Over the past decade, companies have become increasingly aware of the social and environmental pressures facing business. Many management scholars and consultants have argued that these new demands offer terrific opportunities for progressive organizations, and innovation is one of the primary means by which companies can achieve sustainable growth.1 Companies that ignore these pressures, the argument goes, do so at their own peril. But the reality is that managers have had considerable difficulty dealing with sustainable development pressures. In particular, their innovation strategies are often inadequate to accommodate the highly complex and uncertain nature of these new demands.
A strategy that integrates the goals of innovation and sustainable development is needed. In contrast to conventional, market-driven innovation, sustainable development innovation (SDI) must incorporate the added constraints of social and environmental pressures as well as consider future generations.2 SDI is therefore usually more complex (because there is typically a wider range of stakeholders) and more ambiguous (as many of the parties have contradictory demands). Furthermore, sustainable development pressures can be driven by science that has yet to be accepted fully by the scientific, political and managerial communities. Amid such uncertainty, sustainable development innovation is often difficult and risky. Nevertheless, faced with increasing pressure to consider sustainable development, many organizations have revised their business models, and these changes are often highlighted in corporate sustainability reports and Web pages.3 For instance, DuPont Co. has publicly stated that, by 2010, it will reduce its greenhouse gas emissions by two-thirds while holding its annual energy use to 1990 levels.
Achieving such goals requires investments in innovation, and that has been an alluring argument for improving both environmental and economic performance — the so-called win-win situation. Some observers assert that sustainable development can generate a round of what the economist Joseph Schumpeter called “creative destruction,” offering opportunities for new entrants and potential threats for incumbent businesses. Others have advocated radical new technologies, products, processes, business models and environmental innovations to change the present unsustainable industrial patterns. According to that argument, competency-enhancing incremental innovation is insufficient to meet sustainable development pressures. Instead, competency-destroying radical innovation is needed, and it will likely create new capabilities that will ultimately challenge current business practices.
Those arguments aside, few companies have been investing heavily in sustainable development innovation. The problem is that, although radical change might well be the means by which companies can achieve sustainable growth, in practice considerable difficulties, barriers and paradoxes exist for implementing such a strategy. Furthermore, the current approaches for managing innovation are insufficient to deal with the additional demands of sustainable development. See sidebar.
The Complex Impact of Secondary Stakeholders
Consider the experience of Monsanto Co. From the 1970s to the 1980s, Monsanto, then a chemicals company, entered the emerging field of bioscience.4 It pioneered the development of genetically modified (GM) crops that reduce the need for pesticides (because the plants are more resistant to insects) and herbicides.5 According to then CEO Robert Shapiro, the technology was “replacing stuff with information,”6 and the company’s corporate slogan in 1997 was “Sustainable development for the world’s future.”
At first, Monsanto seemed to be doing everything right. The company successfully made the difficult and risky transition from chemicals to bioscience, accumulating technical competencies through acquisitions and research and development. It was also savvy enough to avoid disrupting the competencies of its customers and partners. Farmers could use the same skills and equipment, and complementary innovators such as food producers initially conducted their businesses as they had done before, because the processing properties of GM plants were the same as for regular crops.
At the same time, though, Monsanto began encountering major opposition from environmental groups and European consumers.7 The company’s promotion of sustainability benefits was challenged by safety advocates, antiglobalization activists and environmental groups, among others. Many of those organizations argued vehemently against genetic modification technology, often with derogatory Web sites such as www.frankenfoods.com and www.monsantosucks.com.
What went wrong? In short, although Monsanto was successful at technological innovation, it failed at sustainable development innovation. Monsanto’s customers and partners (namely, the farmers and food producers) have relatively similar interests, such as the production of safe, high-output, low-cost crops. In contrast, other stakeholders (specifically, safety, environmental and antiglobalization advocates) were raising concerns about gene transfer from GM crops to wild plant species, increased pest resistance and the possibility of the developing economies becoming overly dependent on seed companies. Traditional approaches to innovation usually ignore such stakeholders, but many of them can play pivotal roles in sustainable development initiatives. And that was Monsanto’s mistake: It failed to recognize the complex, ambiguous and ultimately disruptive impact of such secondary stakeholders. For example, pressure to label GM products later disrupted the business practices of food producers and retailers, making those stakeholders reluctant to handle GM products and creating a demand for non-GM foods in Europe.
In retrospect, it’s easy to see why Monsanto stumbled. With an aggressive, scientific corporate culture,8 the company was not prepared to assuage the public fears of genetic modification. In 2000, CEO Shapiro admitted as much: “We’ve learned that there is often a very fine line between scientific confidence, on the one hand, and corporate arrogance, on the other. … It was natural for us to see this as a scientific issue. We didn’t listen very well to people who insisted that there were relevant ethical, religious, cultural, social and economic issues as well.”9 Today, Monsanto continues to struggle with a tarnished image and lackluster financial performance.
The Double Edges of Innovation
Decades ago, when Schumpeter described innovation as “waves of creative destruction” — a difficult and expensive process of throwing out the old in favor of the new by offering “irresistible and irreversible changes,”10 such waves enabled the Industrial Revolution. Steam power was replaced with electricity, a more flexible energy source, and iron was replaced with steel, a stronger material. In the 1940s, another wave formed, dominated by mass-production techniques, synthetic materials and oil, which itself is now being challenged,11 given the growing concerns over resource depletion, energy security and climate change, among other issues.
Innovation is now widely recognized as the main driver of industrial growth — as well as a major cause of social and environmental disruption. From a company’s perspective, innovation can be a primary source of sustained competitive advantage12 as well as a significant source of risk, competitive disruption and failure. R&D projects, for instance, can be unpredictable, and even when they are successful, unforeseen or uncontrollable external factors often determine whether an innovation gains widespread acceptance.13
Indeed, innovation has widespread business and public policy implications, both as opportunities for competitive advantage and as potential sources of disruption (see “The Double-Edged Sword of Innovation.”). Business executives have traditionally focused on the left side of the table (quadrants 1 and 2), whereas public policymakers have concentrated on the right side (quadrants 3 and 4). SDI, however, requires the management of all four quadrants. That, obviously, is no easy task because of the number of constraints and pressures involved, many of which are contradictory. Even so, the accumulation of skills necessary in managing all four quadrants could itself become a source of competitive advantage that other companies will find difficult to replicate.
The Double-Edged Sword of Innovation
The Challenge of Radical Technology
The development of any radical technology can be a particularly difficult task, irrespective of SDI, because it usually involves a departure from the present knowledge base (and is thus competency-destroying) and may also require vastly different organizational, administrative and infrastructure requirements. Companies often prefer an incremental (or competency-enhancing) approach, because it allows them to continue profiting from their proven technology and organizational competency base.14 In some cases, though, a company’s current competencies can actually hinder the organization from innovating15 and blind it to the exploration of new opportunities.16 For example, mechanical engineers working to improve the environmental performance of cars might focus on mechanical improvements to the internal combustion engine and miss the potential opportunities emerging in chemical engineering, such as fuel cell technology.
The competency-destroying/-enhancing dichotomy has implications not only for the innovating organization, but also for suppliers, customers and complementary innovators —called the innovation value-added chain17 (here referred to as primary stakeholders). The adoption of an innovation such as fuel cells in autos might be hindered if the technology requires customers to learn vastly different operating skills or if complementary innovators, such as fuel suppliers, lack the competencies to produce and distribute hydrogen (the energy source for fuel cells) cheaply and efficiently. But these challenges are essentially technical, and they tell only part of the story. Other factors are often critical but frequently overlooked, namely, stakeholder complexity and ambiguity, as well as the pressures driving SDI.
Stakeholder complexity: Because the development of radical technology is likely to have widespread social implications, it is often controversial,18 as is frequently the case with SDI. Sustainable development requires the recognition of a wide range of stakeholders, including secondary ones (such as environmental groups) that are not directly involved in a market relationship but can still greatly affect a company’s business.19 The additional interacting pressures from social and environmental concerns make SDI more complex20 than conventional market-driven innovation. Past research on innovation dynamics has implicitly recognized the importance of primary stakeholders (such as suppliers, complementary innovators and customers) but has not fully appreciated the role of secondary ones that are often highly influential in sustainable development innovation.
Stakeholder ambiguity: Because the various stakeholders often have disparate goals, demands and opinions, they can easily interpret the same situation differently, especially when the information necessary to make informed decisions is limited. Ambiguity can emerge for a number of reasons — when the application of radical technology is based on science that is not yet fully accepted21 (for example, biotechnology or hydrogen-based energy systems) or when pressures to disrupt conventional technologies are based on such science (for example, studies on climate change). Uncertainty can easily hinder acceptance of an innovation, as people debate the validity and safety of the underlying scientific and technical concepts. Until a consensus emerges, many companies will oppose changing their business models for what might turn out to be incorrect science. Furthermore, certain stakeholders could simply have irreconcilable differences with one another based on ethical, religious, cultural, social or other issues. For instance, cattle ranchers and vegetarians might never agree on meat consumption.
SDI pressures: Sustainable development pressures create needs, but how can companies reap the benefits of SDI? Schumpeter’s reference to irresistible and irreversible innovation is driven more by the market (quadrants 1 and 2) than by public policy (quadrants 3 and 4). Many companies will not implement carbon dioxide reductions without government pressures in the form of scheduled or anticipated regulations, such as those from the Kyoto Protocol on Climate Change. Instead, companies might very well revert to the old emissions standards once the Kyoto Protocol expires.
The traditional approaches to innovation have generally focused on a narrow range of stakeholders, including suppliers, complementary innovators, customers, investors and regulators. Such analyses consider the impact of a competency-destroying innovation on each of those parties. For example, an innovation that enhances the competencies of a customer holds greater promise than one that destroys them.
In contrast, sustainable development innovation also considers the wide range of secondary stakeholders, including safety advocates, local communities and activists for various causes (antiglobalization, animal rights, environmental issues and so on). Identifying and dealing with those parties may not be as straightforward, and their concerns often involve the perception of a technology’s impact on society (quadrant 4). Thus radical technologies might be considered too risky, whereas incremental ones that are based on well-understood science are less likely to generate controversy.
SDI, therefore, builds on traditional approaches for managing innovation by also recognizing the disruptive potential of secondary stakeholders. An appreciation for the complex and often ambiguous demands and concerns of those parties will enable companies to develop more effective sustainable development capabilities and integrate the demands from those various groups.22
Coping with Climate Change
Canada-based Suncor Energy Inc., a major North American energy producer, and TransAlta Corp., a large electric utility, have taken alternative approaches to sustainable development innovation. Instead of relying on industrywide technological “creative destruction,” which can be controversial, the companies have focused on accumulating and exploiting not only new-to-the-company technologies, but also capabilities in dealing with secondary stakeholders.23 In the future, such approaches may well become the required business model for companies in that industry. Suncor and TransAlta’s strategies have been driven in part by concerns over energy security, sustainability and, more specifically, climate change — an area creating major pressures for innovation, particularly for countries that have ratified the Kyoto Protocol for the reduction of greenhouse gases.
Canada is one such country, and its challenges are particularly daunting. It is one of the world’s biggest users and producers of energy — and a major generator of greenhouse gases. Canada is also heavily reliant economically on the United States — they are each other’s biggest trading partners, and Canada is one of the largest foreign sources of energy for the U.S. Because the United States has not ratified the Kyoto Protocol, Canadian companies could be at a disadvantage within their major markets. Canada and its energy sector have much at stake. To complicate matters, there is considerable controversy because, as with many sustainable development issues, climate change is still being debated within the scientific community. And the economic issues are perhaps even more contentious, with estimates suggesting that the Canadian economy could shrink anywhere from 0% to 3% by 2010.24
For Suncor and TransAlta, concerns over climate change and energy security represent a potential Schumpeterian wave of creative destruction. Both companies have core businesses that are ultimately unsustainable — extraction of oil from large known reserves and the production of electricity from cheap coal. Yet both organizations have found effective solutions for growing their businesses in a sustainable way.
Suncor’s Pathway to Sustainability
In 1991, Suncor was the Canadian subsidiary of Sun Oil Co., based in Philadelphia, operating a chain of gas stations (Sunoco) and producing around 50,000 barrels per day with conventional exploration and production in western Canada. It also had a business that had grown out of the 1967 government-sponsored “Great Canadian Oil Sands” initiative to exploit the extensive, yet low-grade, oil sands of northern Alberta. The company was owned 75% by Sun Oil Co. and 25% by the government of Ontario. To the Canadian public, Suncor was known for two things: a poor environmental record and the image of a quintessential money-losing joint venture between the Canadian government and business. With oil prices at $15 per barrel, Suncor was using bucket-wheel conveyor-belt technology to produce synthetic oil from what were then called tar sands at about $20 a barrel. Employee morale was low, and both owners were eager to exit the business.
Today, Suncor is independent from its former corporate and government owners and is one of the pillars of the Canadian energy sector. Since 1991, it has quadrupled production to 225,000 barrels per day, and, with its $3.4 billion Project Millennium with Syncrude Canada Ltd., it is turning the Alberta oil sands into North America’s largest oil source. Through incremental technological innovation it has increased operating efficiencies, bringing the cost of production down from $20 to around $11.50 per barrel (quadrant 1). The company has also accumulated competencies in manufacturing synthetic oil. Unlike conventional oil companies, Suncor has a known 50-year supply of raw material and is thus now more of a manufacturer than an explorer. In fact, its traditional technological competencies (oil and gas exploration and production) have largely become obsolete. The turnaround at Suncor has been amply reflected in the stock market: Suncor’s share price has increased by more than 1,000% since its initial public offering in 1992.
But Suncor’s technological successes are only part of the story. Over the years, the company was able to develop political competencies by successfully lobbying for royalty reductions from the Canadian government. Even though the oil sands were initially economically unviable, the government regarded their development as strategically important for national energy security and industrial growth. By learning how to lobby and exploit certain public policy issues effectively (quadrant 3), Suncor was thus able to develop important competencies for managing secondary stakeholders.
But it took time for Suncor to develop those capabilities, and there were setbacks along the way. The oil sands projects are the largest source of energy on the continent, and they have an enormous impact on the environment as the biggest producer of greenhouse gases in Canada. In the mid-1990s, environmentalists threatened the projects with costly delays. One group behind that effort was the Pembina Institute for Appropriate Development, which was founded in 1986 in Drayton Valley, in the heart of Alberta oil country. Pembina has since extended its reach across Canada and is now recognized as one of the country’s most effective science-based environmental groups. It has gained a reputation as an organization with technical proficiencies and a willingness to be tough on industry, yet also prepared to work constructively with companies to improve their practices.
One of those companies is Suncor. Years ago, Rick George, Suncor’s CEO since 1991, broke ranks with the industry and actively engaged environmentalists and other secondary stakeholders. That commitment, which has diffused throughout the Suncor organization and is strongly associated with George’s leadership, has paid off. The company’s relationship with Pembina, for example, has enabled it to accumulate skills in dealing with other activist groups that are more radical. For instance, Suncor managed to minimize Greenpeace International’s opposition to an Australian oil shale venture because it had credible Canadian environmentalist allies.25 Such an approach — called “strategic bridging” — has allowed Suncor not only to accumulate capabilities for managing secondary stakeholders, but also to access a network of credible allies that can help reduce the ambiguity of stakeholder concerns.
Strategic bridging was merely one aspect of Suncor’s strategy. Speaking at gatherings of the Canadian energy industry, CEO George acknowledged that rural unrest with industry intrusion was on the rise, and concerns over air pollution were legitimate. Also, Suncor has pledged to make 12% of its workforce indigenous, given that such populations dominate many of the areas in which the company works. The company also discussed the reduction of greenhouse gases well before Kyoto, and it pioneered an international emissions trading contract with Syracuse, New York-based Niagara Mohawk Power Corp. in 1998. At the time, Niagara Mohawk was switching from coal to natural gas, thus reducing its emission of greenhouse gases. Suncor purchased the utility’s resulting emissions credits in order to offset carbon emissions from its own growing oil sands business and to stimulate a market for such credits. In such ways, Suncor successfully addressed social and environmental disruption issues (quadrant 4).
Soon after the emissions trading deal, Suncor announced a $100 million investment in renewable energy. The company also joined the Clean Air Renewable Energy Coalition, an alliance of environmental, municipal and corporate groups that successfully lobbied the Canadian government for wind-power incentives —a victory that, according to Gordon Lambert, Suncor’s vice president for sustainable development, was made possible thanks to the company’s political skills gained from kick-starting Canada’s oil sands business. The coalition estimates that renewable energy sources are growing by more than 30% per year, and the wind-power industry is expected to surge from $4 billion in 2000 to $43.5 billion by 2010.
At first, traditional competencies in the oil and gas industry might seem incompatible with those required for wind energy. For this reason, alternative technologies such as wind power are often regarded as disruptive for the incumbent oil and gas industry (quadrant 2). However, accumulated competencies in political lobbying and stakeholder relations facilitated a better understanding of the nontechnical dimensions of innovation, enabling Suncor to embark on what might otherwise have been a competing disruptive technology. Suncor was also able to recognize the importance of secondary stakeholders and resolve their concerns.
TransAlta’s Pathway to Sustainability
TransAlta, a publicly traded major electric utility, has followed a similar strategy to that of Suncor. Based in Alberta, Canada, TransAlta has relied on that region’s abundant low-cost coal, among the cheapest in North America. But in the late 1980s, under the leadership of then CEO Ken McCready, TransAlta became, along with Suncor, one of the first companies in Canada to adopt a strategy explicitly for sustainable development. McCready was aware of changing societal attitudes, especially with respect to carbon dioxide emissions from coal burning, even though low-cost coal had been TransAlta’s traditional competitive advantage. McCready rightly anticipated that a major regulatory limitation or social backlash against coal (quadrant 4) would have a major disruptive effect on TransAlta’s operations (quadrant 2).
In the mid-1990s, McCready was succeeded as CEO by Steven Snyder, who recruited Bob Page, a former dean of environmental studies at the University of Calgary, as TransAlta’s vice president of sustainable development. Under their leadership, the company has embarked on a number of projects. It has, for instance, worked to reduce greenhouse gas emissions by investing in the development of new grasses on Ugandan cattle ranches and reforestation projects in Central America. More significantly, it recently purchased Vision Quest Windelectric Inc., a privately held wind electricity generator based in Calgary. Page stated that the acquisition was part of TransAlta’s plan to invest $1 billion to $2 billion over the next 10 years in order to meet its commitment of increasing its generation capacity from various renewable energy sources to 10% by 2012, the end of the first Kyoto commitment period.
Like Suncor, TransAlta has accumulated competencies in political lobbying and managing stakeholder relations that have facilitated a better understanding of the nontechnical dimensions of sustainable development innovation, enabling the company to develop what might otherwise have been a competing disruptive technology (that is, wind power). Thanks to such strengths, TransAlta has stated that, with the appropriate regulatory systems in place, it could reduce its carbon dioxide emissions to a net quantity of zero by 2024. The company plans to accomplish that through a series of actions: reducing its emissions by using clean-coal technology and other innovations, increasing its reliance on renewable energy and offsetting the remainder of its emissions through international emissions trading contracts.
Three Cases of Sustainable Development Innovation
Monsanto, Suncor and TransAlta have all invested in potentially competency-destroying innovations26 and were judicious in managing the possible disruptive effects on their operations as well as those of their primary stakeholders. But Suncor and TransAlta also exploited their nontechnological competencies, which allowed them to avoid disrupting secondary stakeholders, while Monsanto did not (see “Three Cases of Sustainable Development Innovation”). Although Monsanto CEO Shapiro might have courted high-profile influential intellects like Amory Lovins of the Rocky Mountain Institute and Paul Hawken of the Natural Step movement, he seems to have neglected more grass-roots environmental and sustainable development organizations. As a consequence, Monsanto missed critical market intelligence that those groups could have provided.27
Another reason for the success of Suncor and TransAlta was that both companies chose the less controversial path of using established science (namely, wind power). Of course, that strategy might not have been feasible for Monsanto, but the key message is this: Any organization that relies on science that is potentially controversial must be prepared to deal with the wide range of nontechnical issues, many of them contradictory, which are inherent to sustainable development innovation.
Ballard: An Unfolding Case
For a current example of the various issues, consider the new technology of fuel cells: electrochemical devices that produce electricity through clean hydrogen-based chemical reactions rather than environmentally detrimental processes like combustion from carbon-based fuels.28 In the 1980s, Ballard Power Systems Inc. of Vancouver, Canada, had a major breakthrough that boosted the power output of previous fuel cell technology by a factor of 4. In 1986, Byron McCormick, head of the fuel cell division at Los Alamos National Laboratory, stated: “… they have made the electric vehicle possible. This is the most significant breakthrough in fuel cells that I’ve ever seen.”29
Ballard believes that its technology may eventually replace the gas piston engine in motor vehicles, leading to a widespread shift toward a hydrogen economy (versus the present carbon-based one) that would alleviate growing concerns over greenhouse gas emissions and climate change. Already Ballard has set up alliances with many of the major automakers, and fuel cells have been gaining widespread attention from a variety of people, ranging from advocates of zero-emission vehicles to President George W. Bush.
But there are potential pitfalls. From a technological perspective, Ballard must minimize disruptions to the competencies of primary stakeholders. For example, auto producers are more likely to adopt a modular design that simply replaces the gas piston engine without requiring major modifications to the vehicle.30 Major investments in large-scale hydrogen production, delivery and maintenance facilities will also be needed. Incumbent industries might counter with hyperinnovation, making the initial fuel-cell initiatives that much less lucrative. (Consider that in response to the advent of coal-fueled steel ships, a flurry of innovations in wooden boats and sailing occurred over a few decades at the end of the 19th century — more than what took place in the previous 500 years.) From a strategic perspective, Ballard’s fuel cells could have more serious implications for companies such as Honda Motor Co. Ltd., which has core competencies in engine manufacturing, than for other producers that subcontract their engines.
A number of perceptual issues could also be obstacles.31 First, consumers expect more features and power than necessary. Specifically, subcompact cars often have more than 120 horsepower, which is actually much more than required for regular driving. Thus people might mistakenly perceive a fuel cell vehicle with, say, 80 horsepower as inadequate for their needs. Perhaps that is one reason why the Toyota Prius, with 70 horsepower, remains a niche vehicle catering to the eco-market. Second, some consumers are attracted to the powerful engine sounds, or “exhaust notes,” of sports cars; fuel cells do not make noise. Third, hydrogen is commonly associated with the Hindenburg disaster and the hydrogen bomb, neither of which is scientifically relevant to fuel cell safety, but perceptions often overshadow reality. Finally, activists might question the environmental impact of hydrogen production, increased traffic congestion and continued exploitation of other resources required to manufacture fuel cell cars.
The enormous technical hurdles required to develop fuel cells are merely one set of challenges. In fact, addressing the public’s concerns and perceptions — that is, managing stakeholder ambiguity — might well be the key to the technology’s success. Indeed, innovation is a messy, complicated process, and the additional constraints of sustainable development only make it more so. Organizations that fail to understand that could well find themselves making costly mistakes in bringing new technologies to market.