Section II: The Crux of Sustainability-Driven Profit: Business-Model Innovation

This is part 3 of 8 from the 2012 Sustainability & Innovation Global Executive Study and Research Project.

To gain a deeper understanding of sustainability innovation, we presented survey respondents with the business model framework described above, which was developed by The Boston Consulting Group. (See “A Framework for Analyzing Business Models.”) Using this framework, we asked respondents how (if at all) they have changed their business model. We found that up to 59% of respondents whose companies changed three or four business model elements report profit from sustainability efforts.

A Framework for Analyzing Business Models


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In short, Sustainability-Driven Innovators pursue innovation aggressively across their business models — much more so than companies that don’t achieve profits from sustainability efforts.

The Potent Combination

A surprising combination of business model elements delivered the most potent results. They weren’t the game-changing products and businesses that one usually hears in the context of innovation. Sustainability-Driven Innovators often take a more straightforward route, combining target segments with value-chain innovations. Nearly 60% of organizations that pull these two levers and change one or two other business model elements are more likely to be Sustainability-Driven Innovators. (See “The Extent of Business Model Change.”) Pulling both allows companies to target new segments and/or better serve the segments where they currently compete. Value-chain innovations help companies realize innovations in these segments.

Kraft Foods is a perfect example. (In October 2012, Kraft Foods changed its name to Mondelez International.) Sustainable sourcing in its value chain is a key part of the company’s strategy, according to Chris McGrath, then vice president for sustainability. In addition to protecting the environment and helping farmworkers improve their livelihoods, models such as Rainforest Alliance, Fair Trade and UTZ Certified help boost crop yields and capacity — a critical need for a global food company dependent on reliable access to commodities. Last year alone, Kraft increased its sustainable sourcing of agricultural commodities by 36%. Currently, more than 15 of its brands carry the Fair Trade or Rainforest Alliance marks.

The Extent of Business Model Change

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The Extent of Business Model Change

Fifty percent of our survey respondents who have changed three or four business model elements say they profit from their sustainability activities, compared to only 37% of those who changed only one element of their business model.

But value chain innovations do more for Kraft than help ensure reliable sources of commodities: they have opened up new consumer segments. Coffee is one of Kraft’s biggest success stories. This year, Kraft committed to 100% sustainable sourcing of the raw materials for its European coffee brands by 2015. “Our consumers and customers care about the benefits certification and verification deliver,” says McGrath. “It is good for business and brings our work full circle.” In the United Kingdom, the Rainforest Alliance Certified seal is generating double-digit revenue growth. In Sweden, Kraft’s sales of instant and espresso coffees with the seal have doubled with the “away from home” consumer segment.

More often than not, however, “greening” a product is not the key to building business in target segments. Kraft discovered this with its YES Pack commercial salad dressings. Through supply chain innovations, the company significantly reduced its packaging costs. The new plastic container requires 50% less energy to produce and uses 28% less primary packaging material than its predecessors. What opens doors to commercial segments, however, is the package design. The bigger, easier-to-use containers — which are also less expensive to produce — are extremely popular with restaurants, giving Kraft competitive advantage with lower costs.3

For Dell, packaging innovation was important to maintaining business in many of its target segments. “You might think packaging is a mundane topic,” said John Pflueger, Dell’s principal environmental strategist. “But it is a recurring pain point for many customers.” Dell’s clientele wants strong packaging to ensure their equipment will arrive undamaged, while Dell wants lighter packaging material to reduce its shipping costs. The company turned to its supply chain for an answer. It found a Chinese company that was experimenting with bamboo fibers as a substitute for paper used in cardboard packaging. Bamboo, which is native to China, is one of the fastest growing plants in the world and, as a result, a renewable resource.

The experiment ultimately proved successful. Because of its structural strength, 70% of Dell notebooks are now shipped in bamboo. The company was also careful to make sure that it was indeed using a sustainable resource; pandas, for example, eat bamboo. In collaboration with the Forest Stewardship Council, Dell ensures that the bamboo forests from which it is sourcing raw materials are not panda habitats.

To gain competitive advantage, Kimberly-Clark looks at the entire value chain of its products, cradle to grave. Its business customers are particularly keen on reducing waste in an environmentally positive way. In its professional business market, the company launched a program called “Reduce Today, Respect Tomorrow.” One of its offerings is a hand towel for public washrooms where users can dry their hands with only one towel. The product certainly has a potentially powerful “green” message. As Thomas Falk, Kimberly-Clark’s CEO and chair, points out, Kimberly-Clark has reduced the amount of fiber in its professional towels by up to 17% since 2005. The company has one of the most progressive fiber procurement policies in the tissue industry. It reduced its water use by 1.1 million cubic meters between 2010 and 2011 and regularly seeks to reduce its use of transport, storage and landfill.

But Kimberly-Clark doesn’t rely solely on the sustainability credentials of its products. The value to customers is the reduced cost of fewer towels. “Sustainability can create competitive advantage,” says Falk. “If we can make a towel that is good enough to dry hands with only one sheet and we can sell it at a competitive price, we create value for the customer and the environment.”

Doing Things Differently, Doing Different Things

Value chain and target segment innovations are by no means the exclusive source of sustainability profit and competitive advantage. Examples of successful sustainability-driven innovation fall along a rich spectrum — from doing things differently to doing entirely different things.

Incremental steps, for example, can significantly improve efficiency and reduce cost. U.K.-based supermarket retailer Sainsbury’s saved $2.4 million by improving water efficiency in its stores. The company fixed leaks, installed sensors on urinals and reduced toilet water capacity. In addition, rainwater harvesting, low-flush toilets and waterless urinals are installed in all of its new stores.

Nestlé developed a cost model innovation in a novel point in its value chain. The company realized how to use coffee grounds — a by-product of its manufacturing process — to help power its factories. Instead of treating coffee grounds as waste, Nestlé discovered that burning them can generate steam, which is used in many of its factories. Some 60% of the steam the company uses now comes from burning coffee grounds, significantly reducing Nestlé’s reliance on natural gas. In addition, in over 20 years, the company was able to divert 1.24 million tons of coffee grounds away from landfills.

At the other end of the spectrum, Interface, the world’s largest manufacturer of modular carpet, developed a powerful revenue model innovation through a service offering with some similarities to Zipcar’s. Its FLOR line offers a system of carpet squares that customers can combine and assemble to create rugs, runners or wall-to-wall designs. In 2003, it began to offer its carpet tiles as a service. Under this model, the company maintains the carpet for customers throughout its life — from installation to replacing tiles to recycling at the end of the carpet’s use.

Apparel manufacturer Patagonia used its sustainability message to bolster its value-proposition innovations with a provocative brand-building campaign. In 2011, it took out a full-page ad in The New York Times with the surprising headline: “Don’t Buy This Jacket.” Consumers were asked to sign a two-part pledge online. In signing the pledge, both consumers and Patagonia agreed to reduce consumption and waste by only buying items when needed, repairing items when they break and recycling products at the end of their useful life. If the company didn’t have credibility in sustainability, the ad could have backfired. The company did, however, and the campaign generated significant buzz. But it also achieved its most important aim: reinforcing Patagonia as a high-quality brand that offers durable, long-lasting products.

Making Sustainability Efforts Happen

Like any major business initiative and opportunity, sustainability-driven innovation requires adroit change management skills and innovative approaches to organizational governance, leadership and employee engagement.

Our research found that top management attention is central. Sixty-one percent of companies that have changed their business model and have sustainability as a permanent fixture on their management agenda say they have added profit from sustainability. (See “Top Management Agenda.”)

Top Management Agenda


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Top Management Agenda

More than 60% of companies that have changed their business model and have sustainability as a permanent fixture on their management agenda say they have added profit from sustainability.

Former CEO of Campbell Soup Company Douglas Conant made sustainability a focus. He argues that a company’s CEO must make sustainability a priority to keep it from falling off the radar and becoming a risk. At Campbell, he advanced what he calls an “abundance mentality” — challenging people not only to create shareholder value but to do it in a way that simultaneously helps build a better world. This abundance mentality is not unique to Campbell. Leadership can unleash it by putting sustainability opportunities front and center. Conant did so personally, making a point of frequenting company discussions on sustainability. “As I did this, sustainability became part of people’s everyday conversation and thinking,” he says. “It became part of the fabric of doing your job.”

At telecommunications company Sprint, sustainability is a board-level agenda item. In 2012, the company made its sustainability efforts part of the formal board review process. At nominating and governance committee meetings, members review the company’s sustainability performance against its goals. Sustainability has become a core part of the company’s annual review.

Integrating Sustainability into the Company

Sustainability-Driven Innovators don’t treat sustainability as a stand-alone function detached from the business. They integrate the efforts into operations and planning. “We have sustainability in all of our operations,” says Hans Johr, Nestlé’s corporate head of agriculture. “We don’t even have a sustainability officer. We believe that you can’t make good progress by using a ‘doctor’ prescribing to everyone what they should do.”

At Dell, sustainability is deeply integrated into the organization and the function reports to the chief marketing officer. Dell’s Pflueger points out that the marketing organization has a global purview that gives sustainability an equally broad outreach. Reporting to the marketing organization also ties the efforts to customers, analysts and opportunities to leverage sustainability for brand development. To build sustainability expertise across the organization, Dell uses a hub-and-spoke model. A small core team works with subject-matter experts across the company to collect data and generate insights about what customers are seeking.

Kimberly-Clark uses a bottom-up/top-down approach and matrix structure to drive its sustainability efforts. The company’s CEO meets with his leadership team and the head of sustainability to set five-year goals and a vision for efforts beyond. The planning work then cascades through the organization for vetting and input. “But then each line executive owns the goals,” Falk says. “We develop a quarterly scorecard so that my leadership team and every business unit leader can see where they stand. Sustainability goals are as important as any others on their lists.”

Scorecards, key performance indicators (KPIs) and other metrics are a mainstay of how many Sustainability-Driven Innovators make sure their efforts come to fruition and achieve the desired impact. Timberland, for example, is currently developing a new set of sustainability KPIs that will be tightly linked to financial performance. AT&T invested in back-end systems to collect the data needed to evaluate its efforts. At AT&T, facilities are graded A through F and the scorecard data is shared broadly throughout the organization. “Visibility into the data drives behavior,” says John Schulz, director of sustainability operations. “Managers want to do well among their peers, and progress on sustainability is linked to their annual performance reviews.”

Most Sustainability-Driven Innovators don’t tend to march to the beat of their own drummers. They are not married to one-size-fits-all or other prescribed approaches. Instead, they generate profit by changing the way they address their markets and operating models. Sustainability is a strategic mandate that Sustainability-Driven Innovators support through providing leadership from the top and by integrating sustainability into the organization.

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.

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