Introduction: Sustainability, Innovation and Profits

This is part 1 of 8 from the 2012 Sustainability & Innovation Global Executive Study and Research Project.

Since 2010, MIT Sloan Management Review and The Boston Consulting Group have been charting how organizations have tackled sustainability-related challenges — from resource scarcity to customer demands for healthier products — with innovations that create business value. Our 2010 study found Sustainability Embracers, who firmly believe that sustainability is necessary to be competitive. In 2011, we probed the business dimension more deeply and discovered that sustainability had become a permanent element of many company agendas and a source of profit for some.

This year, the trend toward profit continued: Key measures bumped up and showed that sustainability is paying off for a growing number of companies. Overall, the portion of respondents reporting profit from sustainability went up 23%, to 37% of the total.

But perhaps most important: Nearly 50% of companies have changed their business models as a result of sustainability opportunities — a 20% jump over last year. As we will explore in detail, business-model innovation is the crux of sustainability profits. Companies reporting that it adds to their bottom lines leverage these innovations to translate sustainability opportunities and pressures into business value.

A Clear Trajectory

Demands are coming from all sides, creating a systemic imperative and an opportunity to advance sustainability goals. As companies in many industries grapple with costs, they are turning to their supply chains to reduce energy use, simplify packaging, mitigate commodity price risks and meet customer sustainability expectations. Consumers, especially in Europe, are increasingly aware of a product’s sustainability credentials and willing to pay a premium for environmentally sound products and services. Employees’ expectations bring a strong internal pressure. Their growing commitment to sustainability makes the company’s footprint a key element in attracting and retaining talent, especially among younger generations.

The systemic effect of these demands is elevating the sustainability agenda in a wide range of industries. Companies in resource-intensive industries have been grappling with sustainability issues for a number of years. But other industries, from consumer products to software, are also increasing their focus on sustainability. Reinsurers, for example, are adding sustainability risks to the actuarial equation, driving companies to innovate to avert those risks. The global software giant SAP has declared sustainability as its purpose, according to Peter Graf, chief sustainability officer. “We want to be the company that helps manage more than finance and human resources,” he says. “That is why we have started to also help clients optimize energy consumption and natural resource use across their supply chains, ensure the safety of products and reduce the risk of their operations.” UPS is turning to technology suppliers to help reduce emissions and costs from its transportation fleet. “Probably the biggest challenge for us is going to be how quickly manufacturers can develop the technology that we need,” says Scott Wicker, chief sustainability officer.

The sustainability race is a global one. According to our research, companies in developing countries are the most likely to focus on sustainability-related business-model innovation, largely, perhaps, because these regions face significant resource scarcity and population growth challenges. Many global companies have also changed their business models in response to sustainability, pursuing growth in developing markets and leveraging those markets for manufacturing and production. North American companies lag. (See “North American companies lag,” below.) Many of sustainability’s demands have not taken hold in the region nor spurred companies to translate these pressures into profitable initiatives.

North American Companies Lag

View Exhibit

North American Companies Lag

Companies in developing countries change their business models as a result of sustainability at a far higher rate than those based in North America.

The Sustainability Bull’s-Eye

The reality of environmental and population trends is putting sustainability squarely in the sights of business. In many parts of the world, natural resources such as water are growing scarce, and energy costs are mounting across the globe. Populations are migrating, and another 2 billion people are projected to be on the planet in a few generations. Consumers are becoming more discerning about the sustainability footprint of the products and services they use. In order to thrive, businesses need to respond—and are. “Companies can find ways to solve these problems and profit in the process. But to do so takes innovation in management practices, business models and market infrastructures,” says Jason Jay, director of the MIT Sloan Initiative for Sustainable Business and Society. As Dan Bena, PepsiCo’s senior director of sustainable development, says: “These things are clearly within the bull’s-eye of sustainable development.”

Zipcar is a prime example of a company hitting the bull’s-eye, where the necessity of sustainability meets opportunity. Robin Chase, Zipcar’s former CEO, points out that 50% of the world’s population lives in cities, and expects that number to climb to 70% by 2050. As a result, urban lifestyles are changing and car ownership, especially among younger generations, is falling down the list of aspirations. Although every shared car can replace 15 to 20 owned cars and up to three parking spaces, Zipcar isn’t a car rental company with environmental objectives — sustainability is at the root of the value it provides. Avis Budget Group has taken notice of the company’s growing value. In January 2013, it announced its intention to acquire Zipcar.

Long-established companies are also putting the sustainability bull’s-eye in their sights and seeing it as a core business driver. PepsiCo, for example, defines its business as “Performance with Purpose.” For the global food and beverage company, financial performance is tightly linked to achieving social and environmental goals in human, environmental and talent sustainability.1 The pharmaceutical giant Bristol-Myers Squibb sees sustainability as fundamental to its future growth. “It is really core to our business,” says Susan Voigt, vice president for environment, health, safety and sustainability. “We define sustainability for our company as helping patients prevail over serious diseases in a manner that contributes to economic growth, social responsibility and a healthy environment.”

Nonetheless, hitting the bull’s-eye is still fraught with challenges. Almost half (46%) of our survey respondents find it difficult to quantify the intangible effects of sustainability, and 37% say it conflicts with other priorities. Forty percent report that higher operational costs take away from profit, and 33% cite increased administrative costs connected with sustainability programs as another profit drain.

However, many companies are profiting from their sustainability efforts and changing their business models to generate that profit. We call them Sustainability-Driven Innovators. They comprise 23% of our survey respondents. In this year’s report, we focus on these companies and how sustainability is adding to corporate profits.

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.

1 Comment On: Introduction: Sustainability, Innovation and Profits

  • THE BIG RE-THINK: SUSTAINABILITY | April 10, 2014

    […] truly ethical brand. The number of companies that profited from sustainability initiatives climbed from 23% to 37% in 2012, meaning Green Growth is a key future opportunity in an era of overpopulation and resource […]

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