5. Multi-criteria Decision Aid (MCDA)
7.11 Using AHP as a Strategic Decision Making Aid
In order to avoid the piecemeal activities in corporate climate change response, rigour and creativity and procedural rationality (Simon, 1956) are necessary. According to Roy (1990: 78),
―In general, it is impossible to say that a decision is a good one or bad one by referring only to a mathematical model: organizational, pedagogical and cultural aspects of the whole decision process which leads to a given decision also contribute to its quality and success.‖
Financial valuation techniques (such as net present value, payback, internal rate of return) and algorithmic solutions of multi-criteria problems geared towards optimisation were found not to be very useful for environmental problems (Funtowicz et al., 1999), and in particular climate change response problems, because the methodology offered must offer a consistent framework for structuring the problem and allowing for a process of debating and learning, so that ―soft‖ issues such as ethical and moral-motivated initiatives are catered for in the response strategy.
7.11.1 Climate Change Response Mission and Planning Horizon Mission
The first step in the crafting of a well thought-through corporate climate change response strategy should be the crafting a climate change mission (Figure 7-6). This should flow from the corporate strategy of the organisation. Both organisations in the study have documented climate change response strategies with varying levels of comprehensiveness. Tongaat Hulett‘s climate change response strategy is part of the bigger Sustainability Strategy, (see Findings section for their sustainability strategic intent). ATNS‘ climate change response mission is articulated in their Sustainability and Climate Change Response Strategy. Conversely, climate change response can shape corporate strategic decisions, where an organisation could leverage its existing competitive advantage in promoting value and ensuring growth (Lynch, 2009). This seems to be the case with the company used in the pilot study, where climate change response is charting new territories for diversification away from the core mining business into renewable energy generation.
Planning Horizon
The climate change response planning horizon informs the investment horizons. This is important because the concerns of shareholders and business executives are not always compatible (Beale & Fernando, 2009). Beale and Fernando (2009) and Jensen (2004) argued that the chase for share price rise encourages short-termism which compromises environmental (including climate change) and social sustainability.
Figure 7-6 AHP Tree for Climate Change Response
This argument was supported in the study where concerns for short-term performance as measured by the payback period are the biggest selection criteria for climate change response initiatives in one of the organisations. In short-term planning cycles, businesses focus on short development cycle initiatives that drive short-term profitability and organisational legitimacy (Lynch et al., 2008) such as social acceptability, reputation or legal compliance. This is what Beale and Fernando (2009) termed mitigation strategies, where companies use existing environmentally tools and additional resource allocation is minimal. ATNS has an elaborate planning horizon with some initiatives ear-marked for the short-term period of 0 to 3 years. The medium-term initiatives falling within the 5 year window are vaguely defined and the long-term initiatives falling within the 6-10 year planning horizon are yet to be clearly defined. Tongaat
Overall Climate Change Strategic Thrust
Financial Business Case Cost savings
Business Opportunities Manager business
Risk
Increase Efficiencies
Organisation Legitimacy
Stakeholder pressure Reputation
Moral Responsibility Corporate culture
& values
…..
Opportunity/
Threat sStremStreng
th
Synergy Resource Availability
Raising Awareness Mission
Criteria
Drivers/Motivation
Continuum
Planning Horizon Short Term Long Term
Business Competency
Strength
Adaptation/
Operational Efficiciency
New Products Fully Integrated
Hulett‘s planning periods were not articulated, but there is evidence and statements from the interviews indicated that there are a number of both long-term initiatives planned or currently underway such as the feasibility study on the use of a starch product for water retention; the desire to move into ethanol production at a commercial scale; the joint-ventures with some municipalities on effluent treatment and engagements with various authorities on electricity generation. Long-term planning horizons largely focus on initiatives that fall on the third and fourth levels of the climate change response continuum largely driven by the need for competitiveness.
7.11.2 Climate Change Response Criteria
Climate change response drivers and motivators extensively discussed in the Findings section are an important determinant and criteria for response. In his design of a market driven corporate strategy using AHP, Wind (1987) argued for the inclusion of synergy as one of the evaluation criteria (see Figure 7-6). Synergy is a dimension that recognises the interdependency among initiatives that can enhance or magnify the response impacts of an initiative or conversely negate it. Synergistic effects can often provide functional advantages and economic benefits but can also be a source of progressive complexity in climate change response.
7.11.3 Qualitative and Quantitative Evaluation Qualitative Evaluations
How should executives apply these criteria in the selection of individual initiatives? AHP lends itself usefully in hierarchically structuring and evaluating the different alternatives within a cluster using the Saaty‘s Linguistic Variables. For example, while water shortages are a genuine climate change concern for Tongaat Hulett, and the need to contribute towards water sustainability are high, the economic justifications of reverse osmosis are not yet favourable.
How do companies put a financial value to moral responsibility and earth citizenship? Subjective and moral-inspired actions are better valued qualitatively than quantitatively, a fit which financial valuation or cost-benefit analysis methodologies do not handle well, particularly when the said benefits only materialize well into the future. As Ansoff (1957) advised, it is important that a company considers and plans for unforeseeable contingencies and technological
advancements - an aspect which AHP handles better than cost-benefit-analysis and financial valuation methodologies.
Quantitative Evaluations
Quantitative measures should seek to answer such questions as: will the climate change response initiatives portfolio address the key risks and opportunities confronting the company?
Will the profit or cost structure, business legitimacy or business competitiveness positions improve as a result? Different aspects of performance are measured by different performance tests such as income adequacy measures, attractiveness to key stakeholders and productivity efficiency measures (e.g. use of capital, physical assets or personnel). Consistency in the definition and application of evaluation criteria is important.
7.11.4 Understanding the Decision Environment using SWOT
Kurttila (2000) and colleagues proposed the use of AHP and SWOT (strengths, weaknesses, opportunities, threats) as a hybrid method yielding analytically determined , quantitative input for strategic planning. It is not sufficient to list a collection of internal factors (Strengths and weaknesses) against external factors (Opportunities and Threats), as one of the companies in the study seemed to have done in deriving its climate change response strategy. An in-depth and analytical appraisal of the internal factors in relation to the external factors (Kurttila et al., 2000) gives business executives a concrete, analytically derived and unbiased basis from which to select appropriate climate change response initiatives.
The advantages that AHP brings to the process are the ability to produce a commensurate set of factors from both qualitative and quantitative data; the expert knowledge; objective information (such as cost-benefit analysis or other financial valuations) and the subjective preferences of the executives.
Conducting the SWOT and Criteria Analysis Step 1:
Climate change response drivers and motivators as proposed in Reyers et al.‘s (2011) code clusters are used. For example the relevant factors for the Tongaat Hulett study should be: cost savings, managing business risks, regulatory and legal compliance, stakeholder pressure, business opportunities and the role of the corporation in social and environmental responsibility.
For ATNS, the factors to be considered are: regulatory and legal compliance, corporate values and culture, stakeholder pressure, reputation, increasing competitiveness, the role of the corporation in social and environmental responsibility and cost savings. The organisation‘s iinternal strengths and weaknesses should also be agreed.
Step 2:
Pairwise comparison of the factors is carried out for each SWOT group or Criteria using the following questions:
1 Which of these two factors compared is of greater strength?
2 By how much? (Answered using the Saaty Linguistic Variables)
After the comparisons, the relative local priorities of the factors are computed using the eigenvalue method described in the Methodology section.
Step 3:
The factors with the highest local priorities represent the specific SWOT group. The global priority is calculated by following process similar to step 2 above.
Choosing Among Climate Change Response Initiatives Step 4:
The results of this analysis are then used to decide on the initiatives to pursue from the climate change response continuum. A similar process is used to select the initiatives under each level of the climate change response continuum. Two alternatives are compared against the agreed criteria. The alternatives should be analysed at the lowest hierarchical level. Starting at the
bottom level, pairwise comparisons are conducted between the elements immediately below each other element. For example, energy efficiency for Tongaat Hulett has sub-categories such as office lighting, HVAC, motors, compressors, pumps, etc. Pairwise comparisons should take place at this level so as to decide on the local priority under energy efficiency. Similar analysis should take place for each of the other categories such as water management (recycling, reducing, treatment, etc.), waste management, business travel and transport, supply chain partnerships, green technology, etc.
The result of this analysis is a quantitative value indicating the preferences of each climate change response alternative. In line with Kurttila et al.‘s (2000) recommendation, companies should consider incorporating senior level and other operational personnel in the analysis process in order to introduce new ideas and new knowledge. The project steering committee structure which ATNS has set up is a good platform for such an exercise. This is especially relevant because climate change understanding is still limited in organisations in general, and companies could benefit from the so-called ―greeniacs‖ and climate change enthusiasts, who may not necessarily be business executives.