Leading Sustainable Organizations
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Digitization opens enormous opportunities for tackling the world’s sustainability challenges. Already today, digital technologies including drones, sensors, GPS, and big data crunching algorithms are critical in illuminating (and addressing) the world’s social and environmental challenges. iNaturalist, for example, is crowdsourcing millions of environmental data points from individuals with smartphone apps to better understand species and the ecosystems they inhabit. The STAMP2 project, which stands for Sensor Technology and Analytics to Monitor, Predict, and Protect Ebola Patients, is using technology to tackle disease in Africa. Wireless sensor networks are improving water management in dry regions around the globe.
But beyond providing scientists, doctors, and resource managers with better information, digitization is also transforming entire industries, holding out the possibility of dramatically improving their social and environmental performance. An emerging area of opportunity is the digitization of physical products and production.
What Is a Product?
To understand digital’s potential impact on the physical world of products, we need to first recognize that any product can be conceptualized as a combination of three elements: matter, energy, and information. A shoe, for example, is composed of a number of materials including leather, rubber, metal, and cloth. The materials in a shoe take on specific forms dictated by the product designer’s choices. These choices represent information that is encoded in a product’s blueprints and designs. This “information” puts the form in a product’s materials. The process of actually forming materials, like shaping raw rubber into a shoe sole, requires energy. Every transformation of materials is thus the application of energy guided by information. The result at the end of the process is a physical artifact that can deliver value to a customer.
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Economists reading this may notice the absence of a historically important factor of production: labor. While it is not going away in a digitized world, the quantity and character of human labor is shifting. The rise of manufacturing robots, 3-D printing, and other automation trends means less physical human labor is demanded. Physical labor is being replaced by the mental labor of working designers, engineers, and programmers that is embedded as design and process information. In a digitized future, an ever-shrinking role for physical human labor promises that three factors — energy, information, and matter — will dominate.
In our shoe example, leather becomes designed uppers, rubber becomes designed soles, metal becomes designed eyelets, and cloth becomes designed laces. Together they combine to create a designed shoe.
Digitization can and is influencing every element in this equation, changing not only what is produced but also how. In many instances, digitization is reducing the environmental impact of products across industries. More than that, digitization and the product equation constitute an invaluable framework for thinking and acting strategically about the sustainability of your products and business.
The product formula helps explain why certain types of digitization led to market transformations before others. In the dot-com days of the mid-1990s, digitization first hit information-based products like newspapers, books, photography, music, and other media.
Digitization then affected information-rich service businesses like travel, banking, accounting, and education where value came from not merely distributing information but manipulating it in new ways that create value for customers. Digitization is now upending middlemen retailers, taxi fleets, hotel chains, and other sectors with physical assets. In the transportation sector, for example, IT platforms now enable a variety of ride-sharing services. In the near future, AI-powered autonomous vehicles will likely disrupt (or catalyze) the new incumbents, like Uber and Lyft, by reducing their need for human drivers. Because value in these sectors comes primarily from managing information about assets, they are vulnerable to digital business models that can capture more and better information and apply it more effectively.
The potential environmental benefits in these examples derive from digitization’s effects on the three product elements. Blockbuster’s digital demise, for example, came through disintermediating informational value delivery from the underlying materials. Video streaming substituted for the production and distribution of physical VHS tapes and DVDs, obviating the need for Blockbuster stores and inventory and replacing it with Netflix, Hulu, and Amazon Prime video streaming. Arguably, environmental sustainability performance gains came from the reduction in materials and energy needed to deliver the entertainment value customers want. While network streaming services require energy-intensive server farms, overall more and better information substituted for the materials and energy used in the old brick-and-mortar business model.
The Environmental Sustainability Formula
How can digitization minimize the environmental impact of the product sphere? Very basically, environmental sustainability performance improves as the quantity of raw materials and energy needed to deliver the product’s functional value to the customer is reduced. Performance can also improve by substituting different types of materials used for production, like swapping synthetic fibers for endangered mink fur, and substituting the types of energy used, like renewable power for oil and gas.
So how do we use the materials+information+energy=products formulation to think strategically about improving sustainability performance? We can start by recognizing the environmental impacts resulting from the use of the three elements.
Environmental impacts from materials arise through the extraction, processing, use, and disposal of resources. An economic copper deposit, for instance, is less than 1% copper, which means 99% percent of the excavated rock becomes waste. This explains why mines are usually massive holes in the ground visible from space, with enormous piles of debris surrounding them. According to a 2015 study, only about half of the resources extracted annually end up in a production or construction process, and two-thirds of that volume is generated as waste each year. Despite the growing interest in the circular economy, less than 8% is currently recycled. We call what we do mass production, but from a material perspective, it is mass destruction.
Environmental impacts from energy come primarily from the fact that our economy relies on fossil fuels. Ecosystem degradation begins with fossil fuel extraction. Think mountaintop-removal coal mining and the denuded moonscapes of the Canadian oil sands. The combustion of fossil fuels for energy generation then releases pollutants like acid-rain precursors sulfur and nitrogen and particulates that cause lung cancer. And yes, combusted carbon builds up in the atmosphere as CO2, causing global climate change and ocean acidification.
We illustrate the potential environmental performance gains from digitization using the Blockbuster example. In effect, Netflix was substituting more and better design information for much of the energy and matter needed in the Blockbuster model. This was made possible by the growth of the internet and the resultant digitization of media distribution. Digital design reduced the energy and matter needed to deliver an entertaining film to customers. Functionally, the same product was provided to customers, but much of its physical attributes had become digitized.
Sustainability gains, like those shown in “Potential Environmental Performance Gains From Digitization,” are just first-order benefits. Digitization, by bringing more and better information into the design of product and product systems, can play even bigger roles, as we will discuss in upcoming installments.
What is clear is that the intersection of digitalization and sustainability is also the intersection of corporate strategy, digital strategies, and sustainability strategies. While much C-suite anxiety is currently focused on strategic digital threats to today’s business, executives have to be careful not to overlook the sustainability opportunities digitization portends. Marrying corporate strategy with environmental sustainability through digitization is going to be a multibillion-dollar market opportunity. Business leaders can help ensure that a digital future is also a sustainable and profitable one in a variety of ways, such as facilitating a circular economy, tackling climate change, improving worker health and safety, and enhancing transparency and community relations.