A SUSTAINABLE FUNDAMENTAL ANALYSIS MODEL

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financial and strategic value drivers can be established, assumptions are to be made and firm valuation will be able to be conducted. Lastly, it is important to stress that the presented approach rests on the assumption that there is access to public information only (Petersen et al., 2017).

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stakeholder theory is built on the assumption that balancing different stakeholders’ interests is the key to value creation, the focus of an expanded strategic analysis would be to list stakeholders’ interests on economic, social and environmental dimensions, rather than following a top-down approach that reflects a one directional linear relationship. Given stakeholders’ various interests, an interest that is well or improperly managed might become a strategic value driver dependent on its potential material impact. In the remaining section, we will explore the interests of all levels of stakeholders on economic, social and environmental dimensions.

3.5.1. Focal firm stakeholders’ interests

Investors’ interests have been well covered by abundant economic researches and they are generally concerned about the return on their investments – a firm’s profitability. As discussed earlier, macro, industry, firm-specific factors influence a firm’s earning potential (Petersen et al., 2017). For instance, economic and social factors, such as recession caused by the COVID-19 pandemic and rising awareness of heathy lifestyle, affect market growth; whereas political and technological factors, such as social welfare (e.g. free education in Europe vs high tuition in US generates a gap in salary level), employment law and government spending on research, affect a company’s cost in operating in a market. Thus, the existing strategic analysis, comprised of PEST, Porter’s five forces and VRIO analysis, is well-equipped to advocate for investors’ interest on the economic dimension.

In terms of social dimension, investor’s interest would be concentrated on corporate governance, as rigorous corporate governance lowers the risk of corporate scandals, reduce agency costs (Aras & Crowther, 2008) and attain societal legitimacy through conforming to political, social and ethical norms (Nwabueze & Mileski, 2008). Consequently, business ethics (bribery and corruption), management of the legal and regulatory environment (compliance)

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and incident risk management are suggested as elements for measuring the effectiveness of the corporate governance of a firm (SASB, 2018; Ruggie & Middleton, 2019).

A firm as a whole must be concerned of the carrying capacity of the ecosystem, as the production inputs rely on the availability of resources (Aras & Crowther, 2008). For instance, paper manufacturers cannot produce any papers without trees, and fishing industry would not exist without fishes. Eco-efficiency, which denotes the efficiency of the use of environmental resources (Figge & Hahn, 2013) and concerns the efficiency in the consumption of energy, raw materials and the emissions of greenhouse gases (GHGs) (Park & Behera, 2014), has been widely adopted to showcase a firm’s interest on environmental sustainability.

Lastly, employee well-being is frequently associated with concepts such as health and safety, better work‐life balance, diversity and equal opportunities, working hours and wages, staff development and training (Kobayashi et al., 2018). These concepts can then be viewed as an employee’s interest in an organizational context.

3.5.2. Supply chain stakeholders’ interests

The stakeholder model for enterprise sustainability constructed by Searcy (2016) defines a supply chain from a life-cycle perspective, where end-of-life product management is also considered as a part of the supply chain. In order words, the stakeholders within a supply chain would include companies (e.g. reclaimers) that specialized in recycling and disposal of products. On the economic dimension, economic benefits (Yang et al., 2017) together with supply chain disruption (Hofmann, 2014) have been found to be important factors for sustainable supply chain implementation. Suppliers, distributors and reclaimers’ economic interest would thus be their individual value creation potential in a supply chain, while customers generally demand value (measured by utility) for money – product quality and

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safety in comparison to price. Supply chain disruption denotes a loss to its stakeholders, when a focal firm’s business operations are of low robustness to external changes (Hofmann, 2014).

For instance, the sky-high prices of surgical masks during the first half year of the COVID-19 pandemic might be a recent example of supply chain disruption. Consequently, it is to the stakeholders’ interest that a focal firm can operate in a robust and adaptive manner.

Social legitimacy denotes a generalized perception or assumption that actions of an entity are socially desirable and appropriate. Given that economic activities in association with providing and consuming a good or service are embedded within a broader societal context, which is comprised of societal norms, rules and expectations, whether an economic behavior is deemed socially acceptable affects an organization’s access to markets and critical resources (Dacin et al., 2007). Thus, organizations value a high degree of social legitimacy, as their economic success depends on how the public perceive the appropriateness and the desirability of their economic behaviors (Kishna et al., 2017).

On the other hand, legitimacy can be exchanged between parties (Dacin et al., 2007), which means that members of a supply chain can influence each other’s social perception (Rebs et al., 2017). In this sense, organizations will also be concerned of the social legitimacy of other parties within a supply chain, and consequently, supply chain stakeholders expect firms to conform to societal rules and expectations of appropriate business behavior (Hofmann, 2014).

It is important to note that consumer, as an entity, is also subject to the scrutiny of social legitimacy. For instance, due to the recent Xinjiang cotton dispute, the consumption of H&M clothing has been widely considered non-socially accepted in China. To wit, social legitimacy is an essential interest to all supply chain stakeholders.

As resources available to product manufacturing are limited, no business would be able to sustain its operation with the conventional “Take, Make and Dispose” linear economy model.

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Circular economy, which emphasizes resource regeneration and recycling, is widely acknowledged to sustain economic growth through saving material cost, ensuring stable supply of materials, driving sustainable consumption, while preserving the environment.

Naturally, it is to the whole supply chain’s interest to adopt circular economy principles and promote resource regeneration and recycling to ensure the supply chain’s long-term survival (Patwa et al., 2021).

3.5.3. Beyond supply chain stakeholders’ interests

Numerous researches have been conducted on the environmental sustainability from the society’s perspective. Strezov et al. (2017), through reviewing multiple sustainable development indices, have revealed some common themes, namely climate change risk (e.g.

greenhouse gases), pollution (e.g. emission on air, waste on water and land), biodiversity (e.g.

room for other species and health of the ecological system), resource depletion risk (e.g. metal, mineral, fossil fuel). These themes would also be of interest to competitors of a firm, given that the competitors often utilize similar resources as production inputs and a firm’s demand on some resources would inevitably affect the availability of those resources to its competitors.

Concerning the social dimension, social well-being, which denotes a good and decent life, encompasses three fundamental prerequisites, namely a healthy and naturally long life, being able to enjoy and respect social membership, and fulfilment of basic needs (Dreyer et al., 2006;

Neugebauer et al., 2014). In this sense, aspects such as housing, employment, equal opportunities and justice are instrumental to social well-being (Neugebauer et al., 2014).

Raworth have proposed twelve social foundations (2017), which are heavily influenced by the social aims of the UN’s Sustainable Development Goals. The twelve social foundations can be reorganized into important aspects of social well-being, namely access to nutritious food, clean water, electricity, health care, education, decent work, housing, social equity, political

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rights, security and justice (Dillard et al., 2012; Raworth, 2017), which corresponds to the scope of social well-being proposed by Dreyer et al. (2006). As a matter of fact, business activities might directly or indirectly exert impact on those social aspect and it is essential that all relevant societal impacts of a company are included. Nevertheless, the company should not be held accountable for the societal impacts that it is not able to influence (Dreyer et al., 2006).

When it comes to the economic dimension, it is worthwhile to revisit the economic functions of government. Government has essentially three principal functions – the allocative function, the stabilization function, and the distributive function. The allocative function denotes public expenditures on goods or services, such as public goods or merit good that the private sector fails to provide in an efficient manner. However, the efficient allocation of resources does not limit to the provision of public service, government also regulates allocations of market resources by setting the legal and administrative framework, such as competition and merger policies and minimum wage levels. The stabilization function refers to the use of fiscal and monetary policies to achieve full employment, control inflation and trade balance.

Lastly, the distribution function concerns the redistribution of income or wealth through social welfare benefits or progressive tax systems, which aims to sustain an acceptable minimum standard of living or resolve market failure (Morris et al., 2016). Consequently, a government’s economic concerns in a business would be how a firm’s operation affects its economic functions. For instance, consolidation, especially in knowledge-intensive sectors, has been found to be one of the main drivers for the diminishing labor share of income (Manyika et al., 2019), which would require government to either regulate competitive behavior or adjust tax level for redistribution purpose.

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