Section III: The Business Case Effect

This is part 4 of 8 from the 2012 Sustainability & Innovation Global Executive Study and Research Project.

A clear business case is vital to generating profit from sustainability. It defines how a given innovation will add business value: companies that profit from sustainability are almost 200% more likely to develop sustainability business cases. The business case is often integral to the company’s overall strategy. “Making the sustainability strategy part of the global business planning process really turned things around for us,” says Peggy Ward, director of the enterprise sustainability strategy team at Kimberly-Clark. “We were able to demonstrate the competitive advantage that sustainability could provide.”

Retailer Marks & Spencer is a prime example of the business case in action. In 2007, the company announced its Plan A, which included 100 sustainability commitments over a five-year time frame. The company extended this in 2010 to 180 commitments to achieve by 2015 to become the world’s most sustainable major retailer. The plan has seven pillars that address customer involvement, climate change, waste, natural resources, becoming a fair partner, health and the company culture. The company’s achievements include becoming carbon neutral, giving customers the opportunity to give back by donating clothes, and integrating sustainability into its financial performance and reviews. The company reports that the plan has delivered $296 million in economic benefits.4

Clear Business Case is Vital

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Clear Business Case is Vital

About three times as many respondents who said that sustainability added profit had a business case for sustainability. That’s been consistent over the past 3 years of our survey.

Often, successful business cases mesh with a company’s business culture. Former Campbell Soup CEO Conant, for example, argues that many food companies have a “reap what you sow” mentality. He points out that the industry is heavily represented on surveys of the most socially responsible U.S. companies. For Dell, sustainability bolsters the company’s focus on efficiencies. “Dell abhors waste,” says Dell’s Pflueger. “Any inefficiency — whether it’s excessive days of inventory or energy waste — is something the company will want to address. Our approach to sustainability fits the company culture.”

The Hard-Nosed Numbers

Business cases for sustainability often focus on the numbers. Sprint, for example, invests in making its phones very easy to take apart. That investment allows them to recycle waste and refurbish phones for more price-sensitive markets. Sprint CEO Dan Hesse also underscores that Sprint’s hurdle rates for sustainability projects aren’t necessarily as stringent as they are for other opportunities. Solar panels, for example, might have a longer payback period than other investments, but still make sense. “You always create a business case,” he says. “But you may need to use criteria with a longer time horizon. But as long as the return is positive, you can do it knowing it’s in shareholder interests.”

Intel also scrutinizes the numbers behind its sustainability activities, and its corporate finance unit has been charged with helping quantify the impact of sustainability efforts across the board. “Some of it is easy,” says Suzanne Fallender, director of CSR (corporate social responsibility) strategy and communications. “Since 2001, for example, we have invested more than $45 million in 1,500 projects. We can quantify what we have saved in energy — about $23 million in annual costs.”

Timberland leverages industry standards to tightly tie sustainability efforts to the bottom line. The company developed its own “nutrition label,” which it calls its Green Index. The index measures the climate impact, chemicals used and resources consumed by the manufacture of a footwear product. With the index, Timberland compares a product’s score to its profit margin. “I can find out if shoes with higher environmental impact are better or worse for margin,” says Betsy Blaisdell, senior manager of environmental stewardship. “They may be more expensive to produce, but generate better margins.”

Although Sustainability-Driven Innovators focus on the numbers, many try not to let them stand in the way of ideas that may be difficult to measure but, nonetheless, have an inherent strategic logic. Sprint’s Hesse points out that a number of sustainability activities build intangible value for the brand. The value of achieving high positions on global sustainability rankings, for example, is difficult to pin numbers to. However, he realizes that a teenager today will be a consumer tomorrow, possibly with high disposable income. Sustainability will be an important element of the brand to that generation. “It’s difficult to say how many subscribers those rankings will add,” he says. “You have to make some reasonable assumptions.”

Intel also makes general assumptions for some of its sustainability initiatives. Fallender points out that Intel is one of the largest purchasers of green power in the United States. The company knows it is currently paying a premium for renewable energy. But it also believes that spurring demand will help bring down renewable energy costs in the future. “Just because you can’t always measure and monetize a sustainability activity doesn’t mean you can’t see the strategic value it creates,” she says.

References

1. PepsiCo, "Purpose," n.d., www.pepsico.com.

2. There are many business model frameworks to choose from. See, for example, H. Chesbrough, "Open Business Models: How to Thrive in the New Innovation Landscape" (Boston: Harvard Business Press, 2006); M.W. Johnson, C.M. Christensen and H. Kagermann, "Reinventing Your Business Model," Harvard Business Review 86, no. 12 (December 2008): 50-59; A. Osterwalder and Y. Pigneur, "Business Model Generation: A Handbook for Visionaries, Game Changers and Challengers" (Hoboken, New Jersey: John Wiley and Sons, 2010); P. Lindgren, R. Jørgensen, Y. Taran and K.F. Saghaug, "Deliverable D 4.1 Baseline for Networked Innovation Models," NEFFICS Consortium, 2011; R. Amit and C. Zott, "Creating Value Through Business Model Innovation," MIT Sloan Management Review 53, no. 3 (spring 2012): 41-49; and Z. Lindgardt, M. Reeves, G. Stalk and M. Deimler, "Business Model Innovation: When the Game Gets Tough, Change the Game," Boston Consulting Group, December 2009.

3. N. Kruschwitz, "Why Kraft Foods Cares About Fair Trade Chocolate," MIT Sloan Management Review, September 12, 2012, http://sloanreview.mit.edu/feature/why-kraft-foods-cares-about-fair-trade-chocolate/.

4. L. Brokaw, "Marks and Spencer's Emerging Business Case for Sustainability," MIT Sloan Management Review, July 13, 2012, http://sloanreview.mit.edu.

5. Regulators, NGOs and the media are not driving the focus for Sustainability-Driven Innovators. However, our study found that companies less successful at sustainability business-model innovation are 25% more likely to be influenced by legislative and political pressures than Sustainability-Driven Innovators are, and 72% more likely to be driven by the need to maintain operating licenses.

6. N. Kruschwitz, "New Ways to Engage Employees, Suppliers and Competitors in CSR," MIT Sloan Management Review, November 14, 2012, http://sloanreview.mit.edu.

7. Some recent research using highly rigorous randomized field experiments shows that people are willing to pay premiums. See J. Hainmueller and M. J. Hiscox, "Buying Green? Field Experimental Tests of Consumer Support for Environmentalism," http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2062429.