3. The Sustainable Value Portfolio
Some years ago, William Ruckelshaus, former EPA administrator and CEO of Browning Ferris, made the following statement: “Sustainability is as foreign a concept to managers in capitalist societies as profits are to managers in the former Soviet Union.” While intended to be at least partially tongue-in-cheek, I believe that this statement showed considerable insight. There can be little doubt that sustainability is one of the most frequently used but least understood terms of our time; it is right up there with the term strategy when it comes to overuse and lack of meaning. (I say that as a professor of both strategy and sustainability!) Indeed, it is with some regularity that I find myself engaged in a discussion with someone about sustainability, only to discover several minutes into the conversation that he is talking about something completely different from me.
This lack of precision in definition is often used by businesspeople to dismiss sustainability from consideration. I would be a rich man if I only had a nickel for every time I heard a manager say something like “Until you can give me a clear definition of ’sustainability,’ I’m not inclined to spend much time focusing on it in my business.” To be sure, sustainability’s ambiguous and multidimensional nature can be maddening at times, yet it is also one of its greatest attractions from a business perspective. A smart strategist gravitates toward ill-defined and ambiguous opportunities. That is because once everything has been defined and reduced to standard operating procedure, there is no money left to be made.
Yet, it is not possible to design a coherent strategy (there is that term again) without some broad guideposts, conceptual categories, and frameworks to work with. Without some broad agreement on constructs, we end up talking past each other. Accordingly, this chapter provides a business-oriented way of thinking about sustainability that organizes and rationalizes the many terms, issues, and communities of practice that are floating around out there. More important, the chapter seeks to connect these key dimensions of sustainability to drivers of shareholder value and financial performance. To this end, my colleague Mark Milstein and I have developed a sustainable value framework that directly links the societal challenges of global sustainability to the creation of shareholder value by the firm.1 The framework shows how the global challenges associated with sustainability, viewed through the appropriate set of business lenses, can help to identify strategies and practices that contribute to a more sustainable world while simultaneously driving shareholder value. This “win-win” approach we define as the creation of sustainable value by the firm.
Sustainability Buzzwords
As the first two chapters suggest, the terms sustainability and sustainable enterprise encompass a mind-numbing range of ideas, issues, concepts, and practices. In an effort to map the conceptual territory, Mark Milstein and I brainstormed a lengthy (but I’m sure not exhaustive) list of buzzwords from the domain of sustainability. These are listed, in no particular order, in Exhibit 3.1. A quick scan of the exhibit will, no doubt, produce some familiar monikers (such as corporate social responsibility), but also some mysterious acronyms and labels (such as B24B). That is because the sustainability space is occupied by distinct and sometimes competing tribes of advocates, practitioners, and theoreticians. Further examination of the list will no doubt begin to produce frustration. You might be asking yourself, “How do I organize all of this stuff in any way that is useful or meaningful from a business point of view?”
Exhibit 3.1. Sustainability Buzzwords
Fortunately, we were able to import one of the most important analytical tools from the field of strategy to help make sense of this blooming, buzzing confusion: the 2 × 2 matrix. As anyone who has attended business school knows, the 2 × 2 matrix is what defines the field of strategy! In all seriousness, two dimensions combined in a framework help to provide conceptual clarity and enable one to cluster related sustainability buzzwords and practices. The framework also helps to organize the parameters that are important to firm performance and the creation of shareholder value (see Exhibit 3.2).
Exhibit 3.2. Shareholder Value Model
Source: Adapted from S. Hart and M. Milstein, 2003. “Creating Sustainable Value.” Academy of Management Executive, 17(2) (2003): 56-69.
Elements of Shareholder Value
The vertical axis of Exhibit 3.2 reflects the firm’s need to manage today’s business while simultaneously creating tomorrow’s technology and markets. This dimension captures the tension created by the need to realize short-term results while also fulfilling expectations for future growth. The horizontal axis reflects the firm’s need to nurture and protect internal organizational skills, technologies, and capabilities while simultaneously infusing the firm with new perspectives and knowledge from outside stakeholders. This dimension reflects the tension created by the need to buffer the technical core so that it can operate without distraction, while at the same time remaining open to fresh perspectives and new, disruptive models and technologies.
Juxtaposing these two dimensions produces a matrix with four distinct dimensions of performance crucial to generating shareholder value—and understanding sustainability in terms relevant to the business. The lower-left quadrant focuses on those aspects of performance that are primarily internal and near-term in nature: cost and risk reduction. Quarterly earnings growth and reduction in exposure to liabilities and other potential losses are important drivers of wealth creation. Clearly, unless the firm can operate efficiently and reduce its risk commensurate with returns, shareholder value will be eroded.
The lower-right quadrant also focuses on performance dimensions that are near term in nature but includes salient stakeholders external to the firm: suppliers and customers in the immediate value chain, as well as regulators, communities, NGOs, and the media. Unless it respects these stakeholders’ interests, the firm’s right to operate might be called into question. But if it uses creativity to include their interests, the firm can differentiate itself, enhance its reputation, and establish the legitimacy it needs to preserve and increase shareholder value.
Shifting to the upper-left quadrant of the model, the firm must not only perform efficiently in today’s businesses, but it should also be constantly mindful of generating the products and services of the future. This means developing or acquiring the skills, competencies, and technologies that reposition the firm for future growth. Without such a focus on innovation, it will be difficult for the firm to create the new product and service flow to ensure that it prospers well into the future. The creation of shareholder value thus depends upon the firm’s ability to creatively destroy its current capabilities in favor of the innovations of tomorrow.
Finally, the upper-right quadrant focuses on identifying the needs that will define the growth markets of the future. Growth requires the firm to either offer new products to existing customers or tap into previously unserved markets. A convincing articulation of how and where the firm plans to grow in the future is crucial to the generation of shareholder value. The growth trajectory therefore provides guidance and direction for new technology and product development.
Firms must perform well in all four quadrants of the model if they are to continuously generate shareholder value over time.2 Performing within only one or two quadrants is a prescription for suboptimal performance and even failure. Firms such as Kodak and Xerox, which failed to adequately invest in digital technology, illustrate how overemphasis on today’s business (to the exclusion of tomorrow’s technology and markets) might generate wealth for a time but will eventually erode shareholder value as competitors enter with superior products and services. The recent experience of many Internet companies also demonstrates how preoccupation with tomorrow’s opportunity to the exclusion of performance today might be exciting and challenging, but shortlived.3 Finally, companies such as Monsanto, which failed to adequately address stakeholder concerns over genetically modified food, show that overemphasis on the internal aspects of the firm might bring short-term results but will ultimately blind the firm to the constituencies and perspectives that are so important to both maintaining legitimacy and generating imaginative new ideas about how the firm might compete in the future.
The Buzzword Sort
Just as the creation of sustained shareholder value requires performance on multiple dimensions, the societal challenges associated with sustainable development are also multidimensional. Accordingly, we can use the shareholder value model described earlier to cluster and organize the buzzwords enumerated in the previous section (see Exhibit 3.3).4 This produces four distinct categories or constructs associated with the four quadrants of the framework. Each captures a conceptually distinct aspect of sustainability and connects to firm performance and shareholder value in a distinct manner. Understanding these conceptual distinctions is key to creating a more disciplined understanding of sustainability to transcend the current rhetoric that still plagues the field.
Exhibit 3.3. The Buzzword Sort
The lower-left quadrant is populated with the assortment of buzzwords that have to do with resource efficiency and pollution prevention—doing more with less. They enable the firm to squeeze more saleable product out of each pound of raw material that it buys. Recognizing that increasing industrialization, with its associated material consumption, pollution, and waste generation, is a key sustainability driver, the items in the lower-left quadrant are all geared toward the reduction of the waste and emissions associated with firms’ current operations.
The lower-right quadrant is composed of buzzwords that focus on stakeholder engagement, transparency, and life-cycle management. These seemingly diverse items cluster together because they all challenge companies to access voices from beyond their immediate operational control. As we have seen, Internet-connected coalitions of NGOs are making it increasingly difficult for governments, corporations, or any large institutions to operate in secrecy.5 Driven by the proliferation and interconnection of civil society stakeholders, the items in this quadrant help firms incorporate voices from the entire product lifecycle; this means more effective stakeholder engagement, new forms of governance, and a proactive approach to corporate social responsibility. Items in the lower-right quadrant thus challenge firms to operate in a transparent, responsive manner due to an increasingly well-informed, active stakeholder base.
The upper-left quadrant is populated by buzzwords that emphasize the development of new, inherently clean technologies and capabilities (through either internal development or acquisition). Specifically, this quadrant focuses on the emerging technologies (genomics, biomimicry, nanotechnology, information technology, and renewable energy) that could make many of today’s energy-and material-intensive industries obsolete. New capability development in clean technology thus constitutes the key dimension of the upper-left quadrant.
Finally, the upper-right quadrant consists of the set of buzzwords that address the increases in population, poverty, and inequity associated with globalization. Whether we are dealing with disinvestment in urban cores, brownfield redevelopment, or the four billion poor at the base of the pyramid (B24B means “business to four billion”), this quadrant focuses on those who have been underserved or even exploited by capitalism to date. Social development and wealth creation on a massive scale, especially among the world’s poorest, is thus the key aspect of the upper-right quadrant.
In sum, global sustainability is a complex, multidimensional concept that cannot be addressed by any single corporate action. Creating sustainable value requires that firms address each of the four quadrants—and be clear about how the strategies associated with each will help the firm build shareholder value. First, firms can create value by reducing the level of material consumption and pollution associated with rapid industrialization. Second, they can create value by operating at greater levels of transparency and responsiveness, as driven by civil society. Third, they can create value through the development of new, disruptive technologies that hold the potential to greatly shrink the size of the human footprint on the planet. Finally, firms can create value by meeting the needs of those at the base of the world income pyramid in a way that facilitates inclusive wealth creation and distribution.
Connecting the Dots: The Sustainable Value Portfolio6
When viewed through the appropriate set of business lenses, the sustainability framework discussed previously presents opportunities for firms to improve performance in all four quadrants of the shareholder value model, as illustrated in Exhibit 3.4. Thinking systematically, through the full range of challenges and opportunities associated with sustainability, is the first important step managers can take toward the creation of sustainable value. Each of the four quadrants of the framework is explored in greater depth next.
Exhibit 3.4. The Sustainable Value Framework
Source: Adapted from S. Hart and M. Milstein, 2003. “Creating Sustainable Value.” Academy of Management Executive, 17(2) (2003): 56-69.
Growing Profits and Reducing Risk Through Pollution Prevention
Material consumption, waste, and pollution present an opportunity for firms to lower cost and risk by developing skills and capabilities in pollution prevention and eco-efficiency.7 Pollution prevention is focused on reducing waste and emissions from current operations. Less waste means better utilization of inputs, resulting in lower costs for raw materials and waste disposal. Effective pollution prevention also requires extensive employee involvement, continuous improvement, and quality management capability.
Programs that reduce waste and emissions through eco-efficiency have been widely adopted by firms over the past decade and include such notable cases as Dow Chemical’s Waste Reduction Always Pays (WRAP) and Chevron’s Save Money and Reduce Toxics (SMART). Pollution-prevention programs have proliferated at the industry level and receive a great deal of attention from regulatory bodies in the United States and Europe as potential alternatives to command-and-control regulation.8 The well-publicized results of such pioneering programs as 3M’s Pollution Prevention Pays (3P) illustrate the direct, bottom-line benefits of pollution prevention. Indeed, between 1975 and 1990, 3M reduced its total pollution by more than 530,000 tons (a 50 percent reduction in total emissions) and, according to company sources, saved more than $500 million through lower raw material, compliance, disposal, and liability costs. In 1990, 3M embarked on 3P+, which sought to reduce the remaining waste and emissions by 90 percent, with the ultimate goal being zero pollution.9
During the 1990s, DuPont’s $1 billion Lycra business helped to further underscore the potentially sizeable financial payoff associated with pollution prevention.10 Between 1991 and 1995, more than 50 million pounds of waste were eliminated from the business’s nine plants worldwide. This saved roughly $5 million in compliance, liability, and waste disposal costs. However, a more thorough accounting revealed that yield improvements attributable to the pollution-prevention program increased process efficiency and reduced material costs by $45 million. Additional revenue associated with saleable by-product (which previously was waste) totaled $100 million. Furthermore, the business avoided making new capital investments in plant and facility as a result of greater up-time and faster cycle time in the existing capacity; this, they estimated, was worth another $100 million. Without even estimating the higher productivity of workers due to healthier working conditions and higher morale, these cost savings totaled a whopping $250 million for the business, a major contribution to the business’s bottom line.
Evidence thus clearly shows that pollution-prevention and waste-reduction strategies actually do reduce cost and increase profits.11 Pollution prevention provides managers with the clearest, fastest way to increase shareholder value by growing the bottom line for existing businesses through reductions in cost and liability.
Enhancing Reputation and Legitimacy Through Product Stewardship
Whereas pollution prevention focuses on internal operations, product stewardship extends beyond organizational boundaries to include the entire product life cycle, from raw material access through production processes, to product use and disposal of spent products.12 Product stewardship integrates the voice of the stakeholder into business processes by allowing the firm to interact with external parties such as suppliers, customers, regulators, communities, NGOs, and the media. It thus offers a way to both lower environmental impacts across the value chain and enhance the firm’s legitimacy and reputation by engaging stakeholders in the conduct of ongoing operations. Product stewardship enhances outsiders’ confidence in the firm’s intentions and activities, helping to enhance corporate reputation and encouraging other firms to follow suit.
Firms can take many actions to increase shareholder value through product stewardship. Cause-related marketing appeals to consumers’ desires to purchase products that have positive social and environmental benefits.13 Life-cycle management extends the value chain beyond traditional limits by including in the firm’s responsibility the costs and benefits of products from raw materials to production and ultimately to disposal by consumers.14 SC Johnson, for example, has developed an approach called Greenlist™ that it uses in product development. By rating raw materials in terms of their environmental footprints, the company is able to facilitate the design of products that minimize environmental impact across the entire product life cycle.
Dofasco, one of the few profitable steel companies in North America, has hinged its strategy on product stewardship. By focusing on the production of ultralight steel auto bodies for the auto industry, the company has enabled its customers (the auto companies) to produce lighterweight and less costly vehicles that also realize better gas mileage. Because many of Dofasco’s products also make use of scrap steel, the company has been able to boost its reputation—and its sales—through product stewardship.15
Companies such as Shell have increased the use of stakeholder engagement through town hall–style meetings, facilitated dialogues, Internet-based comment boxes, and other tools designed to provide venues for stakeholders to voice their views about a firm’s operations. In fact, an increasingly active NGO community has led firms to pursue more collaborative approaches to business management. Together with industry, for example, European governments are pioneering take-back laws for electronic and appliances manufacturers, effectively closing the loop on the product life cycle.16
Nike serves as a recent salient example of the value of product stewardship. Faced with growing backlash against its labor and environmental practices, in the late 1990s, the company turned to product stewardship strategies to recover its reputation and preserve its right to operate. The company enacted a worldwide monitoring program for all contract factories, using both internal and third-party auditors such as PriceWaterhouseCoopers. Nike also became a charter member of the Fair Labor Association (FLA), a nonprofit group that evolved out of an antisweatshop coalition of unions, human rights groups, and businesses. Nike helped found the Global Alliance, a partnership among the International Youth Foundation, the MacArthur Foundation, and the World Bank, dedicated to improving workers’ lives in emerging economies.17
Aside from taking action on the labor (social) front, Nike took action environmentally. Its footwear designers started evaluating their new prototypes against a product stewardship scorecard, using life-cycle analysis. Nike also launched the Reuse a Shoe Project to recycle old, unwanted footwear. The company’s retailers collected shoes and shipped them back to the company, which ground and separated the materials. Through partnerships with sports surfacing companies, the outsole rubber and midsole foam were turned into artificial athletic surfaces. Profits from this business generated income for the Nike Foundation and funded donations of sport surfaces made of the recycled material.
As the Nike case makes clear, firms can use product stewardship to demonstrate that stakeholder voices and opinions matter and can affect company behavior. As with pollution prevention, product stewardship is centered on improving existing products and services. As a consequence, changes are immediate and value is quickly realized in the form of improved community relations, legitimacy, and brand reputation.
Accelerating Innovation and Repositioning Through Clean Technology
Clean technology refers not to the incremental improvement associated with pollution prevention, but to innovations that leapfrog standard routines and knowledge. The rapid emergence of disruptive technologies such as genomics, biomimicry, information technology, nanotechnology, and renewable energy presents the opportunity for firms—especially those heavily dependent upon fossil fuels, natural resources, and toxic materials—to reposition their internal competencies around more sustainable technologies. Thus, rather than simply seeking to reduce the negative impacts of their operations, firms can strive to solve social and environmental problems through the internal development or acquisition of new capabilities that address the sustainability challenge directly.18
A growing number of firms have begun to develop the next generation of clean technologies to drive future economic growth. BP and Shell are ramping up investments in solar, wind, and other renewable technologies that might ultimately replace their core petroleum businesses. In the automotive sector, Toyota and Honda have already entered the market with hybrid power systems in their vehicles, which dramatically increase fuel efficiency. They also launched a market experiment in fuel-cell vehicles in Japan at the end of 2002. Whereas many car makers talk of a transition to alternative power taking 20–30 years, GM, Toyota, and Honda are committed to making it a commercial reality within a decade.
Firms such as General Electric, Honeywell, and United Technologies are investing in the development of small-scale, widely distributed energy systems that could make centralized coal-fired and nuclear power plants obsolete. Finally, firms such as Cargill and Dow are exploring the development of biologically based polymers to enable renewable feedstocks such as corn to replace petrochemical inputs in the manufacturing of plastics. Each of these cases is notable for the firm’s willingness to disrupt the very core technologies upon which its businesses currently depend.
Bold strategies in clean technology continue to be less common among large, established corporations than are activities in pollution prevention or product stewardship. Entrenched corporate mindsets and standard operating procedures inhibit the creation of structures that can catalyze innovation. The risks associated with such investments stand in stark contrast to the risk-reducing efforts associated with the pollution-prevention programs discussed previously. However, it is likely that future economic growth will be driven by those firms that are able to develop disruptive technologies that address society’s needs. Firms that fail to lead the development and commercialization of such technologies are unlikely to be a part of tomorrow’s economy.19
Crystallizing the Firm’s Growth Path and Trajectory Through Sustainability Vision
Too many corporate clean technology initiatives have floundered because the resulting technologies have stumbled in the marketplace—witness GM’s failed effort to develop an electric car during the 1990s. To succeed, therefore, it is crucial to develop a vision not only for what needs the company is trying to address and how they relate to sustainability, but also where the most appropriate markets can be found. The unmet needs of those at the base of the economic pyramid may present the best opportunity for firms to define a compelling trajectory for future growth. A more inclusive form of capitalism, characterized by collaboration with stakeholders previously overlooked or ignored by firms (such as radical environmentalists, shantytown dwellers, or the rural poor in developing countries), can help open new pathways for growth in previously unserved markets.
The case of the Grameen Bank in Bangladesh demonstrates how a vision aimed at those who had been bypassed by the financial system, opened a totally new pathway for business growth.20 Nearly 30 years ago, Muhammad Yunus then a professor of economics at Chittagong University in Bangladesh, conceived of the idea of a bank focused on offering “microcredit” loans to the poorest of the poor. This business concept was developed as a direct result of personal interactions that he had with poor people in rural villages and shantytowns. Most bankers assumed that laziness or lack of skill were the reasons that so many lived in abject poverty. As a result, they focused their attention on more affluent customers. But Yunus was personally motivated to understand what the poor felt they needed to change their lives for the better. Much to his surprise, he discovered, by traveling through villages and through extended personal interaction, that they were, for the most part, energetic and motivated and knew exactly what they needed to move forward. In almost every case, this involved gaining access to small amounts of credit to launch or expand small enterprises. Grameen Bank was established to serve this need.
To succeed, it was necessary for Grameen to turn most of the established assumptions about banking (loan size, need for collateral, contractual enforcement) upside down. Conventional banking is based on the priciple that the more you have, the more you can get. Grameen Bank started with the belief that credit should be accepted as a human right. By focusing on making very small loans to poor women based upon a “peer lending” model, a system was built where those who posssessed the least get the highest priority. Small groups of loan recipients ensure that everyone behaves in a responsible way and no one gets into repayment trouble. The bank’s sales and service people visit villages frequently, getting to know the women who have the loans and the projects in which they are supposed to invest. In this way, lending due diligence is accomplished through trust-based interaction and exchange rather than mountains of paperwork and legal documentation characteristic of conventional banks. In fact, the individual loan amounts are often smaller than the document-processing charges of most financial institutions.
By 2004, Grameen was lending in excess of $445 million each year to more than 3.8 million poor customers in more than 46,000 villages throughout Bangladesh. Even more amazing, it has achieved a 98.9 percent repayment rate, the highest of any bank on the Indian subcontinent, and indeed much higher even compared to North American and European banks in the United States.21 The competitive imagination of Yunus and the Grameen Bank has led to a global explosion of institutional interest in microlending over the past decade, including the recent entry of financial giants such as Citigroup.
Increasingly, MNCs are recognizing that the voices of the poor and disenfranchised can be a source of creativity and innovation. Recognizing that information poverty may be the single biggest roadblock to sustainable development, Hewlett-Packard, for example, has begun to focus attention on the needs of the isolated and disconnected through its World e-Inclusion initiative. HP created an “i-community,” a living laboratory, in rural India with the express purpose of coming to understand the particular needs of the rural poor. The firm has quickly realized that this is not unoccupied space: Local companies such as N-Logue and Tarahaat are also developing information technology and business models to serve this enormous potential market. Through shared access (for example, Internet kiosks), wireless infrastructure, and R&D focused on cost reduction, these companies are dramatically reducing the cost of being connected.
Despite the efforts of organizations such as Grameen and HP, however, most companies continue to mistakenly assume that poor markets possess no value opportunities and have yet to try to understand the possibilities of serving the markets they are used to ignoring. Firms that do take the time appear to recognize that those at the base of the pyramid lack attention and capital, not ingenuity and aspiration. Thus, these firms have the potential to unlock future markets of immense scale and scope.
Charting the Sustainable Value Portfolio
By now, the core dimensions of sustainability and their linkages to firm performance and value creation should be clear: Firms are challenged to minimize waste from current operations (pollution prevention), while simultaneously acquiring or developing more sustainable technologies and skill sets (clean technology). Firms are also challenged to engage in extensive interaction and dialogue with external stakeholders, regarding both current offerings (product stewardship) and economically sound new solutions to social and environmental problems for the future (sustainability vision).
Taken together, as a portfolio, these strategies and practices hold the potential to reduce cost and risk, enhance reputation and legitimacy, accelerate innovation and repositioning, and crystallize growth path and trajectory, all of which are crucial to the creation of shareholder value. The challenge for the firm is to decide which actions and initiatives to pursue and how best to manage them. Companies can begin by taking stock of each component of what I call their sustainable value portfolio (see Exhibit 3.5). This simple diagnostic tool can help any company determine whether its strategy has the potential to truly create sustainable value.
Exhibit 3.5. The Sustainable Value Portfolio
Source: Adapted from S. Hart, 1997. “Beyond Greening: Strategies for a Sustainable World.” Harvard Business Review, January-February (1997): 66-76.
First, assess your company’s (or your business unit’s) capability in each of the four quadrants by answering the questions in Exhibit 3.5. Then rate your capability on the following scale for each quadrant: 1: nonexistent, 2: emerging, 3: established, or 4: institutionalized. Unbalanced portfolios spell missed opportunity and vulnerability: A bottom-heavy portfolio suggests a good position today but future vulnerability. A top-heavy portfolio indicates a vision of sustainability without the operational or analytical skills needed to implement it. A portfolio skewed to the left side of the chart indicates an inward focus that could lead to myopia and might ignore important perspectives from external constituencies. Finally, a portfolio skewed to the right side, although highly open and public, runs the risk of being labeled “greenwash” because the underlying plant operations and core technology still cause significant harm.
Programs in pollution prevention and product stewardship are well institutionalized within most MNCs today and have saved hundreds of millions of dollars over the past decade. U.S.-based companies have been especially focused on the efficiency gains and cost savings associated with pollution prevention. Highly publicized crises at companies such as Monsanto and Nike that failed to successfully engage the views of stakeholders have also caused growing numbers of firms to explore strategies for product stewardship. European companies have been particularly active in engaging in more stakeholder dialogue, extending producer responsibility for products, and adopting more inclusive forms of corporate governance. Research and consulting experience, however, suggest that few firms seem to recognize, let alone exploit, the full range of sustainable business opportunities available.22 Most focus their time and attention primarily on the bottom half of the matrix: short-term solutions tied to existing products and stakeholder groups.
The Road to Sustainability
Consider the auto industry. During the 1970s, government regulation and dirty tailpipe emissions forced the industry to focus on pollution control. In the 1980s, the industry began to tackle pollution prevention. Initiatives such as the Corporate Average Fuel Efficiency requirement and the Toxic Release Inventory led auto companies to examine their product designs and manufacturing processes to improve fuel economy and lower emissions from their plants. The 1990s witnessed the first signs of product stewardship. In Germany, the 1990 “take-back” law required auto manufacturers to take responsibility for their vehicles at the end of their useful lives. Innovators such as BMW influenced the design of new cars with “design for disassembly” efforts. Industry-led consortia such as the Partnership for a New Generation of Vehicles were driven largely by the product stewardship logic of lowering the environmental impact of automobiles throughout their life cycles.
Early attempts to promote clean technology were driven by initiatives such as California’s Zero-Emission Vehicle Law and the U.N. Climate Change Convention, which seeks to limit greenhouse gas emissions on a global scale. But early efforts by industry incumbents were either incremental—for example, the development of natural gas vehicles—or defensive in nature. Electric vehicle programs, for instance, were used primarily to demonstrate the infeasibility of the California law rather than to lead the industry to fundamentally cleaner technology. It came as no surprise that there was little demand for GM’s Impact, an electric vehicle that featured 2,000 pounds of batteries, a range of less than 100 miles, and a price tag double that of other vehicles in its class. Similarly, the issue of climate change, perhaps the single biggest threat to the internal combustion engine as we know it, was addressed primarily through stakeholder dialogue and the establishment of incremental reduction goals for greenhouse gas emissions. These initiatives, while laudable as far as they went, were motivated primarily by a desire to maintain legitimacy and the right to operate in the face of a product fleet that was becoming increasingly dominated by behemoth, gas-guzzling SUVs and oversize pickup trucks.
The early 2000s saw the introduction of the first serious new product entries containing alternative power plants. Hybrid-electric vehicles such as the Prius and the Civic, from Toyota and Honda, respectively, were introduced at competitive prices with fuel efficiencies double or triple that of the fleet average. Despite clear signals of consumer acceptance, however, production capacity lagged far behind demand and, as of 2004, was still restricted to vehicles at the low end of the market, where conventional cars were already quite fuel-efficient. There were no hybrid options in the large car, minivan, SUV, or pickup truck segments, which were, by far, the most polluting and least energy-efficient. Hybrid minivans and small SUVs were due out in the 2005 model year.
The advent of the new century also saw a rush by car companies into hydrogen fuel cell development programs. Some automakers (such as Ford) sought joint ventures with existing fuel cell companies; others (such as GM) initiated their own programs of technology development. Most targeted the United States as the entry market for this revolutionary new technology. Unfortunately, because there are no alternative fuels for sale to consumers in the United States, it will be necessary to outfit these fuel-cell vehicles with expensive gasoline reformers well into the future. Converting gasoline into hydrogen does not solve the problem of fossil fuel dependence or greenhouse gas emissions.
Indeed, it is staggering that none of the large auto companies has connected the challenge of clean technology development to its strategies for emerging markets (such as China and India, where there will be massive transportation needs in the coming decades). Consider the impact of automobiles on China alone. In the mid-1990s, there were fewer than one million cars on the road in China. However, with a population of more than 1 billion, it would take less than 30 percent market penetration to equal the current size of the U.S. car market (12 million to 15 million units per year). Ultimately, China might demand 50 million or more units annually. Because China’s energy and transportation infrastructures are still being defined, there is an opportunity to leapfrog to clean technology, yielding important environmental, public health, and competitive benefits.
Assume for a moment that auto companies succeed in creating a commercially viable next generation of renewable (and affordable) vehicles using emerging markets as the incubator. Now try to envision a transportation infrastructure capable of accommodating so many vehicles. How long will it take before gridlock and traffic jams force the auto industry to a halt? Sustainability will require new transportation solutions for the needs of emerging economies with huge populations. This might feature entirely new products and services designed to make smaller cities and villages more economically viable so that mass migration to megacities becomes unnecessary and even undesirable. Will the giants in the auto industry be prepared for such radical change, or will they leave the field to new ventures that are not encumbered by the competencies of the past?
In summary, although the auto industry has made progress, most companies fall far short of creating truly sustainable value. While most have succeeded in implementing some version of pollution prevention and product stewardship, few have ventured very far beyond the safe confines of the current technology and business model. Initiatives in the clean technology and sustainability vision quadrants have been fragmentary, at best, leaving open a future opportunity of potentially vast proportions.
Pursuing the White Space
As the case of the auto industry suggests, relatively few firms have begun to explore seriously the opportunities associated with the upper half of the sustainable value portfolio, the portion focused on building new capabilities and markets. Indeed, most clean technologies today are being developed and commercialized by small, often undercapitalized, new ventures, not by the MNCs that possess the financial resources for doing so successfully. Similarly, most business experiments at the base of the economic pyramid have been initiated by NGOs or small local firms, while MNCs’ emerging market plays have been limited largely to the elites or emerging middle classes in the developing world. Given that pursuit of clean technology and markets at the base of the pyramid is disruptive in character, perhaps we should not be surprised that large firms have not actively blazed these trails.
Yet, it need not be this way. Just as particular competencies (for example, quality management, continuous improvement, boundary-spanning capability) predispose some companies to be more effective than others in implementing pollution prevention and product stewardship, some MNCs will be better positioned than others to pursue clean technologies and markets at the base of the pyramid—those with demonstrated ability in acquiring new skills, working with unconventional partners, incubating disruptive innovations, shedding obsolete businesses, and creatively destroying existing product portfolios, to name just a few. Incumbent firms with these skill sets possess a potentially powerful first-mover advantage.
The opportunity to create sustainable value—shareholder wealth that simultaneously drives us toward a more sustainable world—is huge but yet to be fully exploited. The sustainable value portfolio outlined in this chapter shows the nature and magnitude of the opportunities in sustainable business development and connects them to ways for the firm to create value. The strategies associated with the four quadrants also enable a sustainable competitive advantage because they cannot be easily or quickly copied by competitors. The framework’s simplicity, however, should not be mistaken for ease of execution: Understanding the connections is not the same thing as successfully implementing the necessary strategies and practices. This task is very challenging and complex indeed. Only a few firms will be able to successfully carry out activities in all four quadrants simultaneously, especially those in the upper part of the portfolio that require the greatest efforts in terms of vision, creativity, and patience.
Stagnant economic growth and stale business models will present formidable challenges to corporations in the years ahead. Focusing on incremental improvements to existing products and businesses is an important step, but it neglects the vastly larger opportunities associated with clean technology and the underserved markets at the base of the economic pyramid. Indeed, addressing the full range of sustainability challenges by moving “beyond greening” can help to create shareholder value and could represent one of the most underappreciated avenues for profitable growth in the future. It is to this prospect that we turn our attention in the next section of the book.
Notes
1 The discussion of the sustainable value framework in this chapter is excerpted from Stuart Hart and Mark Milstein, “Creating Sustainable Value,” Academy of Management Executive 17(2) (2003): 56–69.
2 This idea is similar to the balanced scorecard (see Robert Kaplan and David Norton, “The Balanced Scorecard—Measures That Drive Performance,” Harvard Business Review 72(1) (1992): 71–79) and other tools that emphasize the need to balance a portfolio of actions to drive firm value over time.
3 The experiences of Enron and the numerous dot-bombs of the tech wreck serve as the most recent illustrations that, although it can be very glamorous to be viewed as on the cutting edge of the business world, bankruptcy provides a particularly ineffective platform from which to generate future growth.
4 Admittedly, the clustering of these terms represents our interpretation of where each belongs. Others may well take issue with our choice of placement.
5 Howard Rheingold, Smart Mobs: The Next Social Revolution (Cambridge, MA: Perseus Publishing, 2002).
6 The four strategies developed in this section were first articulated in: Stuart Hart, “Beyond Greening: Strategies for a Sustainable World,” Harvard Business Review 75(1) (1997): 66–76. I would also like to thank my colleagues at the Sustainable Enterprise Academy—in particular, Brian Kelly, David Wheeler, Bryan Smith, John Ehrenfeld, Chris Galea, Art Hanson, David Bell, Nigel Roome, Jim Leslie, and Pat Delbridge—for helping us to clarify our thinking regarding how the drivers of sustainability, viewed through the proper set of business lenses, influence shareholder value.
7 The most comprehensive treatment of eco-efficiency was done by the World Business Council for Sustainable Development in Livio DeSimone and Frank Popoff, Eco-efficiency: The Business Link to Sustainable Development. (Cambridge: MIT Press, 1997).
8 See Alfred Marcus, Reinventing Environmental Regulation (Washington, D.C.: Resources for the Future Press, 2002).
9 3M Company, Pollution Prevention Pays, 1992 videotape.
10 Personal communication, Paul Tebo, Executive VP, DuPont, April 1998.
11 See, for example, Petra Christmann, “Effects of ’Best Practices’ of Environmental Management on Cost Advantage: The Role of Complementary Assets,” Academy of Management Journal 43(4) (1998): 663–680; and Sanjay Sharma, and Harrie Vredenburg, “Proactive Corporate Environmental Strategy and the Development of Competitively Valuable Organizational Capabilities,” Strategic Management Journal 19(8) (1998): 729–753.
12 See, for example, Ulrich Steger, “Managerial Issues in Closing the Loop,” Business Strategy and the Environment 5(4) (1996): 252–268.
13 Steve Hoeffler and Ken Keller, “Building Brand Equity Through Corporate Societal Marketing,” Journal of Public Policy and Marketing 21(1) (2002): 78–89.
14 Joseph Fiksel, Design for Environment: Creating Eco-efficient Products and Processes (New York: McGraw-Hill, 1995).
15 Personal communication, Don Pether, CEO of Dofasco, Inc., November 2003.
16 See, Proposal for a Directive of the European Parliament and of the Council on Waste Electrical and Electronic Equipment and on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, COM #(2000)347, available at http://europa.eu.int/comm/environment/docum/00347_en.htm.
17 The Nike example is drawn from Heather McDonald, Ted London, and Stuart Hart, Expanding the Playing Field: Nike’s World Shoe Project (Washington, D.C.: World Resources Institute, 2002).
18 William McDonough and Michael Braungart, Cradle to Cradle (New York: North Point Press, 2002).
19 Gary Hamel, Leading the Revolution (Boston: Harvard Business School Press, 2000); Clay Christensen, Thomas Craig, and Stuart Hart, “The Great Disruption,” Foreign Affairs 80(2) (2001): 80–95; and Robert Foster and Sarah Kaplan, Creative Destruction (New York: Currency Books, 2001).
20 Alex Counts, Give Us Credit (New York: Times Books, 1996).
21 Muhammad Yunus, Grameen Bank at a Glance (Dhaka: Grameen Bank, 2004).
22 Stuart Hart and Mark Milstein, “Global Sustainability and the Creative Destruction of Industries,” Sloan Management Review 41(1) (1999): 23–33; Stuart Hart and Clay Christensen, “The Great Leap: Driving Innovation from the Base of the Pyramid,” Sloan Management Review 44(1) (2002): 51–56; and C. K. Prahalad and Stuart Hart, “The Fortune at the Bottom of the Pyramid,” Strategy+Business 26 (2002): 54–67.