complemented with previous systems. It introduces a new approach, new techniques and tools as I notice next. 63

See Carroll’s responsive part of the Corporate Social Performance model on page 11

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9.7.1.

Stakeholder Revolution

Atkinson, Waterhouse & Wells (1997) explained that Performance Measurement Systems had to adapt due to the increasing trend of incorporating stakeholder theory into the organization. Neely et. al. agreed by including all the stakeholders of the organization on the same framework and highlight them as key elements to achieve long term organization success. The Performance Prism process begins by asking the questions which I next introduce64: • Stakeholder Satisfaction: Who are the key stakeholders of the organization and what are their wants and needs? • Stakeholder Contribution: What do we want and need from our stakeholders on a reciprocal basis? • Strategies: What strategies are needed to satisfy the wants and need of our stakeholders? • Processes: What processes do we need to execute the strategy? • Capabilities: Which capabilities de we need to allow operate our processes? The Performance Prism model can be resumed on next figure: Figure 13: Performance Prism65

Source : The Performance Prism 64

Neely et. al . 2002 The stakeholders included in Performance Prism model are: investors, customers & intermediaries, employees, regulators & Communities and suppliers. 65

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9.7.2. 9.7.2.1.

Start with Stakeholders not strategies. Stakeholder Satisfaction

Unlike Balanced Scorecard, which starts by asking the question “What is the organization Strategy?”, Performance Prism starts with the question “Who are the organizations’ stakeholders and what do they want and need?” By trying to satisfy stakeholders, organizations seek to build trust and to have a good long-term relationship with them. Hence, such good relationship may let the organization have a good reputation; and good reputation leads organizations to achieve positive value performance (Koh et. al. 2009). Performance Prism tries to achieve this by respecting and satisfying also Society and Environment, at the same time. But not always the benefits may come in wealth for shareholders. There could be some other benefits a part from the merely financial. An example for this was found by Behrend et. al (2009). Their research demonstrated that environmental activities have an effect of improving the perceived reputation, and in turn makes the company more attractive to prospective employees. Hence, Organizations need to enhance, maintain and defend their reputation to obtain benefits. Otherwise they may fail to achieve a good corporate image, which may be the factor of unwanted financial outcomes. Besides, nowadays, the power of Media and fast word-of-mouth through the Internet force organizations to strongly care for their image and reputation, due to the possible fast spread about the organizations’ activities, which may cause catastrophic consequences for corporations, as reputation is difficult to win, and very easy to lose. 9.7.2.2.

Stakeholder Contribution

Most of the previous PMS include Customer Satisfaction as a key driver to achieve better results, but some of them miss the fact that they do not take into account what the customer contributes to the organization itself. Not all satisfied customers are profitable for the company, and for that reason, resources must carefully be allocated. Like with customers, organizations need to check the rest of stakeholders. Thus, companies from now on shall ask themselves other questions apart from “What are the wants and needs of our stakeholders?” and begin to ask as well “what do we want and need from our stakeholders?”

55

With both aspects of customer satisfaction and customer contribution, companies set out the tool to manage reciprocal relations between stakeholders and organizations. This Quid-pro-Quo relationship is a key element of TRM’s stakeholder engagement that managers will have to take care of when creating the right measures. Figure 14. Example of Stakeholder Satisfaction and Stakeholder Contribution.

Source : The Performance Prism. Illustrative

A good Customer Relations Management (CRM) strategy could be a good tool to be implemented on Performance Prism, which basically helps organizations in creating value from customers and focusing on the real customers which drive value creation. 9.7.2.3.

Linking Strategies, Processes and Capabilities

The next questions need to be asked once organizations have found out the interests and contribution of all the stakeholders: • What strategies are required to deliver value to these stakeholders? • Then, what processes does the organization need to put in place to execute these strategies? • And finally, what capabilities does the organization need to carry out such processes?

9.7.2.3.1. Strategies At this point the role of measurement is four-fold: (1) Measures are required to track whether or not the strategies they have chosen are actually being implemented. (2) Measures can be applied to communicate the strategies. (3) Measures can be applied to

56

encourage and enhance implementation of strategy. (4) Measurement data can be analyzed and used to challenge whether the strategies are working as planned. Some companies fail to state the correct strategy because managers are not able to find the real drivers for the success of organizations. It will be of maximum importance to align business strategies with processes and capabilities to achieve the desired outcome. Unlike BSC, which sets the strategy as the direction for the organization, Performance Prism uses one (or more) strategy for each stakeholder. This fact turns the model into a flexible system. Instead of setting up what companies want to achieve (or where the companies want to direct to), Performance Prism aims at maximizing the wealth creation and value for all stakeholders, focusing on the long-term relationship which will bring a better reputation, and this long-term value creation.

9.7.2.3.2. Processes During the 90’s there was a trend towards Business Process Re-engineering (BPR). BPR was created with the objective to increase the efficiency of organizations’ business processes. The main goal was to establish the right business processes to produce effective and efficient products and services, which could satisfy customers and maximize profit to shareholders. Nowadays, satisfying only customers and shareholders can be a threat for the long term success of organizations and the global sustainability of resources. Thus, the perspective must be wider and the right processes must be set to create value to all the stakeholders of the organization.

9.7.2.3.3. Capabilities Organizations need skills, practices, legislation, physical infrastructure, or technology to make processes work; to sum up, concrete abilities to create value for the stakeholders. Sometimes such abilities are not physical; they could be brands, services or even the organization itself. Measurement will have to focus on the value of intangible assets too (eskildsen et. al. 2003).

9.7.3.

Success maps to help in the aligning process

Balanced Scorecard uses strategy maps, helping organizations in getting their strategic goals. Once the strategy is set, organizations establish the path to reach the goals of the strategy. Performance Prism, in a similar way, uses success maps to align strategies,

57

processes and capabilities. These are used to visualize the path in order to have an easy picture of the value creation process for all the stakeholders and the organization. Figure 15: Example of mapping Employee relationships through the Performance Prism

Source: The Performance Prism. Illustrative only. (format modified by me)

Performance Prism can be considered as a second generation PMS, because it is created to continuously generate value to the organizations’ stakeholders. Such second generation of PMS helps organizations in focusing on the activities and assets that are of highest utility to meet stakeholder and organizational needs (Green & Jack, 2004). To help in visualizing the value creation process, Performance Prism uses value maps, although Neely et. al. (2002) named them Success Maps (see figure 15). Such tool serves as visualizing technique of the value creation process. Green & Jack (2004) interpret value mapping like Neely et. al (2002) interpret Success Maps: • Value needs are the highest-utility needs of the stakeholder groups which must be balanced. • Value drivers are the tangibles and intangibles relating to activities and assets of the organization that create value.

58

• Value outcomes are the measurable outcomes of value creation and can be both intangible and tangible. A value outcome can result from the impact of one value driver or from the impact of multiple networked value drivers. • Value maps are visual representations of the value drivers and value outcomes, including links to performance measures, strategic objectives and stakeholder needs: they are computer-based. 9.7.4.

Cause-and-effect implicit implications of Performance Prism

Next figure indicates the cause-and-effect implicit relationship which I suggest that Performance Prism has, as the authors did not explain in depth such implications. Figure 16 Implicit Cause-and effect relationship of Performance Prism

Source: Own creation

Last figure 16 shows the cause and effect implication of the model, trying to understand the cause and effect theoretical implications which the model needs towards creation of the long-term value for all the stakeholders. Waddock and Graves’ research in 1997 found as most significant stakeholders: employees, customers and to a lesser extend communities. Such findings cover mostly all the Stakeholders that Performance Prism includes in its model, which would defend the instrumental theory of CSR. Then, the most important stakeholders are the employees66, the artifacts of the whole process in itself. They will be present behind

66

It is of prime importance the role of Leadership, the ones who will have to create the commitment throughout the organizations, creating the strategies, and ensuring that the right capabilities and processes are created and functioning as they should.

59

every strategy (on which leadership will have a key role), process and capability (created by managers, employees and suppliers) to satisfy the rest of the stakeholders. Customer satisfaction, for instance, will lead to loyalty and hence to better financial results.(Eskildsen, westlund, kristensen, 2003; Kristensen and Westlund 2003)67. To make sure that the organization takes care of measuring such intangible issues, it will be strongly recommendable to use the European Performance Satisfaction Index (EPSI) for measuring satisfaction and loyalty and European Employee Index (EEI) (Eskildsen, westlund, kristensen, 2003; Kristensen and Westlund 2003). It must be noticed that part of this cause and effect relationships have already been proved (Eskildsen et. al. 2000) on the EFQM framework. However, this suggested path would have to be confirmed with empirical data and with Structural Equation Modeling analysis.

9.7.5.

Analysis of Performance Prism and CSR Theory

Performance Prism’s foundations come from the stakeholder theory, but although this concept seems, at first, to satisfy CSR in itself; certain theoretical implications need to be analyzed. It is necessary to check whether Stakeholder Theory fulfills the theories that Garriga and Mele gathered on their study in 2004. Taking Freeman’s definition of stakeholders as “anything influencing or influenced by the firm” (Freeman, 1984), it sets up the start of the argument and discussion of the Stakeholder theory, because there could be some non-participants who could have an impact on the organizations, such as the Media, environmentalist or potential employees (despite such stakeholders have no stake in the organization). The theoretical implications of why the authors of Performance Prism use stakeholder theory is due to the fact the Stakeholder Theory follows the descriptive theory, the normative theory and instrumental theory (see figure 16).The stakeholder theory has been advanced and justified in the management literature on the basis of its descriptive accuracy, instrumental power, and normative validity the three aspects of stakeholder theory. They are the foundation of the stakeholder theory and the three elements are mutually supportive. (Donaldson & Preston, 1995) 67

See figures 25 and 26 on Appendix

60

Figure 17.Three aspects of Stakeholder Theory

Donaldson & Preston (1995)

9.7.5.1.

Descriptive justification

Performance Prism shows all the stakeholders which are affected and that affect the organization (following Freeman’s concept of stakeholder theory). Although the measurement model includes the descriptive approach, such justification is not enough for organizations. Usually, companies don’t use stakeholder theory to show in a descriptive manner that they follow the law, or to simply show to the public opinion that they carry out specific practices. Despite Performance Prism is not created with a descriptive justification, the model shows all the stakeholders and includes external forces like customers, NGOs, environmentalists, Regulators and Communities. Even though, a further justification is needed (Donaldson & Preston, 1995), as the simple description of how organizations approach the nature of the business has not enough strength.

9.7.5.2.

Instrumental justification

Instrumental theory of stakeholders clearly shows the relationship between stakeholder management and corporate performance (Donaldson & Preston, 1995). Despite this, the instrumental theory is pretty much arguable and controversial among researchers because there is no concrete empirical finding showing that a stakeholder management approach in itself leads to positive financial performance (Donaldson & Preston stated so in 1995). On the other hand, the truth is that most of the organizations and normative PMS, like the Excellence Models, are transforming their business models or PMS towards a stakeholder point of view. Waddock & Graves’ research in 1997 discovered some links that lead to think that the instrumental theory of seeking wealth could be valid. Their 61

research suggests that the instrumental justification of the stakeholder theory might be defended and could have enough validity. They agreed that organizations taking a stakeholder managerial point of view obtain better financial organizational performance than those ones which do not. In contrast, Donaldson & Preston (1995) argue such validity of stakeholder theory to be used as an instrument to create wealth to all stakeholders. The reason for them to think that way is due to the power that managers and owners have in the organization. Such conclusion comes from one of the stakeholder theory: the stakeholder-agency theory, on which Managers use stakeholders as instrument for their own interests (or managers’ interest), making stakeholders not ends but means for their own personal interests68. The importance of power of owners and managers may lead to think that the instrumental theory is used for a few people’s own stake. Such problem needs to be solved in the negotiation process, due to the differing interests of the different stakeholders. The other justification of the instrumental use of stakeholder theory is the perspective of Firm-as-contract. Such approach defends the theory that organization uses stakeholder theory to agree with the stakeholders (with contracts for instance) in order to achieve operational performance. A more informal approach would be needed because there are many implicit and informal relationships. Such approach needed is also fulfilled in Performance Prism, as one of its key features is the stakeholder engagement (which include formal contracts and more informal relations) Instrumental view of stakeholder theory is also defended in a way that better relationships help in reducing transaction costs (Hill and Jones 1992). Performance Prism would cover that perspective, as it is created to accomplish Stakeholder Engagement aiming at building trust and thus organizations may be able to reduce some transaction costs. 9.7.5.3.

Normative

The Normative Stakeholder theory requires the same attention to the legitimate interests of all stakeholders and the organization has to balance such interests. It is no valid any more to satisfy the interests of the firm’s stockholders (defended by Friedman 1970). 68

Schilling (2000) totally disagrees with this premise. Schilling agreed with the notion of stakeholder theory of Follet (1924)

62

Organizations must satisfy the moral rights, and social contracts of individuals. Schilling (2000) defends the premise of cooperative inclusiveness, which tries to reach the integration of different interests of stakeholders. Schilling states that management and labor must not be seen as different sides; they should be perceived on the same side. If this was the case, each stakeholder should evaluate its own needs and the other needs to seek a solution that satisfies both. Schilling’s perception is not easy to share in organizations, because such moral and social rights are not guaranteed. Performance Prism has to make sure that all the stakeholders’ interests are being coordinated to provide good outcomes for everybody. To balance such interests, there should be some element extra; something to be added that respects the interest of all the stakeholders which could act as a monitoring device. A possible solution for this problem would be to include legal instruments to act as stake-keepers (Fassin, 2009)69. Performance Prism includes such extra legal participator, forcing organizations to act in a correct manner and intermediating among stakeholders. Despite this fact, there could still be some gaps, depending on the country where the model is implemented (as in some countries there could be some regulatory gaps not covering all the interests of all the stakeholders). Besides, Performance Prism also includes other stakeholders which could act as stakekeepers too, such us NGOs, Labor organizations, etc. The main problem and critic of Performance Prism is with the notion of fairness. Such fairness must be controlled to overcome the different conflicts on differing interests. Neely’s PMS contributes with the stakeholder engagement, identifying the wants and needs of both the stakeholder and the organizations. But the problem comes with next question: are the resources morally allocated to all the stakeholders? Although Performance Prism includes Regulators, and Communities (NGOs, Media, etc.), the allocation of resources of the organizations needs an ethical approach, as not always laws control such unethical behaviors. Then, an ethical approach is necessary in Performance Prism (Donaldson & Preston, 1995). Such weakness would still be a problem if Performance Prism was implemented in countries with proper law acting against such unethical behaviors. In the United States,

69

See Figure 23: The triangular relation between stakeholder, stakewatcher and stakekeeper transposed on the new framework as a solar system

63

for instance, the American Law Institute70 puts emphasis on ethical and philanthropy considerations, but the creation of such laws is very complex and difficult to define, because even if there would exist a law, certain attitudes do not guarantee the concept of distributive fairness among the stakeholders. Then, Performance Prism needs the inclusion of an ethical element on the Model (Donaldson & Preston 1995) Besides, despite Performance Prism’s inclusion of Stakeholder Engagement, the actions organizations perform to satisfy one stakeholder might not necessarily be beneficial for other stakeholders. For that reason, an ethical behavior is necessary to guarantee the fairness on the treatment of the multiple stakeholders. Despite such findings, Performance Prism would be Normative and would agree with the Ethical theories if it were based on the contemporary pluralistic theory of property (Donaldson & Preston, 1995). Normally in the past, it was thought that property rights justified the dominance of shareowners' interests, but if organizations want to keep being competitive in the long run, they have to carry out ethical behaviors with environment, communities, customers, employees and all the other stakeholders to guarantee the long-term benefit. If this was the case, Performance Prism would not need any extra element (the previously cited ethical behavior) to fulfill the theoretical requirements of CSR. Then, Performance Prism could be justified to be used with an ethical approach; if it were based on the assumptions of the contemporary pluralistic theory of property rights. Summarizing, (Performance Prism, although there has not been empirical evidence that it affects financial performance as stakeholder theory as such), Graves and Waddock’s (1997) research might indicate that the instrumental CSR theory of wealth creation could be fulfilled. Also, to fulfill the political theories, Performance Prism includes the integrative social contract theory, as it contributes to stakeholders, and vice versa; it guarantees the Corporate Citizen theory, because it includes Social, Environmental and Governmental aspects into the model, by satisfying communities, NGO’s, customers, employees, partners, etc; and introduces a Stakeholder Management view oriented towards stakeholder theory, creating strategies, policies and practices.

70

http://www.ali.org

64

The theory of Sustainable development is similar to Corporate Citizen, Universal Rights and

the

common

good

approach,

because

Performance

Prism

includes

environmentalists, NGOs, business partners and communities among others; so that the Elkington’s triple bottom line is incorporated. Further consensus would be required to agree with the different organisms of Human Rights, like the UN, or labor and environmental issues like the International Labor Organization, the GRI, or the ISO 14000. However, the voice of environmentalists, labor organizations, or regulators, which are included in the Performance Prism, would force the organizations to work according to such standards. Besides, if organizations implementing the Performance Prism would take into account the pluralistic theory of property, they would have the ethical behavior which would assure fairness in the treatment of the stakeholders. As this may not be the common attitude of organizations, then Performance Prism needs an ethical approach into leadership statements and strategic management to ensure that the resources of the organization are morally distributed among the stakeholders Then, Performance Prism would just need to fulfill the Normative Stakeholder Theory, which states that a socially responsible firm requires simultaneous attention to the legitimate interests of all stakeholders. 9.7.6.

Performance Prism and SMEs

One of the key characteristics of Performance Prism is its alignment power. This is a common characteristic to share with the BSC, because both models let organizations create their own success maps (in the case of Performance Prism), and strategy maps (in the case of BSC). Both concepts are very similar in a way that they help in visualizing the strategy process (in the case of BSC), and the value creation process (in the case Performance Prism) by creating a tailored scorecard which creating their own measures to reach their specific outcomes. Such factor is of key importance on SMEs as they have the high need of good alignment methods, due to the fact they have fewer resources. Resource allocation is, then, critical to accomplish their goals.

65

Performance Prism, then, might offer the flexibility that organizations need, by letting the organization create its own measures templates71, and success maps (or value maps). Flexibility comes from the freedom Performance Prism gives to the organizations by letting them ask themselves the key questions to identify and measure the cause and effect relationships which could help in reaching their goals (stakeholder satisfaction/contribution)72. Clarkson (1995) stated that stakeholder theory is easy to understand; and so is Performance Prism, which is a pure stakeholder model whose Success Maps enable the organizations create the integrated framework representing their strategy, plans, initiatives, measures in the value-creation process. Besides they help in giving further clarity to the desired outcomes based on strategic aim statements and map these out (Green & Jack, 2004)73 Performance Prism includes a pure stakeholder model which is based on Stakeholder engagement treating stakeholder as ends, and not as means74. This characteristic might indicate that SMEs will have fewer problems when using the model, as they have closer relations with their stakeholders, and a major capacity to build trust in the relationships. The fact that Performance Prism model is built to satisfy all the stakeholders of the organization and vice-versa, adds the dynamism SMEs need due to the continuous Quid-pro-Quo relationship. This constant need will drive SMEs towards the continuous actions organizations will have to take and, will bring the constant dynamism. Besides, as SMEs have less layers of employees, (and in some cases owners are the own managers), Performance Prism could easily be implemented due to the fewer people involved. Such fact allows easier communication in SMEs than in large organizations, creating an advantage in case managers want to use Performance Prism.

71

See appendix figure 27. Example of measure template Neely et. al (2002) Book includes a list of measures in an illustrative way 73 They stated so about value maps 74 Despite this, I have suggested a cause and effect model to try to reinforce the theory of causation of the model. 72

66

10.Discussions The results of the analysis might indicate that despite EFQM and Baldrige’s perfect transformation towards the concept of TRM, by accomplishing the total embedding of CSR throughout the respective models’ Criteria, some concerns shall be taken into account for SMEs. Despite the creation of SMEs categories for both models, the European and the American (allowing some SMEs to be excellent), there is some evidence from some researchers (Kristensen et. el., 2003 and Hamilton, 2003) which might indicate that there exist some issues to be discussed on the implementation of Excellence Quality Awards (EQA) on such type of organizations. Such frameworks, despite the fact they are non-prescriptive frameworks, still present some problems for SMEs in a way that they require extensive resources (like financial and Human Resources i.e.); they need certain amount of time (which SMEs’ leaders may not have available); they require extensive cultural and/or operational changes; they might lead to over-measurement75, and the model may be perceived as too complex (Hamilton, 2003). The latter may be a big concern for SMEs’ leaders and managers who often lack the expertise necessary to assimilate and apply complex models. For instance, American SMEs indicated that only in the 6.6% of the cases, SMEs agreed that Baldrige approach fit their organizational needs. Although the purpose of my research is not to criticize or to tear apart such recognized frameworks, this research brings up with some evidence that the frameworks may not always be successful; and hence, some issues shall be taken into account. In especial for SMEs, on which the election of the most accurate PMS may be of prime importance due to the fact that they have less available resources than large organizations. Also, the research has shown that BSC (despite its worldwide acceptance and proven financial success on SMEs) may not fulfill the concept of CSR completely. Although the model includes some of the most significant stakeholders: shareholders, employees and customers; and despite the introduction of the concept of “Be a good Corporate Citizen”, the model might not be seen as having a proactive attitude towards the environment and the community.

75

Agreed by organizations which use the Baldrige Criteria

67

Instead, Kaplan and Norton’s model might be seen as having a reactive attitude76 towards Corporate Social Responsibility. Such argument would make BSC fail to get all the possible benefits that taking a proactive attitude could bring for the organization. Waddock & Graves (1997) corroborated this fact as they found Communities also as significant77 stakeholders on their study of S&P 500 organizations, finding correlation between such stakeholder and financial performance78. Despite BSC could be considered as a more flexible system and easier to understand than the Excellence Models, there are some arguments among researchers who argue about the flexibility of the BSC. Such arguments say that BSC would have to change the whole measurement process if there was an internal event, external force in the environment or a new opportunity that may make the previous strategy worthless. Thus, the desired new strategy would suppose the need of change of the whole previous process, making the process a bit more inflexible. Mc Adam, 2000, in such respect, found out on a case study that SMEs (having previously considerable training), had difficulties to achieve a short-term financial benefits in fast changing markets, rapidly increasing competition and limited investment funds. The introduction of the Performance Prism shows a different approach in respect of BSC for instance as it introduces in the model all the stakeholders which affect or are affected by the organization; and treat them as ends, instead of means. Such new approach aiming at satisfying all stakeholders’ and organizations’ needs brings a new form of treating the concept of CSR as it uses a “pure” Stakeholder Theory approach. The fact that Performance Prism is based on Stakeholder Engagement might lead to think that the model would have a good implementation for SMEs, as such organizations have

closer relations with their stakeholders, and hence, a major capacity to build trust in the relationships. Also, such engagement and continuous dialogue may bring dynamism to SMEs. The fact that Performance treats stakeholder as ends and not as means79might indicate that

76

See Carrol on page 11 Although not so much as the employees and customers 78 Although the correlation was not strongly significant, there is still correlation 79 Despite this, I have suggested a cause and effect model to try to reinforce the theory of causation of the model. 77

68

SMEs will have fewer problems when using the model, as they have closer relations with their stakeholders, and a major capacity to build trust in the relationships. Other positive characteristic of the Performance Prism for SMEs is, like the BSC, its alignment power. While BSC uses its model to help in aligning resources to achieve the strategy, the Performance Prism uses Success Maps, also considered value maps, with the intent to help in visualizing the value creation process by the alignment of capabilities, processes and strategies for each stakeholder. Performance Prism, then, might offer flexibility to organizations by letting them ask the key questions to reach their goals (stakeholder satisfaction/contribution)80. Also, Performance Prism follows strictly the Stakeholder Theory. Clarkson (1995) stated that stakeholder theory is easy to understand. Hence, although future empirical implementation examples will be needed, Performance Prism (which is a pure stakeholder model) could also be considered as an easy model to understand. The fact that Performance Prism needs an ethical approach on the model puts the model in disadvantage compared to the Excellence model, which have a complete approach of CSR. The contemporary pluralistic theory of property does not seem to have enough strength to guarantee the distributive fairness of the organizations’ resources among stakeholders.

11.Conclusions and Suggestions Despite there is no empirical evidence of implementation on any organization, I tried to analyze the theoretical implications of the Performance Prism with the objective to show that such model could be a good PMS for SMEs concerned with the concept of CSR, filling the gaps up that the previous models might have missed on both respects. The results of my research shows that while Performance Prism’s aspects and characteristics might indicate that the model could be valid for SMEs (as the stakeholder theory is easy to understand (Clarkson, 1995)); and the model may have the due alignment power SMEs need, Performance Prism is not consistent with all of the CSR theories, as it does not agree with the Normative Stakeholder theory. Such Theory defends that a socially responsible firm requires simultaneous attention to the legitimate interests of all appropriate stakeholders and it has to balance such multiplicity of interests; not only the interests of the firm’s stockholders. 80

Neely et. al (2002) Book includes a list of measures in an illustrative way

69

Despite the inclusion in the Performance Prism of stakeholders which may act as stakekeepers (Fassin, 2009), like NGO’s or Regulators (even though it is a great step forward), the model does not assure that the resources of the organizations are fairly distributed across all the stakeholders of the organization. Besides, the pluralistic theory of property which defends that the use of the property is not unlimited, involving all stakeholders and non-stakeholders to guarantee the future success in the long run, does not seem to have not enough strength to control such unethical behaviors of certain stakeholders, nor is it a good mediator to control the power that certain stakeholders may have in the corporation. For that reason Performance Prism is in disadvantage with the Excellence models in respect of CSR, which through several revisions, have achieved the total integration of the concept of CSR. The inclusion of an ethical behavior into Leadership Criteria; in respect of the vision and mission statement, and being more concerned with the total inclusion of CSR into every strategic decision or activity of the organization, assures fairness on the treatment of every stakeholder. It is of great importance, then, to admit that both Excellence models have evolved successfully from TQM to TRM. Although the results show that Performance Prism does not agree with the objective of my research, I would suggest to add an ethical approach in the model (Donaldson & Preston, 1995), so that managers act with an ethical behavior assuring fairness in the treatment of every stakeholder. With that inclusion, Performance Prism could be a good PMS for SMEs fulfilling the CSR theories. Another suggestion for SMEs is that they could use Performance Prism and an Excellence Framework. The first would allow organizations align their resources, while the latter may be used to identify AFIs to achieve the maximum CSR implication for SMEs. However, further research would be needed in order to solve the problems that EQA have on SMEs, and a further empirical implementation of Performance Prism (obviously with the inclusion of the ethical behavior) in the real business world would help in confirming whether Performance Prism functions correctly integrating CSR on SMEs.

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12.

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Websites •

http://ec.europa.eu/environment/emas/index_en.htm



http://ec.europa.eu/growthandjobs/index_en.htm 77



http://europa.eu/legislation_summaries/employment_and_social_policy/employ ment_rights_and_work_organisation/n26039_en.htm



http://www.accountability21.net/



http://www.ali.org



http://www.balancedscorecard.org/



http://www.baldrige.nist.gov/PDF_files/2009_2010_Business_Nonprofit_Criteri a.pdf



http://www.business-humanrights.org



http://www.cauxroundtable.org



http://www.csreurope.org/pages/en/activities.html



http://www.epa.gov/nrmrl/lcaccess/



http://www.europa.eu/index_es.htm



http://www.globalreporting.org



http://www.iso.org/iso/home.htm



http://www.nist.gov



http://www.nist.gov/public_affairs/releases/stock.htm



http://www.oecd.org



http://www.sa-intl.org/



http://www.unglobalcompact.org/



http:www.johnelkington.com/TBL-elkington-chapter.pdf



www.iasb.org



www.wbcsd.org

• http://research.shu.ac.uk/cfie/ecop/docs/EFQMCSRFrameworkECOPF.pdf • http://www.dpyl.com/Doc%20Tec/DT%200401%20EFQM%202003%2004011 3.pdf

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13.Appendix Item 1. Institutional Support at the European Union (own creation) Corporate Social Responsibility (CSR) has been and it is part of the worldwide debate on economical growth and sustainability. For that reason, The European Commission has marked important steps on this process, integrating CSR on the green Paper (2001), EU CSR communication (2002) and the CSR Forum (2003). Also, on the Integrated Guidelines for Growth and Jobs (2005-2008), the European Council recommended that Members States should “encourage enterprises in developing their corporate social responsibility”. Europe alliance on CSR was also created as a political umbrella for new or existing CSR initiatives by large companies, SMEs and their stakeholders. Although it is not a legal instrument, it is a political process to increase the uptake of CSR amongst European enterprises. The Green Paper of the European Commission (2001) identifies internal and external components of CSR81: -

Internal components of CSR •

Human resources management: practices for attracting and retaining skilled workers; responsible recruitment practices to get more integrated labor markets and higher levels of social inclusion, as enterprises seek to recruit more people from disadvantaged groups; life-long learning.



Health and safety: improvements in public health, as a result of voluntary initiatives by enterprises in areas such as marketing and labeling of food and non-toxic chemicals.



Adaptation to change: balancing and considering the interests and concerns of all groups affected; seeking participation and involvement through information and consultation; identifying major risks; calculating all costs and evaluating alternative strategies/policies which would reduce the need for redundancies; involving public authorities, companies and employee representatives; better innovation performance, in especial those addressing the societal problems as a result of the interaction with external stakeholders and the creation of working environments leading to innovation.

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External components of CSR

Green paper (2001)

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Organizations contribute to their communities, especially local ones, by providing jobs, wages, benefits and tax revenues, as much as they depend also upon the health, stability and prosperity of these.



Business partners, suppliers and consumers: organizations work closely with business partners and suppliers, promoting entrepreneurial initiatives in their region by assisting existing small companies and also that they offer products and services which customers need and want in an efficient, ethical and environmentally concerned manner.



Human rights: companies negotiate voluntary codes of conduct which have a strong human right dimension, particularly in relation to international operations and global supply chains which cover working conditions, human rights and environmental aspects.



Global environment concerns: organizations pursue their environmental responsibilities. They take a more rational use of natural resources and reduced levels of pollution, thanks to investments in eco-innovation and to the voluntary

Nowadays, CSR is included as part of the 2010 European Union Strategy, which seeks “the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion by 2010”.

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Figure 18: Principles of Corporate social Responsibility

Source: Corporate Social Revisited. Wood (1991) Figure 19: Corporate Social Outcomes of Acting on CSR Principles within CSR Domains

Source: Corporate Social Revisited. Wood (1991)

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Figure 20. Corporate Social Responsibilities and related theoretical approaches

Source Garriga and Mele 2004

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Table 7. CSR Activities on UK’s SMEs

Environmental ISO14001 Waste minimization, re-use and recycling schemes Reduction in use of harmful chemicals Reduction in atmospheric emissions Use energy from renewable sources Membership of environmental organizations Investment in new technology Environmental reporting Award winning environmental schemes Employees Investors in people Flat management structures Creation of good work-life balance and family friendly employment Employee Newsletters Social events for staff Employees sent to developing countries to undertake community projects Award winning training and development programs for employees Employment of older and disabled people One to one mentoring of employees 360º appraisal schemes Supply chain/business to business Open house policy for customers, suppliers and competitors to look around Directors of business associations Seeking to develop long-term partnerships with customers and suppliers Supplier learning schemes Measurement of key performance indicators and feedback to staff, customers and suppliers Winners of industry awards e.g., world class manufacturing or service industry excellence Support and encouragement for suppliers to become more socially responsible Take part in industry best practice programs Inside U.K. enterprise scheme ISO9001 Quality standard

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Community/society Work with local schools on projects e.g., working with children with learning difficulties Donate percentage of profits to charity Supporting local homeless people Sponsorship of local sports teams Involvement in awards schemes for young people Time banks for employees to work in the community Social Auditing Employ people from the local community Working on community projects in developing countries Work experience placements Award winning community engagement programs Source Jenkins 2006 Figure 21. Total Responsibility Management

Source: Global Compact from Waddock, Bodwell & Graves (2002)

Item 2. Benefits of TRM (Waddock & Graves 2002 and Gatti & Testa 2003) Although the benefits of TRM are difficult to measure, they are seen in the long run. Among TRM’s benefits, are next: • Theoretically, the model covers all aspects of CSR at the highest level, creating a theoretical model to achieve organizational and global sustainability.

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• Responsible treatment of organizations towards employees, society and environment is a source of significant competitive advantage as consumers become more aware and sophisticated about how, where, and under what conditions their goods are produced (Fombrun & Shanley, 1990) • Internal social benefits: diffusion of organizational culture, spirit of belonging, consensus, (Gatti & Testa 2003) • External social benefits: social legitimization, image, consensus, credibility, reputation leading to an increase in trust from the consumers, suppliers, social and economic organizations as well as general improvement in the relationship with its own relevant sub-systems (Gatti & Testa 2003; Fombrun & Shanley, 1990) • TRM avoids costs of not having an EMS82, which can be seen on next

figure.

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EMS =Ethical Management System

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Figure 22.Schematic Comparison Principles and Processes in TRM, the Baldrige Award, Deming Prize, and European Quality Award

Source: Waddock & Bodwell (2004). A) 2001 Criteria for Performance Excellence, Baldrige National Quality Program. B) Source: Deming Prize Criteria, Ichiro Kotsuka, 2000, JUSE. C) Source: European Foundation for Quality Management .

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Item 3. Radar Logic RADAR logic83is a scoring system which consists on the following elements: Results: • Results: In an excellent organization the results will show positive trends and / or sustained good performance. Additionally, the scope of the results will address the relevant areas. Among the results to be checked out are Trends, Targets, Comparisons, Cause and Scope. As part of the Enablers: • Approach: what an organization plans to do and the reasons for it. In an excellent organization the approach must be well defined and it will have to develop processes. • Deployment: what an organization does to deploy the approach in relevant areas. • Assessment and Review: what an organization does to assess and review both the approach and the deployment of the approach.

Item 4. Pathfinder Card Pathfinder Checklist84card is a self-assessment tool created with the purpose of identifying opportunities for improvement. It reflects the RADAR logic, but it is not a scoring system. It consists on asking the next questions: • Approach: Is the approach soundly based? Focused on stakeholder needs? Supporting policy &

strategy?

Linked

with

appropriate approaches?

Sustainable? Innovative? Flexible? Measurable? • Deployment: Is the deployment of approach implemented in all potential areas in the organization? Implemented to its full potential/capability? Achieving all the planned benefits? Systematic? Understood and accepted by all stakeholders? Measurable? • Assessment & Review: Is the approach & its deployment measured for effectiveness regularly? Providing learning opportunities? Benchmarked with others best in class? Improved based on assessment & review? • Do the results cover all appropriate stakeholders? Measure all the relevant approaches & deployment of approaches using perception & performance 83

The EFQM Excellence Model. A Guide to the use of the EFQM Excellence Model in the National Probation Service of England and Wales. By the National Probation Directorate. 2002 84 The EFQM Excellence Model. A Guide to the use of the EFQM Excellence Model in the National Probation Service of England and Wales. By the National Probation Directorate. 2002

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indicators? Show positive trends or sustained good performance and if yes, for how long? Have targets? If yes, are the targets achieved? Have comparisons with others, for example competitors, industry averages or best in class? Compare well with others? Show a cause & effect link to approaches? Measure a balanced set of factors both for now & in the future? Give a holistic picture?

Item 5: Categories of EFQM85 Price Awards are only given to international organizations. Non-international companies only achieve the level of Committed Organizations or Recognized for Excellence. • Stage 1: Committed organizations: Applicants must self-assess the 9 criterions of the EFQM Excellence Model. Managers must identify improvement projects, resources and start them up to reach the category of committed organizations. • Stage 2: Recognized for Excellence. This stage requires that applicants have demonstrated that these improvement projects have been implemented, monitored and have impacted the overall performance to become organizations Recognized for Excellence These two stages show the organization’s progress towards improving competitiveness through Excellence. Organizations are already on their way to Excellence and have already experience in implementing the Excellence concepts and Management Frameworks. • Stage 3 Award winners and prize winners: Only large organizations and SMEs with subsidiaries abroad, working independently and carrying out an international strategy are selected for the Award Winner Stage.

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2006 EFQM material from http://www.efqm.org/.

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Figure 23: The triangular relation between stakeholder, stakewatcher and stakekeeper transposed on the new framework as a solar system

Source: Yves Fassin 2009

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Figure 24: Deming Prize set of Criteria

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Source : Khoo and Tan (2003)

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Figure 25: the EPSI rating model

Source : Eskildsen et. al 2003 Figure 26: the EEI rating model

Source : Eskildsen et. al 2003

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Figure 27: Measures Definition Template: Facilitator's checklist Measure: What should the measure be called? Does the title explain what the measure is? Is it a title that everyone will understand? Is it clear why the measure is important? Purpose: Why is the measure being introduces? What is the aim/intention of the measure? What behaviours should the measure encourage? Relates to: Which other measures does this one relate to? What specific strategies or initiatives does it support? Metric/Formula How can this dimension of performance be measured? can the formula be defined in mathematical terms? Is the metric/formula clear? Does the metric/formula explain exactly what data are required? What behavior is the metric/formula intended to induce? Are there any other behaviors that the metric/formula should induce? are there any other dysfunctional behaviors that might be induced? Is the scale being used appropiate? How accurate will the data generated be? are the data accurate enough? If an average is used how much data will be lost?

Target level(s) What level of performance is desirable? How long will it take to reach this level of performance? Are interim milestone targets required? How do these target levels of performance compare with competitors? How good is the competition currently? How fast is the competition improving? Frequency: How often should this measure be ade? How often should this measure be reported? Is this frequency sufficient to track the effect sufficient to track the effect of actions taken to improve? Source of data: Where will the data to track this measure come from? Who measures: Who-by name, function or external agency- is actualy responsible for collecting, collating and analyzing the data? Who acts on the data (owner) who-by name or fuction- is actually responsible for initiating actions and ensuring that performance along this dimension improves?

Is the loss of "granularity" acceptable? Would it be better to measure the spread of performance?

what do they do: how exactly will the measure owner use the data? what actions will they take to ensure that performance along this dimension improves? Source: the Performance Prism

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