L7: Tools& Techniques to manage sustainability: Materiality analysis

Question 1

Financial reporting materiality

Answer 1

threshold for influencing the economic decisions of investors

Question 2

Sustainable materiality:

Answer 2

• Importance for shareholders: reflecting the organization’s environmental and social impacts (positive or negative).
• Importance for stakeholders: influencing the assessments and decisions of affected groups

Question 3

Materiality Analysis:

Answer 3

• Material topics importance are related to their relative priority
• Materiality analysis should identify the crucial sustainability problems of an organization.
  • External reporting (which issues do we want to cover in sustainability reporting?)
  • Building sustainability policies (which issues should the managers focus on?)

Question 4

Importance of Materiality analysis:

Answer 4

• It makes the organization responsive and accountable to external requests.
• Economizes on scarce resources for sustainability.
• It is a way to get the attention of top management, because it highlights impacts of a company’s business.
• Finally, you can use materiality analysis to engage stakeholders, by asking them what are the most material issues.

Question 5

Typical process of materiality analysis:

Answer 5

• Most important stakeholders: usually employees, suppliers, and customers
• Around 50% of the companies update their sustainability policies after the analysis
• Often stakeholders choose not to participate in the process
• most common engagement tool: stakeholder surveys
• Most companies involve heads of the main departments.

Question 6

Useful Materiality Analysis:

Answer 6

1. Identify the most important stakeholders (stakeholder map)
2. Issues must be properly defined (specific problems)
3. Include issues (no current policies, no positive impacts)
4. A small set of issues should emerge as highly material (top right area of the materiality matrix)

Question 7

Business Model:

Answer 7

• Describes the rationale of how an organization creates, delivers, and captures value.
• Helps to understand the value creation process and the role played by the firm’s fundamental elements.
• Business model includes the “revenue model” (how the firm gets its revenues), but also wider decisions (architecture of the organization; stakeholder relationships).
• Firms in the same industries/ that satisfy similar needs may use different business models.

Question 8

Business model Canvas

Way of representing the business model (Alexander Osterwalder):

Answer 8

snapshot of the system of elements that originate the business model and the relationships among each other.
- Useful for:
• Translating a start-up idea into the elements that entrepreneurs should build to create a viable organization
• Identifying problems and opportunities for change in any organization

Question 9

Customer Segments

define

Answer 9

• Who are our most important customers?

- What do they expect from us? B2B, B2C, B2G. Mass market vs. niche market. Consumer vs. buyer. Multi- sided platforms.

Question 10

Customers are in different segments when:

Answer 10

• They have different needs that require different products/services
• They must be reached through different distribution channels
• They ask for different types of relationships
• They guarantee different profit margins

Question 11

Value Propositions

Answer 11

• What value do we deliver to customers?
• Which problems are we helping to solve? What are the reasons they buy our products and services? (e.g. Product design, Brand/status, Performance, Convenience, Easiness of use, Customization, Reliability, Availability)

Question 12

Channels

Answer 12

• How are we reaching our customers?
  The contact points that allow us to serve customers: Stores, e-commerce, direct selling, …
• Directly-owned channels (high margins, high control, high costs) vs. third-party channels (low …).

Question 13

Customer relationships

Answer 13

• What type of relationships have we established with our customers? Frequency, intensity, nature of the relationships. (e.g. Sales assistance (vs self-service), post-sale service, communities of users, co-creation of service (participation of customers in production))

Question 14

Revenue streams

Answer 14

• For what value do our customers pay? How are the currently paying? (e.g. Single sales vs recurring sales; purchase vs subscription; selling to customers vs selling to intermediaries; selling price vs royalties; fixed prices, volume-dependent, feature-dependent; selling vs leasing; single good vs families of complementary goods)

Question 15

Key resources

Answer 15

• What resources do our value propositions require?
  The essential resources that allow firms to offer value, to reach customers, to maintain customer relationships and obtain the revenue stream.
• Resources must be unique (also valuable, imperfectly imitable and non-substitutable) to sustain competitive advantage.
• Human, financial, tangible and intangible resources.

Question 16

Key activities

Answer 16

• What do we do to create value? The essential activities that the organization performs. Without them the organization cannot put the business model in practice. Costs and revenues depend on these activities.
  E.g.
• Manufacturing (vs. supply chain management)
• Distribution (vs. royalties or downstream outsourcing)
• Product development (vs focus on manufacturing or distribution)
• Post-sale assistance (vs depending on external providers)

Question 17

Key partners

Answer 17

-	Who is helping us create value?
Key suppliers, distributors, and allies. They allow the organization to focus on key activities, reduce costs, and access unique external resources.
-	Supplying and distribution partners
-	Strategic alliances and joint ventures
-	Manufacturing networks
-	Collaboration with research partners
-	Ecosystems and platforms

Question 18

Cost Structure

Answer 18

• What are the most important costs inherent in our business model?
• Which key resources or key activities are most expensive? What are the cost drivers of the offered value?
  Cost-driven (low cost) vs value-driven (differentiated) business models.
• Fixed vs variable costs
• Economies of scale and scope
• Scalability (ability to expand volume without changing the cost structure)

Question 19

How to use the canvas to materiality in materiality analysis

Answer 19

• The environmental and social impacts of an organization are linked to the elements of the business models (impacts of the activities, of the partners, of the products, of the resources, …).
• Given the industry, impacts change according to the business model of the organization.
• The costs and benefits of given sustainability issues for the firm depend on how they affect the business model.
• Primary stakeholders are in the business model (they participate to value creation);
  the secondary stakeholders influence the elements from outside.

Question 20

The environmental dimension of each case

Answer 20

Customer segments: impacts by customers over the life cycle of the product/service (energy, emissions, additional materials and activities)
Value propositions: volumes of production
Channels: impacts of distribution activities (stores, transportation, warehousing. …)
Customer relationships: waste, impacts of collecting and treating products at end of life, impacts of maintenance
Revenue streams: compare the impacts of the product/service with alternative ways of satisfying customer needs
Key resources: impacts of their use (volumes, sources of energy, materials, …)
Key activities: emissions and other impacts related to manufacturing or production of services
Key partners: all impacts of activities outsourced to partners
Cost structure: how the impacts are distributed across different types (climate change, pollution, human rights, employee welfare, customer welfare, …)

Question 21

The social dimension of each case

Answer 21

Customer segments: positive and negative impacts on customers (good value, personal welfare, safety, health, …)
Value propositions: whether the product/service serves a purpose or objectives of human societies (SDGs)
Channels: the geographic areas in which the organization operates (local, national, multinational) and the impacts on various cultures
Customer relationships: can customers use the product for anti-social goals (crime, fake news, discrimination, …)?
Revenue streams: all benefits for society (jobs, innovation, philanthropy, …)
Key resources: impacts on employee welfare (health & safety, work-life balance, equal opportunities, salary and benefits, …)
Key activities: transparency, ethical conduct, compliance, contribution to public regulation, …
Key partners: positive and negative impacts on local communities, collaboration with NGOs, contribution to industry associations, …
Cost structure: how the impacts are distributed across stakeholders, theme, social relevance, …