Sustainability and continuous improvement of organization: Review of process-oriented performance indicators

Medne, Aija; Lapina, Inga Article Sustainability and continuous improvement of organization: Review of process-oriented performance indicators Journal of Open Innovation: Technology, Market, and Complexity Provided in Cooperation with: Society of Open Innovation: Technology, Market, and Complexity (SOItmC) Suggested Citation: Medne, Aija; Lapina, Inga (2019) : Sustainability and continuous improvement of organization: Review of process-oriented performance indicators, Journal of Open Innovation: Technology, Market, and Complexity, ISSN 2199-8531, MDPI, Basel, Vol. 5, Iss. 3, pp. 1-14, https://doi.org/10.3390/joitmc5030049 This Version is available at: https://hdl.handle.net/10419/241350 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Journal of Open Innovation: Technology, Market, and Complexity Article Sustainability and Continuous Improvement of Organization: Review of Process-Oriented Performance Indicators Aija Medne and Inga Lapina * Institute for Quality Engineering, Faculty of Engineering Economics and Management, Riga Technical University, Kalnciema iela 6, LV 1048 Riga, Latvia *Correspondence: [email protected] Received: 18 June 2019; Accepted: 24 July 2019; Published: 26 July 2019   Abstract: Nowadays, organizations are trying to have, not only a competitive advantage in the market, but also in sustainable development. The purpose of this paper is to investigate the process of measuring organizations’ sustainability using process-oriented indicators. The research seeks to address the following research question: How are process-oriented indicators linked to an organization’s strategy in the context of sustainable development? This research is based on reviewing the literature on organizational performance analysis in the context of sustainable development. The literature review highlights the main elements of organizational performance analysis and linkages to the overall business strategy. There are many ways of how to conduct an in depth assessment of an organization’s performance regarding sustainability. The research shows the elements that are integrated in the process and the organization’s performance analysis. These elements are—objectives, metrics, data measures, indicators and key performance indicators (KPIs). The research shows that growing organizations with a strategic focus on sustainability integrate these elements in the process analysis. Keywords: sustainable development; process-orientation; key performance indicators; continuous improvement; article 1. Introduction More organizations are pressured by their stakeholders to report on their performance in a much wider perspective, such as triple bottom line (TBL) reporting [ 1 – 3 ]. This is not only an internal decision made by the organization’s management. In order to be competitive, organizations should consider changing their business models continuously [ 4 ]. There is a wide range of ways how organizations could measure their performance regarding sustainability. Many studies address the organizations’ sustainable performance and openness to innovation as important requirements for continuous development [ 5 , 6 ]. It also depends on what level of performance the organization is looking at—organizational, process or performer level [ 7 ]. The size of the organization, the complicity of the organization’s structure and the different processes could be some of the main issues that complicate measuring organizational performance [ 8 ]. To solve this problem, several organizations’ performance dimensions, such as financial performance, customer satisfaction, employee satisfaction, social performance and environmental performance, have been identified [ 9 ]. Each of these dimensions consists of a set of performance indicators that could be measured and analysed in terms of organizational and process levels. From a different perspective, some organizations use economic indicators, such as productivity regarding the use of resources and creating value for the customer to measure the performance [ 6 ]. Often organizations use predefined models to measure the overall J. Open Innov. Technol. Mark. Complex. 2019,5, 49; doi:10.3390/joitmc5030049 www.mdpi.com/journal/joitmc J. Open Innov. Technol. Mark. Complex. 2019,5, 49 2 of 14 performance from different perspectives, including corporate social responsibility and sustainability. It is not obligatory but many organizations use several sustainability frameworks for reporting on their performance. As it has become more important to measure an organization’s sustainability and report on it, it is necessary to understand the purpose of these activities. The reason for this is that some organizations use this practice as corporate greenwashing to seem more sustainable and socially responsible to the stakeholders [10]. The accuracy of the stated aim, the applied methods and the stakeholder analysis are the basis of the performance measurement framework [ 11 ]. Some studies have already analysed the difference between sustainability frameworks and standards, such as GRI and AECA, and how they are complementary [ 1 ]. Each of these frameworks consists of a different set of performance-based indicators that may vary depending on the main reporting goals of the framework or standard. In this case, it means that different kinds of organizations use the same predefined set of indicators introduced by the sustainability framework to measure a different range of activities. Therefore, the organization’s management needs to have a good understanding of what is relevant and important to the organization [ 12 ]. It is necessary to choose the most appropriate framework or define an adaptive version with a set of indicators that best describe the suitability of the organization’s performance. Although it is important to integrate and externally report on activities related to sustainability in the organization, there is still a weak link of systematic sustainability integration in the organization’s strategy as some studies consider this as an issue [ 13 ]. For this reason, some organizations use a different set of tools that complement the set of internally defined sustainability indicators. For example, organizations use process mapping, not only for process development, but also for identifying environmental improvement initiatives [ 2 ]. Organizations with a performance measurement system that measures sustainable performance are more likely to be able to manage sustainability in their organization [ 13 ]. For this reason, the purpose of this paper is to investigate the process of measuring an organizations’ sustainability using process-oriented indicators. The research seeks to address the following research question: How are process-oriented indicators linked to an organization’s strategy in the context of sustainable development? To answer the research question, this research paper is divided into three steps. First, the authors discuss the concept of sustainable development to understand how sustainability can be integrated in an organization’s process-oriented performance analysis. The second step is to investigate the trends of using different process-oriented methods and approaches for measuring an organization’s sustainable development. The third step is to investigate the main elements that link process-oriented measurements with the organization’s strategy in the context of sustainability. 2. Methodology This research is based on a literature review. Thirty publications were shortlisted and included to investigate the main elements of linking organizational processes with an organization’s strategy. These articles were selected by analysing their relevance to the contribution of the organizations’ performance analysis and process-orientation in the context of sustainability and continuous improvement. The search results showed 74 publications with open access from two databases—Scopus and Web of Science. The authors chose publications by using five sets of relevant keywords and query strings. The keywords and limitations used for the search of publications in Scopus were: (1) Key Performance Indicator AND sustainable development AND identification AND review. In total, 4 relevant publications were retrieved. (2) Performance indicator AND measurement AND metrics AND objectives AND quality AND review. In total, 9 relevant publications were retrieved. The keywords and limitations used for the search of publications in Web of Science were: (1) Key performance Indicator AND business. In total, 10 relevant publications were retrieved. J. Open Innov. Technol. Mark. Complex. 2019,5, 49 3 of 14 (2) Performance indicator AND measurement AND metrics AND review. In total 7 relevant publications were retrieved. (3) Sustainability AND Benchmarking AND Key Performance Indicators LIMIT TO (open access). In total 5 relevant publications were retrieved. The acquired results were used to conduct a qualitative literature review to investigate how to integrate sustainability elements into the organisation’s strategy and performance measurements. Furthermore, the authors discuss how continuous development affects the creation of an innovation environment within an organization. Open dynamic innovation is viewed as a link between the measurements, strategy and the development of the organization. By analysing the literature in the context of the research question, there emerged five elements linking processes with the organization’s strategy. From the literature, the most mentioned elements were—objectives, metrics, data measures, indicators and KPIs. While reviewing the research literature about the organization’s performance measurement, the authors indicated the main methods and approaches that were used to measure organizational performance and sustainable development. 3. The Concept of Sustainable Development Since Our Common Future or the Brundtland report of the World Commission on Environment and Development was published by the UN in 1987, the concept of sustainable development has become an important element in the strategic planning for countries all over the world [ 14 ]. Sustainable development is not just what the organization could invest into society, economics and environment. It is also an important goal for management. In addition, sustainability is not a short-term approach for the development of the organization. Some studies stress that time is the central element of sustainability [ 15 ]. Being sustainable means managing processes and resources effectively from a long-term perspective [ 16 ]. Organizational social connectedness may be equally important for longer-term organizational sustainability [ 17 ]. Therefore, sustainability is a broad concept that organizations adapt in different ways. Many organizations are integrating sustainability concerns into their strategic decision-making processes. Some studies point out that understanding the need for sustainability strategies and initiatives can be perceived as legitimate by the managers, which is a fundamental step toward facilitating sustainable development [ 18 ]. An in-depth analysis of the organization’s environment and stakeholders helps to develop a long-term strategy and an action plan [ 19 ]. Some studies stress that there is value in identifying and understanding the organization’s main stakeholders and their needs in a normative and legitimate manner to become more sustainable, meaning that stakeholders should be the basis of the organization’s strategy [ 20 , 21 ]. Sustainability initiatives should be planned as both short-term and long-term activities to ensure that all stakeholder groups are satisfied [ 22 ]. The key elements of sustainability should be defined in the organization’s strategy to deliver a clear and direct message to all stakeholders. Many studies address the organization’s sustainable performance and openness to innovation as important requirements for continuous development [ 23 – 26 ]. In addition, some studies agree that organizations which are open to innovation and change continuously are more likely to be competitive [ 4 ]. It is important to understand the objectives and common stakeholder positions regarding sustainable development before making any changes in the organization. Comparing different definitions of sustainable development helps to understand the sustainability concept more comprehensively. Furthermore, by understanding the main elements of sustainability, it is possible to integrate them in the process-oriented performance analysis of the organization. The comparison given in Table 1includes both widely recognized concepts of sustainable development and different researchers’ ideas regarding sustainability. J. Open Innov. Technol. Mark. Complex. 2019,5, 49 4 of 14 Table 1. The comparison of the concepts of sustainable development. Time Sustainable Development Sustainability Focus 1987 Seeks to meet the needs and aspirations of the present without compromising the ability to meet those of the future [14]. Future thinking 2005 As a principle and a practice brings added value to the content and process. Sustainable development can only be progressed—or indeed achieved—through a critical understanding of its complementary parts—environmental, socio-political and economic factors [27]. Triple bottom line 2008 At the general level is a continuous process that is essentially sustainable, influenced by three factors: environment, economy and society [28]. Continuous process; Triple bottom line 2009 and 2015 Achieving a balance between the environment, society and the economy (triple bottom line (TBL)) is considered essential to meet the needs of the present without compromising the ability of future generations to meet their needs [29]. Triple bottom line 2012 Based on continuous change, systemic thinking, integrated and dynamic processes, as well as a change in the organization’s internal culture and strategy [30]. Continuous change; Systemic management; Integrated and dynamic process management 2014 Ensures the need for more accurate measurement and regular analysis of existing resources (environmental, human, physical) in order to ensure fact-based decision making [ 31 ]. Accurate measurements; Regular analysis; Fact-based decision making 2014 Sustainability and responsibility must be one of the values of the organization in order to be able to define sustainable development. Future generations must be one of the considered stakeholders [32]. Future thinking; Stakeholder management 2016 Based on clear understanding of the organization’s key sustainability factors—economic, environmental and social. Sustainability is based on innovative ideas, focus on stakeholders and benchmarking [33]. Triple bottom line; Innovative ideas; Benchmarking The authors have identified the main sustainability focus areas in the compared definitions of sustainable development. As the table shows, sustainable development essentially consists of the balance between three key elements of sustainability—environment, society and economy. Many definitions put emphasis on future-oriented thinking [ 14 , 29 , 32 ], whereas others describe the importance of the development of processes [ 28 , 30 ]. In addition, it is emphasized that stakeholders have an important role in the organization’s development [ 32 , 33 ]. While the UN World Commission on Environment and Development report (1987) offers a holistic definition of sustainable development, it does not explain the necessary actions an organization should take to be sustainable [ 14 ]. The ISO Standard 9001:2015 (2015) promotes sustainable growth and the balance between the triple bottom line (TBL) defining the minimum of requirements for the processes [ 29 ], but sustainable development is not reached by only fulfilling the Standard requirements. As sustainability and sustainable development have become more important for organizations, the need for analysing and measuring sustainability is growing. For this purpose, organizations need to define indicators which should be precise and reflect the performance of the organization. J. Open Innov. Technol. Mark. Complex. 2019,5, 49 5 of 14 These indicators should be in line with the organization’s strategy and objectives related to sustainable development. 4. Measuring the Organization’s Sustainable Development The in-depth research of sustainable development performance indicators is a must to understand the creation of efficient and reliable key performance indicators (KPIs). Many organizations already have integrated models or approaches for determining some of the sustainability elements for their organization. To answer the research question, it is necessary to understand if the solutions mentioned in the literature are transferrable to any kinds of organizations or are specific for one organization. The main themes discovered in the literature review are shown in Table 2. Table 2. The themes related to organizational performance and sustainable development. Year Themes of Measuring the Organization’s Sustainable Development Authors 2011 Viewed through Corporate Social Responsibility (CSR) indicators that measure internal and external stakeholder expectations. [34] 2014 Using multidimensional indicators to measure sustainable development. [35] 2014 Using Balanced Scorecard (BSC) method for Corporate Social Responsibility indicators. Introducing the environmental dimension in the BSC. [36] 2014 Benchmarking other organizations’ sustainable development. [2] 2015 Triple bottom line (TBL) (social, environmental and economic) reporting. Comparing and using GRIs and AECA. [1] 2015 Coloration of sustainability, innovation, and competitiveness at organizational and business level. [24] 2017 Sustainable competitiveness includes several interrelated aspects of the concept of sustainable development. [37] 2017 Sustainability concept of the “Triple P” (planet, people and profit) used in the Systematic Sustainability Assessment (SSA) tool for improving business performance [38] 2018 The Enterprise Resource Planning (ERP) system for sustainable development of the organization. [39] 2018 Defining sustainable Key Performance Indicators with the aim to control sustainability-related issues. Using the best sustainable practices in the business field. [13,40] 2018 The Life Cycle Sustainability Assessment framework used for measuring the economic dimension of sustainable development. [41] In 1996, Kaplan and Norton [ 42 ] emphasized the importance of transferring and linking the organizational vision with real action to ensure sustainable business performance results. Nowadays, one of the models used in organizations is the corporate social responsibility (CSR) model that is employed as the basis of sustainable development in the organization. It includes top-down and bottom-up (stakeholder) integration in process development [ 34 ]. The CSR framework is incomplete unless it also involves the element of continuous improvement [ 34 , 41 ]. The trends show that nowadays, there is a need for context-specific indicators, internally-focused indicators and society-related indicators that describe sustainability [ 1 , 34 , 35 ]. Some studies agree that using predefined frameworks of indicators, such as GRI, AECA, SSA, is a good start for the organization in the sustainable development field [ 1 , 34 , 38 ]. Some studies highlight the balanced scorecard (BSC) approach as an opportunity that could present the advantage of using indicators from all initiatives without compromising their initial purpose [ 36 ]. The BSC approach introduced by Kaplan and Norton in 1992 [ 43 ] is still used to reach a variety of business objectives. This performance-based assessment is used, not only in managing organizations, but also in managing process performance and sustainable development. The BSC is a comprehensive tool to analyse the characteristics of the organization, including the financial and non-financial measures, internal and external factors influencing the J. Open Innov. Technol. Mark. Complex. 2019,5, 49 6 of 14 organization. The four BSC perspectives are customers, financial, internal business processes, learning and growth [ 44 ]. However, there has been a discussion that BSC does not include the social and environmental dimension, which is crucial for organizational sustainability [45]. In the newest literature, such terms as sustainable competitiveness, life cycle sustainability assessment and resource planning that are highly linked to the environmental dimension of sustainability [ 37 , 39 , 41 ] have been used, as one of the important trends nowadays is to benchmark not only the business processes and success, but also benchmark other organizations’ sustainable development [ 2 ]. The implementation of CSR activities in the organization not only consists of the fulfilment of the triple bottom line (TBL) elements, but also contributes to identifying the main sustainable development indicators for the organization. The main trends that emerged from the literature analysis were that process-oriented indicators in the context of the organization’s sustainable development are context-specific, internally-focused, multidimensional and stakeholder-oriented. For implementing a strategy in the context of sustainable development, the main findings show that organizations use predefined frameworks for sustainability, adapted or modified methods for data analysis and benchmark sustainable solutions. 5. Analysing the Performance of the Organization Nowadays, organizations have developed frameworks and scorecards that include their main business performance elements. Studies mention at least five different elements that help to describe and analyse the organization’s performance. They are: objectives [ 23 , 46 – 51 ], metrics [23,47,48,52,53] , data measures [ 23 – 26 , 46 – 49 ], indicators [ 23 , 46 – 48 , 54 , 55 ] and key performance indicators (KPI) [ 23 , 39 , 45 – 47 , 49 , 52 , 55 – 59 ]. Each of these elements is important to monitor the organization’s activities. Each of these elements has a different meaning regarding the organization’s performance analysis. Many organizations do not have a clear understanding of the need for in-depth performance measurements [ 45 ], which results in working with wrong measurements that do not show the organization’s performance accurately. This research is focused on determining what elements are linking processes to the organization’s strategy in the context of sustainable development. By determining the main elements, it is possible to discover how they are linked. A more detailed summary is shown in the following tables, starting with analysing the term, data measures, used in relation to organizational performance (see Table 3). Table 3. The term, data measures, used in relation to organizational performance. Element Description Authors Data Measures Data measures are based on organizational performance and consist of data sets and numbers that are analysed together with performance indicators. These measures have to be quantifiable and reliable. [49] KPIs are based on data measures of physical characteristics of a system or process, it could be challenging, for example when measuring the key aspects of the innovation process in the organization. [23–26] Data performance measures need to be as dynamic as the rapidly changing business environment. This indicates real time measures as an important factor. [48] Good performance measures are quantitative, objective and not subjective. They are simple, understandable, practical, and consistent with appropriate scales and clear, timely objectives. [46] Measurements are the magnitude or values of actual data gathered from the process based upon a standard or unit of measurement. [47] The data measures are statistical data sets and are more commonly used in addition to indicators. They are the basis of the organization’s performance in figures, such as units sold or services provided. J. Open Innov. Technol. Mark. Complex. 2019,5, 49 7 of 14 Some studies discuss the necessity of data measures being a complex data set, which makes it more difficult to analyse organizational performance. Some studies argue that data measures consist of data sets and numbers, they are simple, practical and time-bound [ 46 , 49 ]. Contrary to those views, some studies in their publications mention that data measures can be complex to understand and quantitative [ 23 – 26 , 47 ]. The disagreement can be linked to the complexity of the organization, system or process which is being analysed. Indicators are a commonly used term regarding performance measurement. However, it is important to understand that only sets of defined indicators can provide comprehensive and detailed information on the performance. In addition, carefully tailored indicators can show more precise information of the process or system performance (see Table 4). Table 4. The term, indicators, used in relation to organizational performance. Element Description Authors Indicators Indicators in the process perspective are analysed as lagging (outcome) and leading indicators. Most benchmarking approaches use lagging indicators to measure the performance outcomes. [49,60] Measuring indicators are used to measure and improve the organization’s performance. These indicators need to be aligned with the organization’s strategy. [45] There is a wide range of indicators that describe the system or process, but not all of them are related to performance. [23] The relationship between business performance and performance measures often leads to a large number of indicators. For process management it is important to incorporate financial and non-financial indicators in balanced proportions. [48] The Performance Measurement System (PMS) should be balanced and include indicators that are necessary and sufficient. PMS allows to identify critical performance areas and helps to define KPIs. [13,46,54] An indicator is a parameter, which points to, provides information about, or describes the state of a phenomenon with significance and relevance to performance objectives. [47] Companies usually use inappropriate or poorly classified indicators or compare own results with previous periods, where there were different conditions for organizations’ achievements. [55] As this research is focused on performance-oriented indicators, it is important to separate the term, indicator, from the term, KPIs, because the organization can have many different indicators at all levels of the organization, but not all of them describe the performance of the organization. These indicators can be compiled in a performance management system (PMS) and help to define the strategic KPIs [ 13 , 46 , 54 ]. In the literature, some studies mention two main types of indicators—lagging (outcome) and leading indicators [ 49 , 60 ]. At the same time, organizations can divide indicators into financial and non-financial [ 48 ]. However, the organization should understand the main difference between indicators and KPIs. Not all indicators can be considered as KPIs. The main differences of these two terms are described in Table 5. J. Open Innov. Technol. Mark. Complex. 2019,5, 49 8 of 14 Table 5. The term, key performance indicators, used in relation to organizational performance. Element Description Authors Key Performance Indicators Key Performance Indicators is a set of carefully selected indicators that describe the organization’s main business objectives. [49] It is important to develop the relationship between the inherent Key Performance Indicators and the particular process. KPIs are crucial for measuring and improving processes. [23] Key Performance Indicators (KPIs) represent a set of measures focusing on those kinds of organizational performance that are most relevant to the effectiveness of current and future design of the organization or key success factors. [46,56] KPI is one that is critical to the current and future success of the organization. Indicators should, among other things, be numerically and precisely quantifiable. [47] The correct choice of performance indicators is an important part of the corporate strategic process and quality management, because well-defined and weighted KPIs can help realise strategic plans. [39,55,57,59] KPIs are directly linked to business success, but defining an effective KPI that shows business benefits is not always easy. To develop a set of indicators, it is necessary to include the name, owner, formula, justification and description of KPIs. [52,58] The literature review shows that key performance indicators are a set of carefully selected indicators that describe the organization’s objectives and performance [ 46 , 49 , 56 ]. Also KPIs are directly linked to current and future organizational and business success [ 47 ]. Nowadays, studies are analysing and developing groups of indicators that have a specific strategic purpose for a company [ 61 ]. For example, some studies analyse the company’s product selection by proposing such indicators as technology readiness, market attractiveness and customer needs readiness [ 62 ]. As it is important to choose the right indicators, it is also necessary to describe these indicators in a proper way by using the name, owner, formula, justification and description of KPIs [52,58]. Parmenter [ 45 ] has introduced four performance measure categories—key performance indicators (KPI), result indicators (RI), performance indicators (PI) and key result indicators (KRI). These categories are used as a 10/80/10 model for organizations, where there are 10 KPIs, 10 KRIs and 80 RIs and PIs. Some studies have used the SMART method for weighting KPIs [ 47 – 49 ]. The SMART performance measurement framework stands for five criteria for any performance-related indicators or objectives. These five criteria are: Specific, measurable, attainable or achievable, relevant and time-bound [ 47 ]. The SMART framework uses both external and internal performance measures [ 47 , 48 ]. By using this SMART performance pyramid, the organization can build a framework for developing overall KPIs [ 48 ]. Although this method is used in the process of developing KPIs, it does not always help in choosing the most applicable indicators for the organization. As previously shown in Table 5, defining correct and effective KPIs is difficult [52,58]. Most organizations have defined their short-term and long-term goals that are stated as the organizational objectives. These objectives are directly linked to the organization’s long-term strategy. The organization’s objectives serve as a reflection of all the above-described elements (see Table 6).