Teste

Business Strategy and the EnvironmentBus. Strat. Env. 11, 269–284 (2002)Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/bse.339

THE SUSTAINABILITYBALANCED SCORECARD –LINKING SUSTAINABILITYMANAGEMENT TO BUSINESSSTRATEGY

Frank Figge, Tobias Hahn,* Stefan Schaltegger and Marcus Wagner

Centre for Sustainability Management, University of Luneburg, Germany

The Balanced Scorecard of Kaplan andNorton is a management tool thatsupports the successful implementation ofcorporate strategies. It has been discussedand considered widely in both practiceand research. By linking operational andnon-financial corporate activities withcausal chains to the firm’s long-termstrategy, the Balanced Scorecard supportsthe alignment and management of allcorporate activities according to theirstrategic relevance. The BalancedScorecard makes it possible to take intoaccount non-monetary strategic successfactors that significantly impact theeconomic success of a business. TheBalanced Scorecard is thus a promisingstarting-point to also incorporateenvironmental and social aspects into themain management system of a firm.Sustainability management with theBalanced Scorecard helps to overcome theshortcomings of conventional approaches

* Correspondence to: Tobias Hahn, University of Luneburg,Centre for Sustainability Management, Chair of CorporateEnvironmental Management, Scharnhorststrasse 1, 21335Luneburg, Germany. E-mail: [email protected]

Copyright 2002 John Wiley & Sons, Ltd and ERP Environment.

to environmental and social managementsystems by integrating the three pillars ofsustainability into a single andoverarching strategic management tool.After a brief discussion of the differentpossible forms of a Sustainability BalancedScorecard the article takes a closer look atthe process and steps of formulating aSustainability Balanced Scorecard for abusiness unit. Before doing so, the basicconventional approach of the BalancedScorecard and its suitability forsustainability management will beoutlined in brief. Copyright 2002 JohnWiley & Sons, Ltd and ERP Environment.

Received 16 August 2001Revised 27 February 2002Accepted 14 March 2002

INTRODUCTION

In the market system economic scarcitiesare reflected by market prices. Environ-mental and social scarcities are, however,

only partially reflected in economic transac-tions, although they have become increasinglyimportant for business. Management reacts to

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perceived scarcities with the use of manage-ment instruments. To the degree that environ-mental and social issues are reflected in mar-ket transactions and with the growing impor-tance of environmental and social issues manycompanies have implemented specific environ-mental or social management systems duringthe last decade. These systems have, however,rarely been integrated with the general man-agement system of a firm. As a consequence,environmental and social management is oftennot linked to the economic success of the firmand the economic contribution of environmen-tal and social management therefore remainsunclear. The decisive role of companies inachieving sustainability has been stressed anddiscussed both on the strategic (see, e.g., Hart,1995, 1997; Roome, 1998) as well as on theinstrumental level (see, e.g., Schaltegger andBurritt, 2000; Bennett and James, 1999). If firmsare to achieve simultaneous improvements ofthe economic, environmental and social per-formance of businesses (strong contributionsto sustainability; Figge et al., 2001b), this lackof integration turns out to be a major obstacle.Concerning the relation between the environ-mental and social performance of the firmand its economic performance, the literature ismainly based on empirical studies that refer tothe correlation but not to the causality betweenenvironmental and social measures and theeconomic success of firms (see, e.g., Pavaand Krausz, 1996; Griffin and Mahon, 1997;Wagner, 2001; Schaltegger and Synnestvedt,2002). To date there is rather little literatureon the relation between environmental andsocial measures and the achievement of long-term economic goals (for some exceptions seeBurke and Logsdon, 1996; Figge, 2001; Figgeand Schaltegger, 2000; Schaltegger and Figge,1997). The Balanced Scorecard as a strategicmanagement tool claims to identify the majorstrategically relevant issues of a business andto describe and depict the causal contributionof those issues that contribute to a success-ful achievement of a firm’s strategy (Kaplanand Norton, 1997). Thus, it appears promising

to use the Balanced Scorecard methodologyto integrate environmental and social manage-ment with the general management of a firm(Figge et al., 2001a, 2001b). After a brief dis-cussion of the different possible forms of aSustainability Balanced Scorecard (SBSC), thearticle concentrates on the process and stepsof formulating a Sustainability Balanced Score-card for a business unit. Before doing so, theBalanced Scorecard approach and its suitabilityfor sustainability management will be outlinedin brief in the following section.

THE BALANCED SCORECARD AS ANINSTRUMENT FOR SUSTAINABILITYMANAGEMENT

The balanced scorecard approach

The concept of the Balanced Scorecard (BSC)was developed in the early 1990s as a newapproach to performance measurement dueto problems of short-termism and past ori-entation in management accounting (Kaplanand Norton, 1992). The concept of the BSCis based on the assumption that the efficientuse of investment capital is no longer thesole determinant for competitive advantages,but increasingly soft factors such as intellec-tual capital, knowledge creation or excellentcustomer orientation become more important.As a reaction Kaplan and Norton suggested anew performance measurement approach thatfocuses on corporate strategy in four perspec-tives (Kaplan and Norton, 1992, 1997, 2001).This BSC aims to make the contribution and thetransformation of soft factors and intangibleassets into long-term financial success explicitand thus controllable. The BSC’s four perspec-tives can be characterized briefly as follows(Weber and Schaffer, 2000, p. 3; Kaplan andNorton, 1997, p. 24, 2001, pp. 23, 76).

(i) The financial perspective indicates whetherthe transformation of a strategy leads toimproved economic success. Thus, thefinancial measures assume a double role.

Copyright 2002 John Wiley & Sons, Ltd and ERP Environment Bus. Strat. Env. 11, 269–284 (2002)

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On one hand, they define the financialperformance a strategy is expected toachieve. On the other hand, they are theendpoint of cause and effect relationshipsreferring to the other BSC perspectives.

(ii) The customer perspective defines the cus-tomer/market segments in which thebusiness competes. By means of appropri-ate strategic objectives, measure, targetsand initiatives the customer value propo-sition is represented in the customer per-spective through which the firm/businessunit wants to achieve a competitive advan-tage in the envisaged market segments.

(iii) The internal process perspective identifiesthose internal business processes thatenable the firm to meet the expectations ofcustomers in the target markets and thoseof the shareholders.

(iv) Finally, the learning and growth perspec-tive describes the infrastructure necessaryfor the achievement of the objectives ofthe other three perspectives. In this case,the most important areas are qualifica-tion, motivation and goal orientation ofemployees, and information systems.

The purpose of a BSC is to formulate ahierarchic system of strategic objectives in thefour perspectives, derived from the businessstrategy and aligned towards the financialperspective. Based on such a causal systemof objectives, corresponding measures areformulated in all four perspectives. Kaplan andNorton basically distinguish between laggingand leading indicators (Kaplan and Norton,1997, p. 28).

Lagging indicators and long-term strategicobjectives are formulated for the strategiccore issues of each perspective derived fromthe strategy of the business unit. Laggingindicators thus indicate whether the strategicobjectives in each perspective were achieved.

In contrast to the lagging indicators, theleading indicators are very firm specific.They express the specific competitiveadvantages of the firm and represent

how the results – reflected by the laggingindicators – should be achieved. Based onthe specific strategy of the business unit,the key performance drivers that have thegreatest influence on the achievement of thecore strategic objectives (measured by laggingindicators) are identified for every perspective.

The integration of the indicators in the fourperspectives is achieved by defining goalsand appropriate lagging and leading indica-tors (Kaplan and Norton, 1997, pp. 28, 142)for a specific business strategy. By doing so,a BSC translates strategy in terms of objec-tives, measures and targets in the four per-spectives. Rather than representing strategyas a loose collection of indicators and mea-sures, these are linked by cause and effectrelationships. By formulating and defining thegoals and measures based on the strategy topdown from the financial perspective throughthe other perspectives, it becomes clear whichinfluence factors impact most the lagging indi-cators and thus ultimately the achievementof the objectives. These strategy-specific influ-ence patterns are reflected through cause-and-effect chains, which directly or indirectly linkall the goals, indicators and measures of theBSC perspectives hierarchically towards thefinancial perspective with its long-term finan-cial goals. It is noteworthy that the causallinking of leading and lagging indicators notonly occurs within the individual perspec-tives, but also by constructing effect chainsthrough the four perspectives of the BSC.This means that lagging indicators of a lower-level BSC perspective are acting as leadingindicators/performance drivers for an indi-cator in a higher-level perspective. Proceed-ing in this way results in a situation wherethe lagging (financial) indicators are com-bined with the leading indicators/performancedrivers through the four perspectives, leadingto a hierarchical cause–effect network, whichreflects the fundamental assumptions for suc-cessful translation of the strategy (Kaplan andNorton, 1997, pp. 8, 28). This strategy-focused


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hierarchical approach ensures the identifica-tion of the major strategic issues of a busi-ness and assigns them their particular strategicrelevance – as strategic core issues or perfor-mance drivers. This enables an orientation ofall business resources and activities towardsthe conversion of the strategy and a bettercommunication of the strategy.

The BSC as an instrument for performancemeasurement was further developed beyondits original conception into a strategic manage-ment concept. Here, the BSC is used to com-municate and coordinate the translation of thebusiness strategy (Kaplan and Norton, 1997,24, p. 34): the gap between strategic and oper-ative planning can be bridged and the long-term achievement of the strategic objectivesguaranteed by means of a consistent applica-tion and formulation of a previously definedbusiness strategy in the four perspectives ofthe BSC (Kaplan and Norton, 2001, p. 65). Inparticular, Kaplan and Norton subdivide thestrategic management system of the BSC intofour partial processes. The central question forthe theme of this article about the structure of aBSC is mainly related to the first of the four crit-ical management processes to be described byKaplan and Norton (Radcliffe, 1999, p. 8): clar-ification and translation of vision and strategy.

The BSC is directed top down, both in itscontents and in its development as a manage-ment system. Therefore, to be able to clarifyand translate the strategy top managementmust agree on the strategy. The goal is to createa common and comprehensible strategic basisin the form of a formulated BSC (Kaplan andNorton, 1997, pp. 11, 186). Because of this, theverbally formulated strategy should be trans-lated and causally linked in terms of objectivesand measures as described above.

Suitability of the balanced scorecard as a tool forsustainability management

Conceptually, sustainability management withthe BSC seeks to address the problem ofcorporate contributions to sustainability in

an integrative way. It posits that for com-panies to contribute to sustainable devel-opment, it is desirable that corporate per-formance improves in all three dimensionsof sustainability – economic, environmental andsocial – simultaneously (see Figge et al., 2001a).In contrast to approaches that try to measurecorporate sustainable performance (see, e.g.,Huizing and Decker, 1992; Atkinson, 2000),in this article we propose a more procedu-ral approach to sustainability management:While conflicts between the three performancecategories of sustainability (social, ecologi-cal and economic goals) may occur, from apragmatic business viewpoint corporate sus-tainability management should first identifyand realize opportunities for simultaneousimprovements in all three dimensions in orderto achieve strong corporate contributions tosustainability.

In a BSC all aspects relevant for achievinga permanent competitive advantage should beincluded. In the four perspectives of the BSC,therefore, the company’s activities critical forlong-term business success are included andcauses are linked to effects. In the formulationof a BSC the objectives and measures inall perspectives are deduced from the long-term strategic financial goals in a top-downprocess. This hierarchical structure of theBSC guarantees that all business activities arelinked to the successful implementation of thebusiness strategy.

This characteristic of the BSC can also beused for the management of environmen-tal and social aspects. Against the backdropof the fundamental deficits of most currentapproaches for environmental and social man-agement described above the ability of theBSC to integrate the three dimensions of sus-tainability offers the possibility to integratethe management of environmental and socialaspects into mainstream business activities.Such an approach to sustainability manage-ment aims at a simultaneous achievement ofecological, social and economic goals (Figgeet al., 2001a, 2001b; Schaltegger and Burritt,


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2000). Therefore, the relation between allthree performance dimensions of sustainabil-ity – environmental, social and economic per-formance of the firm – has to be explicitly takeninto account. Integrating the three pillars ofsustainability into general business manage-ment by a pragmatic approach offers threemajor advantages (Figge, 2001; Figge et al.,2001a, 2001b).

(i) Sustainability management that is eco-nomically sound is not endangered by eco-nomic crisis because it is not only carriedout as long as the company is successful.Usually, if firms find themselves underfinancial distress, those costs that are per-ceived as not contributing to the economicsuccess are cut down first. Sustainabilitymanagement that is economically sound,however, will also be practiced in timesof crises and not only as long as firmsare successful.

(ii) Firms that want to promote or rein-force their environmental and socialmanagement often orientate themselvestowards competitors. Therefore, sustain-ability management that also contributesto economic objectives helps to dissemi-nate the idea of sustainable developmentin business, as it serves as an appropriaterole model for other businesses.

(iii) An integration of environmental andsocial aspects into general business man-agement ensures that corporate sus-tainability management covers all threedimensions of sustainability. Accordingto the three-pillar concept sustainabil-ity involves economic, ecological andsocial aspects. Usually, it is implic-itly assumed that these aspects bear acomplementary relation to each other.Thus, from the viewpoint of sustainabil-ity, it is most favourable if a businessimproves performance with regard toall the three dimensions of sustainabilitysimultaneously.

The BSC assists the identification and themanagement of simultaneous improvementsof environmental, social and financial busi-ness goals. Therefore, an SBSC fulfils the cen-tral requirement of the sustainability conceptfor a permanent improvement of the busi-ness’ performance in economic, ecological andsocial terms. A particular suitability of theBSC for the integration of all three sustain-ability dimensions results from the possibil-ity to also consider soft factors, which can-not be monetarized. Environmental and socialaspects often show precisely these character-istics (Senn, 1986). Thus, an SBSC helps toimplement soft factors such as environmen-tal or social objectives within the core man-agement of businesses instead of just addingsatellite systems. In the following section thefundamental possibilities of an integration ofenvironmental and social aspects into the BSCare briefly described.

DIFFERENT POSSIBLE APPROACHESOF INTEGRATING ENVIRONMENTALAND SOCIAL ASPECTS

There are basically three possibilities to inte-grate environmental and social aspects in theBSC. First, environmental and social aspectscan be integrated in the existing four standardperspectives. Second, an additional perspec-tive can be added to take environmental andsocial aspects into account. Third, a specificenvironmental and/or social scorecard can beformulated (Deegen, 2001, p. 50; Epstein, 1996,p. 73; Figge et al., 2001a, 2001b; Sturm, 2000,p. 374).

Integration of environmental and social aspects inthe four balanced scorecard perspectives

Environmental and social aspects can be sub-sumed under the four existing BSC perspec-tives like all other potential strategically rel-evant aspects (Deegen, 2001; Epstein, 1996,p. 73; Figge et al., 2001a, 2001b). This means


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that environmental and social aspects are inte-grated in the four perspectives through respec-tive strategic core elements or performancedrivers for which lagging and leading indi-cators as well as targets and measures areformulated (Kaplan and Norton, 2001, p. 90).Through this top-down derivation those envi-ronmental and social aspects that are strate-gically relevant within the framework of thefour standard perspectives of the BSC areidentified. Environmental/social aspects con-sequently become an integral part of the con-ventional Scorecard and are automatically inte-grated in its cause–effect links and hierarchi-cally orientated towards the financial perspec-tive and a successful conversion of a busi-ness’ strategy.

Within all its four standard perspectives thelogic of the BSC remains almost exclusivelyin the economic sphere. Exchange processesoutside the market mechanism are hardly con-sidered. Therefore, the approach of the inte-gration of environmental and social aspects bysubsuming them under the four standard per-spectives is particularly relevant for strategi-cally relevant environmental and social aspectsthat are already integrated in the market sys-tem. For instance, for a firm that aims atan environmental customer segment the coremeasure ‘market share’ in the customer per-spective would have an environmentally ori-ented dimension. Also, the leading indicator‘product features’ would have an environmen-tal dimension.

Introduction of an additional non-marketperspective into the balanced scorecard

As already noted above, environmental andsocial aspects and scarcities are not (yet) fullyintegrated in the market exchange processesthrough assigned market prices. The reasonfor this is that, fundamentally, environmen-tal and social aspects originate from non-market systems as social constructs. Thus,many environmental and social aspects are stillnot integrated into the market coordination

mechanism and often represent externalities.However, the model of the socio-economicrationality according to Hill shows that firmsdo not operate exclusively in the commer-cial–economic sphere. As quasi-public institu-tions, they rather interact with other spheres,too, for instance the socio-cultural or the legalsphere (Hill, 1985). Environmental and socialaspects as social constructs can emerge in allspheres and can become strategically relevantfor firms through other mechanisms than themarket exchange process.

Given these particular characteristics of envi-ronmental and social aspects, it becomes clearthat for the integration of strategically rele-vant environmental and social aspects fromoutside the market system the standard BSCstructure – which reflects the market systemonly – might have to be extended by an addi-tional perspective. Figge et al. (2001a, 2001b)propose the introduction of an additional, socalled non-market perspective in order to inte-grate strategically relevant but not market-integrated environmental and social aspects.Kaplan and Norton also point out that thefirm-specific formulation of a BSC may involvea renaming or adding of perspectives (Kaplanand Norton, 1997, p. 33). In order to justifyan introduction of an additional non-marketperspective, environmental and social aspectsfrom outside the market system must explic-itly represent strategic core aspects for thesuccessful execution of the strategy of the com-pany considered. Thus, the necessity for anadditional non-market perspective arises whenenvironmental or social aspects that cannot bereflected according to their strategic relevancewithin the four standard BSC perspectives atthe same time significantly influence the firm’ssuccess from outside the market system.

Strategically relevant environmental/socialaspects from outside the market system canimpact a firm’s performance in all four per-spectives of the conventional Scorecard. Thismeans that they can be relevant both directly(with regard to the financial perspective) and


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indirectly (with regard to the other perspec-tives). Thus, an additional non-market per-spective can affect all four conventional per-spectives. Analogously to the process of for-mulating a conventional scorecard, the strate-gic core aspects and leading indicators of thenon-market perspective must also be identi-fied and reproduced through respective mea-sures. These measures are then linked towardsthe financial perspective by means of hierar-chical cause-and-effect chains. Consequently,strategy-linked management is guaranteed forthe strategically relevant non-market aspects,too. As will be shown later on, the decision ofwhether an additional non-market perspectiveis necessary to formulate an SBSC for a specificbusiness strategy cannot be taken beforehandbut only within the process of formulation.

Deduction of a derived environmental and socialscorecard

The third approach to integrating environmen-tal and social aspects into the BSC lies in thededuction of an environmental and/or socialscorecard. At this point, it is very impor-tant to note that a derived environmentalor social scorecard cannot be developed par-allel to the conventional scorecard. Instead,in order to integrate sustainability manage-ment into mainstream business managementthis is only possible in conjunction with oneof the two alternatives of integration dis-cussed above. Therefore, a derived environ-mental/social scorecard is not an independentalternative for integration, but only an extensionof the two variants discussed in the previoussections. A derived scorecard as discussed inthis section draws its contents from an existingBSC system and is thus predominantly used inorder to coordinate, organize and further dif-ferentiate the environmental and social aspects,once their strategic relevance and position in thecause-and-effect chains have been identified by thetwo approaches presented above. Deriving such ascorecard can serve to clarify the relationship of

an internal service unit with the strategic busi-ness units and their scorecards (Kaplan andNorton, 2001, p. 48). Thus, this additional vari-ant of a derived environmental/social scorecardallows coordinated control of all strategicallyrelevant environmental/social aspects, whichare spread and integrated in the whole overar-ching BSC system.

Relationship of the three approaches to building asustainability balanced scorecard

As already pointed out in the previous para-graph, a fundamental difference exists betweenthe three approaches to building an SBSC. Onthe one hand, the first two variants (subsump-tion and addition) refer to the structure of thecore scorecard for a business unit. On the otherhand, the derived environmental/social score-card is deduced from the core scorecard. Inother words, a derived environmental or socialscorecard can only be formulated after at leastone of the two first variants has been realizedfor the core scorecard system. The contents of aderived scorecard result from the higher-levelBSC of the strategic business unit. Concerningthe process of building up an SBSC, formulat-ing a derived environmental/social scorecardrepresents thus only a possible second step.The first step always needs to be an integrationof the strategically relevant environmental andsocial aspects into the core BSC with the helpof the two variants discussed above.

After having delineated the first twoapproaches from the subsequent possibility ofa derived environmental or social scorecard,it is important to take a look at the relationbetween the two variants concerning thestructure of a business unit’s core scorecard. Itis important to note that certain environmentalor social aspects can be subsumed under thefour conventional BSC perspectives parallel tothe introduction of a specific perspective forother strategically relevant environmental orsocial aspects. In other words, the first twoalternatives of structuring an SBSC are notmutually exclusive. Given the characteristics


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of the two alternatives as outlined above itbecomes clear that the difference lies mainly inthe characteristics of the strategically relevantenvironmental and social aspects. For thosestrategically relevant environmental or socialaspects that are already integrated in themarket system (e.g. environmental costs), itis fairly straightforward to integrate themby means of appropriate leading or laggingindicators into one of the four conventionalperspectives. In contrast, if environmental andsocial aspects exert their strategically relevantinfluence via mechanisms acting in the firm’snon-market environment (e.g. complaints ofneighbour groups), then an additional, non-market perspective is necessary. Becausethere might well exist situations wherestrategically relevant environmental or socialaspects already incorporated in the marketsystem occur alongside those influencing thebusiness unit via non-market mechanisms, itis neither necessary, nor desirable, to make afinal decision for or against one of the twovariants of integration. Most of the authorswho have dealt with different approachesto integrate environmental and social aspectsin the BSC so far neither consideredexplicitly the relationship between the differentapproaches nor discussed the preconditionsof their respective appropriateness (Epstein,1996, p. 73; Radcliffe, 1999; Sturm, 2000,p. 374; Fahrbach et al., 2000; Czymmeck andFaßbender-Wynands, 2001). We propose twofundamental conditions for the introductionof an additional non-market perspective. Inorder to justify the addition of a non-market perspective (i) environmental andsocial aspects have to be strategically relevant,i.e. they are either strategic core aspects orperformance drivers and (ii) it is not possibleto include these aspects appropriately, i.e.according to their strategic relevance, intothe four conventional perspectives of the BSC(Figge et al., 2001a, 2001b).

Regarding the process of formulating anSBSC these findings lead to the conclusion

that the decision on which structure is appro-priate for a specific business unit cannot betaken without further consideration. Rather, itdepends on the nature of the strategically rele-vant environmental and social aspects that areidentified during the process of formulating anSBSC. The choice of how environmental andsocial aspects are integrated is therefore takenduring this process, rather than at its begin-ning. The process of constructing an SBSC isdescribed in the following section.

THE PROCESS OF FORMULATING ASUSTAINABILITY BALANCEDSCORECARD

Based on our reasoning in the previous sectionsthe process of formulating an SBSC has to meeta number of basic requirements.

(i) First, the process must lead to an integra-tion of environmental and social manage-ment into business management.

(ii) An SBSC that exactly meets the specificcharacteristics and requirements of thestrategy and the environmental and socialaspects of a business unit must not begeneric. The process therefore has toensure, second, that the SBSC formulatedis business unit specific.

(iii) Third, environmental and social aspectsof a business unit must be integratedaccording to their strategic relevance.This includes the question whether theintroduction of an additional non-marketperspective is necessary.

On the basis of these requirements the processof formulating an SBSC can be divided intothree major steps. First, the strategic businessunit has to be chosen. This step presupposesthat a strategy of the business unit exists. Sec-ond, the environmental and social aspects ofconcern have to be identified. Third, the rele-vance of these aspects for the specific business


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Choose strategic business unit

Identify environmental and social exposure

Determine strategic relevance of environmental and social aspects

FinancialPerspective Customer

Perspective InternalProcessPerspective

Learningand GrowthPerspective Non-Market

Perspective

Figure 1. Process of formulating an SBSC

unit’s strategy has to be determined. Figure 1gives an overview of the whole process.

Choice of strategic business unit

The BSC as developed by Kaplan and Nortonwas originally designed for strategic manage-ment at the business unit level (Kaplan andNorton, 1997, p. 161). Thus, as a first step,the business unit for which an SBSC will beformulated has to be chosen. For small andmedium sized enterprises the business unitlevel may be identical with the corporate level,while in large companies or groups there areoften several business units that aim at dif-ferent customer segments, often organized asindependent profit centres. The choice of thebusiness unit presupposes that a strategy existsfor this business unit. It is important to notethat the BSC is not a tool for the formulation ofstrategies. Rather, the BSC serves to describeand translate an existing strategy consistentlyin order to enhance the successful execution ofthe strategy (Kaplan and Norton, 1997, p. 36,2001, p. 104). The formulation of a BSC is thusnot an independent process but is part of awider framework of competitive positioningand strategy formulation (Kaplan and Norton,2001, p. 40). This is also the case for the for-mulation of an SBSC: before an SBSC can beformulated top management has to arrive at acommon agreement on what the strategy is, nomatter whether it explicitly mentions sustain-ability issues or not.

Identification of the environmental and socialexposure of the business unit

In order to ensure that the SBSC is tailored tothe specific needs of the business unit chosen,the environmental and social aspects that affectthe business unit must be identified in a secondstep. The result is a profile of the environmentaland social exposure of the business unit. Thepurpose of this step is to identify all thepertinent environmental and social aspects inorder to obtain a comprehensive list of allpossibly strategically relevant environmentaland social aspects. For the identification ofthe environmental and social exposure of abusiness unit two generic frameworks canbe used.

The first framework (see Figure 2) serves toidentify the environmental exposure of a busi-ness unit. The idea behind this framework isto identify all the environmental interventionsthat originate from a business unit’s opera-tions and products. These interventions are

Emissions (to air, water, and soil)

…

…

…

…

…

…

…

…

Material input/material intensity

Noise and vibrations

Environmental exposure of a business unit

Type of environmentalintervention

Business unit specificoccurrence

Waste

Energy intensity

Waste heat

Radiation

Direct interventions on natureand landscape

Figure 2. Framework for the identification of the envi-ronmental exposure of a business unit (Figge et al., 2001a,

p. 36)


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eventually responsible for the environmentalimpacts a business unit causes, because allenvironmental problems can finally be tracedback to physical and/or chemical interventions(Heijungs et al., 1992). In order to obtain thebusiness-unit-specific environmental exposureall activities and products of the business unitmust be checked against the categories of theframework as shown in Figure 2. It is impor-tant to consider all pertinent environmentalinterventions in order to come up with a com-prehensive and business-unit-specific profile ofthe environmental exposure.

Social aspects that are strategically relevantcan be identified, analogous to the environ-mental aspects. However, due to the greatvariety and diversity of social aspects and thelack of a common foundation in natural sci-ences as found for environmental aspects itis very difficult to achieve a comprehensiveclassification of social aspects (Clarkson, 1995,p. 102). Rather, social aspects heavily dependon the preferences and values of the differ-ent actors involved (Zadek, 1999, p. 7). It istherefore advisable to classify social aspectsnot according to their contents but according tothe actors involved. The stakeholder approach(Freeman, 1984) provides a useful frameworkto classify the actors concerned with differentsocial claims (Clarkson, 1995). The social issues

concerning a business unit can thus be identi-fied by systematically following a comprehen-sive framework of potentially relevant stake-holder groups (Liebl, 1996). Figure 3 providessuch a framework. Potentially relevant stake-holder groups for a business unit can be distin-guished into internal stakeholders, stakehold-ers along the value chain, stakeholders in thelocal community and societal stakeholders. Asa further, cross-sectional, classification, directstakeholders can be distinguished from indi-rect stakeholders (Rowley, 1997). Direct stake-holders are those groups that are related tothe firm by direct material resource exchangeflows, while with indirect stakeholders no suchdirect material exchange flows are established.In a first step, all pertinent stakeholder groupsfor a business unit have to be identified. In asecond step the social claims and issues broughtup by these groups have to be identified. Byspecifying the framework shown in Figure 3a specific profile of the social exposure of thebusiness unit can be obtained.

Determination of the strategic relevance ofenvironmental and social aspects

For both the conventional BSC and the SBSCthe identification and alignment of the strate-gically relevant aspects is the core step. Thepurpose of this step is to translate the verballyformulated strategy of a business unit into

Social exposure of a business unit

Direct stakeholders Indirect stakeholders

Internal In the localcommunity

Internal In the localcommunity

particularstakeholdergroup

…

claim/issue

...


…

claim/issue

...


…

claim/issue

...


…

claim/issue

...


…

claim/issue

...


…

claim/issue

...


…

claim/issue

...


…

claim/issue

...

Along thevalue chain

Societal Along thevalue chain

Societal

Figure 3. Framework for the identification of the social exposure of a business unit (Figge et al., 2001a, p. 38)


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causally linked objectives and indicators. Asalready mentioned above the BSC is a toolto identify the 15–25 strategically most rele-vant aspects and to link them causally andhierarchically towards the long-term successmeasured by the financial perspective. Forthe formulation of a BSC Kaplan and Norton(1997) propose a top-down process to iden-tify the strategically relevant aspects in allthe perspectives. In principle, this approachcan also be used for the formulation of anSBSC. The only difference is that in additionto ‘conventional’ aspects environmental andsocial aspects have to be considered, too. Bygoing through the perspectives in a cascade-like process starting from the financial per-spective as indicated in Figure 1, the hierar-chical and causal linkage of the strategicallyrelevant aspects is guaranteed. This serves toalign all strategically relevant aspects of a busi-ness unit towards the successful conversion ofthe strategy and thus towards long-term eco-nomic success.

Like all other business issues, we candistinguish between three stages of strategicrelevance of environmental and social aspects.

(i) Environmental or social aspects can rep-resent strategic core issues, for which lag-ging indicators have to be defined. Theselagging indicators measure whether the

strategic core requirements in the perspec-tive have been achieved. Kaplan and Nor-ton (1997, p. 4) have proposed generic cat-egories for the formulation of lagging indi-cators in each perspective (see Table 1).

(ii) Performance drivers as represented byleading indicators show how the resultsin each perspective, reflected by the lag-ging indicators, are to be achieved. Perfor-mance drivers are highly business specificbut there are once again categories to sup-port identification (see Table 2). Leadingindicators will reflect environmental orsocial issues whenever environmental andsocial aspects act as performance drivers.

(iii) Finally, environmental or social issues canalso represent hygienic factors, reflectedby diagnostic indicators. Hygienic factors(Herzberg et al., 1999) are issues that haveto be managed sufficiently in order toguarantee successful business operations;however, addressing these factors doesnot lead to any competitive advantage(Kaplan and Norton, 1997, p. 156). Inother words, hygienic factors representnecessary but not sufficient conditions fora successful execution of a firm’s strategy.Therefore, these factors are not part ofthe BSC.

Environmental and social aspects have to beclassified and integrated into the scorecardsystem according to their strategic relevance

Table 1. Generic categories for the formulation of lagging indicators (Figge et al., 2001a; see also Kaplan and Norton,1996)

Financialperspective

Customerperspective

Processperspective

Learning andgrowth perspective

Non-marketperspective

° Revenuegrowth

° Market share ° Innovationprocess

° Employee retention ° Freedom ofaction

° Productivitygrowth

° Customer acquisition ° Operationsprocess

° Employee productivity ° Legitimacy

° Assetutilization

° Customer retention ° Postsale serviceprocess

° Employee satisfaction ° Legality

° Customer satisfaction° Customer

profitability


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Table 2. Generic categories for the formulation of leading indicators (Figge et al., 2001a; see also Kaplan and Norton,1996)

Financialperspective

Customerperspective

Processperspective

Learning and growthperspective

Non-marketperspective

– ° Product attributes ° Cost indicators ° Employee potentials leading or lagging° Customer relationship ° Quality indicators ° Technical

infrastructureindicators from allother perspectives

° Image and reputation ° Time indicators ° Climate for action

just like all potentially strategically relevantaspects. In order to determine the strategic rel-evance of environmental and social aspects foreach perspective a matrix as shown in Figure 4can be used. To determine whether environ-mental and social aspects represent strate-gic core issues, performance drivers or sim-ply hygienic factors, environmental and socialexposure are cross checked against the cate-gories of lagging and leading indicators (seeTables 1 and 2) in a cascade-like top-down pro-cess as shown in Figure 1 for every perspective.It is useful to check systematically all pertinentenvironmental and social aspects by answeringthe following questions when going throughthe four conventional perspectives.

(i) Does the environmental or socialaspect represent a strategic core issuefor the business strategy of ourbusiness unit (→ environmental or sociallagging indicator)?

(ii) Does the environmental or social aspectcontribute significantly to a strategic coreissue and therefore represent a perfor-mance driver for the business strategy ofour business unit (→ environmental orsocial leading indicator)?

(iii) What is the substantial contribution of theperformance driver to the achievement ofa strategic core issue?

(iv) Is the environmental or social aspect sim-ply a hygienic factor, which necessar-ily has to be well managed but leadsto no particular strategic or competi-tive advantage?

As already mentioned above, the decisionwhether adoption of an additional non-marketperspective is necessary can only be takenduring rather than before the process of formu-lating an SBSC. Therefore, after having gonethrough the four conventional scorecard per-spectives, it finally has to be checked whetherstrategically relevant environmental or social

Social exposureEnvironmental exposure

Direct Stakeholders Indirect Stakeholders

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Figure 4. Matrix to determine the strategic relevance of environmental and social aspects (according to Figge et al.,2001, p. 42)


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aspects exist that significantly influence thesuccess of the business unit’s strategy viamechanisms other than the market system.This can be done by answering the follow-ing questions.

(i) Are there any environmental or socialaspects that influence the business unit’ssuccess via non-market mechanisms?

(ii) Do these environmental or social aspectsrepresent strategic core elements at whichthe business unit has to excel in order tosuccessfully execute its strategy?

(iii) What is the substantial contribution of theperformance driver to the achievement ofthe business unit’s strategy?

When going through the perspectives in thedescribed cascade-like manner it is impor-tant to remember that the causal relationshipsbetween the strategically relevant aspects iden-tified stretch beyond the lagging and leadingindicators within one perspective. Rather, allaspects and indicators have to be directly orindirectly linked towards the financial per-spective. The strategic core aspects and valuedrivers of the lower level perspectives in thecascade shown in Figure 1 serve to achieve theobjectives set by the indicators in the upperlevel perspectives. Therefore, every time onemoves from an upper level perspective tothe next lower level perspective in the cas-cade it has to be ensured that and shownexplicitly how the lower level strategic coreaspects and performance drivers contribute tothe achievement of the objectives in the higherlevel perspective(s). This serves to establish thehierarchic cause-and-effect chains that link allstrategically relevant aspects to the successfulexecution of the strategy. As discussed above,in contrast to the other scorecard perspectivesthe non-market perspective acts as a frame thatembeds the other perspectives. However, thestrategic aspects of the non-market perspectivehave to be linked directly or indirectly to thefinancial perspective as well. It is importantto note in this context that the core aspects

of the non-market perspective can in principleinfluence objectives in any other perspective.Consequently, as indicated in the last columnof Table 2, the performance drivers for the non-market perspective can also be found in anyother perspective.

As the result of the process described above,all strategically relevant aspects reflected byappropriate lagging or leading indicators arepart of a cause-and-effect network, which visu-alizes and translates the strategy of the busi-ness unit. By systematically going throughthe perspectives in a top-down direction, thestrategic relevance of the pertinent environ-mental and social aspects is determined, as forall other, ‘conventional’, aspects. This ensuresthe full integration of environmental and socialaspects in the general management system.The result of the process of formulating anSBSC can be shown graphically by usinga strategy map (Kaplan and Norton, 2001).In such a strategy map, all economic, envi-ronmental and social aspects that have beenidentified as strategically relevant are repre-sented in the hierarchical network of cause-and-effect chains. Figure 5 shows an SBSCfor a sample company as such a strategymap. Once the identification and alignmentof the strategically relevant aspects has beenperformed, the next step is to define indica-tors, targets and measures in order to controland steer corporate performance towards theachievement of strong corporate contributionsto sustainability.

DISCUSSION AND CONCLUSION

The process of formulating an SBSC describedin this article shows how environmental andsocial issues can be integrated with the generalmanagement of a business unit. The process isdesigned in such a way that it can be appliedno matter whether a conventional scorecardalready existed prior to integrating environ-mental and social aspects or not. As a further


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Non-Market Perspective

Child labour

Financial Perspective

Turnover growth(+20%)

Return on sales (4% 4.5%)

ROCE(6% 8%)

Internal Process Perspective

Innovation ProcessProduction Process

Service Process

Strategic core issues

Toxic residues in the products

Production cost

Performance drivers

Energy-, water-, andmaterial-efficiency

Use of harmful substances in production

Quality control purchasing

Learning and Growth Perspective

Employee potentials Technical infrastructure

Employee satisfaction

Climate for action

Employee health and safety


Performance drivers

Customer Perspective

Customer Relationship

Increase market share(15% 20%)


Performance driversProduct attributes

Toxin-free productsDurable products

Image and Reputation

Customer satisfaction

Environmentally friendly andsocially responsible image

Figure 5. SBSC as a strategy map for a sample company

advantage, the SBSC concept is an open con-cept. This means that it can be applied tointegrating environmental and social aspectsinto the successful implementation of both‘conventional’ corporate strategies and explicitcorporate sustainability strategies. It is obviousthat in the case of companies that have adoptedexplicit sustainability strategies (see, e.g., Hart,1997) environmental and social aspects willplay a more prominent role in the SBSC. How-ever, the openness of the approach to alsoinclude conventional firms widens the appli-cability of the SBSC from sustainable niche

players to the far wider range of mainstreamcompanies and helps them to move towardsa more sustainable performance. It is obviousthat the SBSC makes no statement on whatkind of strategy should be chosen. Here again,it becomes clear that an SBSC is embedded inthe wider context of strategic management.

This embeddedness also holds true whenit comes to the relation of the SBSC withother tools of sustainability and environ-mental management. As the SBSC is usedto translate a verbally formulated strategyinto operational terms, it can be seen as


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a tool for strategic control. Thus, it has avery tight link to information managementtools, which can also be found with corpo-rate control, corporate eco-control, environ-mental, economic and social performance indi-cators, as well as internal reporting devices.On the other hand, the formulation of an SBSCdepends on information generated by toolsfor strategic planning. Furthermore, througheach of its perspectives the SBSC estab-lishes links to the realms of finance, mar-keting, operational or process management,human resources and issues management,within all of which environmental specifica-tions can be found in literature. The approachproposed in this article can help to chosethe most pertinent tools for environmentaland social management for a specific busi-ness considered. Eventually, this will enhanceboth effective and efficient environmentaland social management and sustained eco-nomic success.

Overall the SBSC provides a strong toolfor an integrated sustainability management.It helps significantly to overcome the short-comings of the often parallel approaches ofenvironmental, social and economic manage-ment systems implemented in the past.

ACKNOWLEDGEMENTS

The authors would like to acknowledge the usefulcomments of two anonymous reviewers.

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BIOGRAPHY

Dr. Frank Figge, Tobias Hahn (correspond-ing author), Professor Stefan Schaltegger andMarcus Wagner are based at the Univer-sity of Luneburg, Centre for SustainabilityManagement, Chair of Corporate Environmen-tal Management, Scharnhorststrasse 1, 21335Luneburg, Germany.Tel.: +49-4131-782216Fax: +49-4131-782186E-mail: [email protected]


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