Section V: Hitting the Sustainability Bull’s-Eye

This is part 6 of 8 from the 2012 Sustainability & Innovation Global Executive Study and Research Project.

The trends are clear, and the stakes are high. Climate change, demographic shifts and population growth are increasing the sustainability demands placed on businesses. Our research has found that companies need not see these demands as a cost burden nor respond to them with tweaks to their businesses or “greenwashing.” Sustainability is both a business necessity and an opportunity, what PepsiCo’s Dan Bena calls the sustainability bull’s-eye. Even moderate changes to company business models can reap significant financial rewards.

Five Practices

Our study found that many companies are generating profits from sustainability. To do so, they are following these five practices:

1. Be prepared to change business models. Business-model innovation is a key indicator of whether a company will profit from its sustainability activities. Since business-model innovations can involve significant corporate change, organizations should address the need for and the speed of that change. Setting multiyear sustainability goals that matter needs consistent top management attention, especially if achieving the goals requires adding new capabilities and changing elements of the business model.

2. Lead from the top, and integrate the effort.
Although the momentum for sustainability efforts is often bottom-up, Sustainability-Driven Innovators lead it from the top. Executives make sure goals are set and tied to strategy. Steering committees and other coordinating groups ensure that knowledge is shared and that good ideas move systematically from pilot to rollout. Sustainability should never be a stand-alone effort. It needs to be integrated into the business and its operations with clear accountabilities.

3. Measure and track sustainability goals and performance. As the adage says: “If you can’t measure it, you can’t manage it.” Sustainability-Driven Innovators use scorecards, KPIs and other integrated reporting tools that track performance against goals. These measures give a clear signal that top management takes the effort seriously. In many cases, sustainability results are a key element of performance reviews and compensation.

4. Understand how customers think about sustainability and what they are willing to pay for in connection with sustainable products or services. Customers aren’t always willing to pay more for a “green” product or service.7 It is important to determine whether they are. In North America, LEED certified buildings have been definitively shown to command price premiums in the real estate market. In some parts of the world, especially Europe, consumers will pay a premium for environmentally sound products. But this approach only scratches the surface of sustainability opportunities. As is the case with Dell and Kimberly-Clark, sustainability can help target and address a broad range of market and customer needs.

5. Collaborate with individuals, customers, businesses and groups beyond the boundaries of the organization. Many companies are forming outside advisory groups to help frame their sustainability agenda. This process is an opportunity to get closer to customers, who can be a useful resource for identifying appropriate members. NGOs have become much more constructive in their corporate engagements and can help your company identify credible, meaningful and feasible sustainability objectives that lack the appearance of “greenwashing.” Consider participating in or helping create an industry group to give your business an opportunity to shape what “doing good” means in your market.

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.