Business Strategies

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Business Strategies

  1. 1. Leader Business Strategies profitable today, sustainable tomorrow David Bent, Stephanie Draper, October 2007 1
  2. 2. summary “Whether it is the world’s rapidly growing population or the worsening problem of global warming, we see the need for sustainable business practices as increasingly urgent. And perhaps more than anything else, we see sustainability as mainstream.” 1 Lee Scott, Chief Executive of Wal-Mart, 2007 Sustainability has finally made it. A quiet night in front of the TV sees climate change on the news, reality shows ‘going green’, government carbon footprint campaigns and everyone from banks to supermarkets advertising their eco-credentials. Meeting our needs without compromising the ability of future generations to meet their own needs – in short, sustainable development – is the major challenge facing our age. And for Leader Businesses, companies that are pushing the boundaries on sustainability in one or more areas of their business activity, rising to that challenge is already boosting profits. This document provides an in-depth look at a comprehensive model of their business strategies and key approaches, and shows how your business can benefit too. It follows on from an eight page summary. today’s rules won’t apply tomorrow Leader Businesses recognise that many ways of making money today won’t be profitable tomorrow. Basic services and resources that the natural world now provides cheaply will become more and more expensive. Rising expectations of business’s role will translate into new regulation, changed consumer behaviour, new norms in the supply chain and investor pressure. New entrant entrepreneurs will grab market share from established competitors caught napping. Leader Businesses realise that sustainability issues are forming the operating context from which they need to make money. And as the leading sustainable development charity, we have already seen a profound strategic shift on sustainability. When we started over a decade ago, our partners asked, “What should our sustainability strategy be, in the light of our business?” Now the likes of BT, First Choice, Marks & Spencer and Unilever are asking, “What should our business strategy be, in the light of sustainability?” From ‘nice to have’ add-on, sustainability has become a driver of business strategy. Leader Business Strategies model In our last publication Are you a Leader Business? Hallmarks of sustainable performance we highlighted best practice in key areas of business activities, including senior commitment, governance, procurement, stakeholder engagement and investor relations. This latest report provides a practical model of Leader Business strategies for your next competitive edge: • the TECHNOLOGIES that underpin a business’s offer, such as 3M’s Pollution Prevention Pays, GE’s Ecomagination, Caterpillar’s engine re-manufacturing or Phillips’ radical new lighting equipment; • the MARKETS where businesses make their offer, such as Nike subjecting its supply chain to scrutiny, M&S asking customers to ‘Look Behind the Label’, Unilever opening up new markets at the Bottom of the Pyramid, or GSH’s energy management service; • the CONTEXTS that set the rules of competition, such as Unilever's sustainable agriculture programme, the Climate Change Leaders Forum pushing for better regulation, or the Forest Stewardship Council, set up by collaborating competitors and civil society. 2
  3. 3. TECHNOLOGIES MARKETS CONTEXTS these strategies explore these strategies create the these strategies tackle how to improve or replace right sort of demand in both issues beyond the company’s technologies in the supply new and existing markets. boundaries to create a more chain, and in the products successful competitive and services themselves. context for the business. improve technologies in improve transparency to improve inputs, supply current production methods protect brand value chain and infrastructure use closed-loop systems in create and grow new markets seek regulation that production and beyond at the bottom of the pyramid rewards responsibility improve product design as grow the size and form strategic alliances to customer needs evolve sophistication of demand in address business-critical mature markets issues create radical new technology sell services, not products key approaches to integrate sustainability into strategy Leader Businesses use three key approaches to develop and integrate the right combination of strategies for sustainability: • PLAN strategy to include sustainability trends and incorporate them into today’s decisions on future business direction; • MANAGE how opportunities are defined and selected, so that the potential for emerging sustainability solutions is identified and maximised; • EXPERIMENT with a variety of approaches to learn which yield the best results. into the future Our model has brought together the strategies Leader Businesses are exploring now for profit and for a sustainable future. The particular strategies will evolve and new ones will be discovered. What we do know is that sustainability issues are going to form the strategic context for business. Companies who ask “What should our strategy be, in the light of sustainability?” will have the chance to thrive – sustainability and profitability will increasingly be seen as the same thing. The companies that thrive will be current incumbents and new entrant entrepreneurs. We have brought our experience together into practical tools for you to use. Will you be one of the next Leader Businesses? 3
  4. 4. do you want to be a Leader Business? Forum for the Future, the sustainable development charity, works in partnership with leading organisations in business and the public sector. Our vision is of business and communities thriving in a future that is environmentally sustainable and socially just. We believe that a sustainable future can be achieved, that it is the only way business and communities will prosper, but that we need bold action now to make it happen. We play our part by inspiring and challenging organisations with positive visions of a sustainable future; finding innovative, practical ways to help realise those visions; training leaders to bring about change; and sharing success through our communications. This document is a summary of Leader Business Strategies. Our research builds on our related publication, Are you a Leader Business? Hallmarks of sustainable performance. A further approach to applying environmental principles to business can be found in Sustainable Wealth Creation within Environmental Limits. All are available from our website www.forumforthefuture.org.uk. Authors: David Bent and Stephanie Draper. For more information about Leader Business strategies and how to make them happen, email us at business@forumforthefuture.org.uk. With thanks to our Foundation Corporate Partners who contributed to this report through the Business Futures Fund. 4
  5. 5. contents summary 2 1 introduction 6 2 why now? 7 3 practical model of Leader Business strategies 10 TECHNOLOGIES that underpin a business’s offer 12 MARKETS where businesses make their offer 18 CONTEXTS that set the rules of competition 24 4 key approaches to integrate sustainability into strategy 29 PLAN strategy to include future trends 29 MANAGE how opportunities are defined and selected 30 EXPERIMENT to learn and to create options 31 5 into the future 33 6 references 34 The authors wish to thank the following for their contributions: Additional research: Tom Berry and Ved Walia Writing and communications: Imogen Martineau and Esther Maughan Comments on earlier drafts, all in a personal capacity: Nick Barter (University of St Andrews), Frances Cairncross (University of Oxford), Julian Crawford (Ecosteps), Peter Desmond (Growth International), Alison Kennedy (Egmont), Cynthia McEwan (Avastone Consulting), Jeremy Nicholls (new economics foundation, AccountAbility) Katherine Raleigh (Barcelona Center for the Support of the Global Compact), Karin Read (ACPO), Chris Seeley (Just Business), Jessica Shortall (Catalyst Strategic Advisors), Alex Stobart (Scottish Executive), David Whiting (Environmental Law Foundation), Derek Whatling, and from Forum for the Future: Jonathon Porritt, Peter Madden, Sally Uren, Chris Sherwin and Lynne Elvins. Participation in Partner seminar, made possible by Cadbury Schweppes: Greg Chant-Hall (Skanska), Anthony Ho (Tetley Group), Sara Howe (Tetley Group), Lisa Huggins-Chan (Cadbury Schweppes), Monica Wilson (Capgemini). 5
  6. 6. 1 introduction Forum for the Future has been working with business on sustainable development for over ten years. This report captures our latest thinking on the shift in how business strategy addresses sustainability: from reputation and risk management to a strategic opportunity for profit. The last decade has seen the rise of Corporate Social Responsibility (or ‘CSR’), where typically a business tries to reduce its negative impacts on society. This is important, but CSR has tended to focus on compliance or risk management. Few business people get really excited about avoiding risks. When we started over a decade ago, our partners asked, “What should our sustainability strategy be, in the light of our business?” Now the likes of BT, First Choice, Marks & Spencer and Unilever are asking, “What should our business strategy be, in the light of sustainability?” From ‘nice to have’ add-on, sustainability has become a driver of business strategy. This report is our contribution to the evolving field of sustainability in business strategy. We work with over 60 companies – from engineers Arup to global telecoms giant Vodafone; from small UK-based suppliers such as Cafédirect to multi-national manufactures such as Unilever – challenging and advising them on how their business can combine success and sustainability. We have concentrated our work with business in three areas: leadership, innovation, and futures. Business strategy is a key thread in each of them: a strategy defines a leadership position and innovation is fundamental to finding a new competitive edge, as well as new products and services. Strategy is the means to bring the future context into today’s decisions. Subsequent publications will highlight the roles of innovation and futures in business and sustainability. From our work with our partners, we know that leading businesses are changing their strategy to go beyond ‘future-proofing’ – they are reaching for the opportunities that will define business success in the coming decade. This report is based on our experience with our partners and our knowledge of global best practice. We have found mainstream business strategies driven by growth, differentiation, cost control and risk reduction, but they all benefit society and the planet at the same time. They are some of the strategies that will define the successful business of the next 10 years. Section 2 asks why now? In Section 3 we describe the practical model of Leader Business Strategies. In the next section we provide key approaches to integrate sustainability into strategy. We conclude with a short look into the Future. Read on to find out how strategy, environment and society are intrinsically linked in today’s changing business environment and what it means for your products, your competitors and your markets. The paper explores a range of ways that you can respond and profit from this changing world – not all of them will work for you, but finding the right configuration will make your business fit for the future. 6
  7. 7. 2 why now? “Many CEOs recognise the underlying tension between business models wedded to increasing patterns of consumption and the reality of limited natural resources.” 2 McKinsey & Co, Shaping the New Rules of Competition, 2007 Sustainability is an end goal: the ability of global society to continue into the far future. Sustainable development is the journey towards that end goal: how can we meet our needs without compromising the ability of future generations to meet their own needs? The increasing evidence that we are compromising the ability of future generations to meet their needs means we can no longer take for granted our current pattern of development. The consequences of a new pattern of development are already changing the strategic context for business and affecting the types of strategies that will succeed into the future. the challenge: reducing supply and rising demand Business depends on a host of often unnoticed ‘eco-system services’, from a stable climate to assimilation of waste, from providing food to controlling disease and pests. The overwhelming scientific evidence is that most ecosystem services are currently being degraded or used unsustainably. The Millennium Ecosystem Assessment3, the largest ever scientific assessment of our impact on the environment, concluded: “Human activity is putting such strain on the natural functions of the Earth that the ability of the planet’s ecosystems to sustain future generations can no longer be taken for granted. Many of these eco-system services are at or beyond limits.” It's not just rainforests and tigers under threat. Climatic systems, water resources, agriculture and fisheries are all degraded or unsustainable eco-system services which we still rely on for business success. In 2006, Nicholas Stern, former Chief Economist at the World Bank, revealed that it would cost the global economy far more to manage the effects of climate change that it would to move to a low-carbon economy . In his assessment of the economics of climate change, Stern confirmed that our present path of development is bringing us up against environmental limits that will lead to catastrophe for humans and our economies, as well as many other species on our planet - the way the climatic system regulates our weather, our water and our crops being the particular focus. And we’re depleting our natural systems at the very time when our need is growing. The planet will be home to nine billion people by 2050, with just under one billion extra people in the next 10 years alone. And just as we want to continue to drive our cars and buy new shoes, so people in developing countries want that too. Business faces the twin challenges of delivering greater equity between rich and poor nations and having fewer resources to do it with. Renowned economist Jeffrey Sachs puts it this way: “Our planet is crowded to an unprecedented degree…It is bursting at the seams in human terms, in economic terms and in ecological terms. This is our greatest challenge: learning to live in a crowded and interconnected world that is creating unprecedented pressures on human society and the physical environment.” 5 7
  8. 8. the opportunity: to profit from creating a sustainable future The surge in population and consumption over the next 20 years looks impossible for damaged ecosystems to sustain. But smart businesses will profit from these challenges by finding ways to give us what we need and want whilst maintaining the eco-system services on which we rely. As one example, the Stern review says that “as a result of action on climate change, new markets are created in low-carbon energy technologies and other low-carbon goods and services. These markets could grow to be worth hundreds of billions of dollars each year.” And that’s just the opportunity from low-carbon products. Several companies are seeing wider value in sustainability. Lee Scott, Chief Executive of Wal-Mart, says that “whether it is the world’s rapidly growing population or the worsening problem of global warming, we see the need for sustainable business practices as increasingly urgent. And perhaps more than anything else, we see sustainability as mainstream.” 6 Demand will grow for more efficient ways to use ecosystem services for meeting needs or mitigating impacts, especially in the new emerging markets of the developing world where large populations are becoming consumers. People increasingly expect business to play a key role in finding solutions to these global problems. During a recent series of interviews with business leaders, McKinsey were told by one CEO of an industrial materials company that responsiveness to sustainability issues is “increasingly a question for customers; they want to be certain we have our house in order. At this point it’s a differentiating factor.” 7 There is an opportunity now for business to explore how to combine profit with creating a sustainable future. Business strategies that address this challenge at a profit will define the successful business of the next 10 years. the Five Capitals Framework At Forum for the Future we use the Five Capitals Framework to understand the detail of sustainable development. The Framework is a way of extending the familiar notion of capital – a stock that has the capacity to generate a flow of benefits to people – to give analytical rigour to sustainability. No company can sustain itself by living off its capital alone. The same is true for society. 8 the Five Capitals in the Framework are : • Natural capital (also referred to as environmental or ecological capital): any stock or flow of energy and matter that yields valuable goods and services. It falls into several categories: resources, some of which are renewable (like timber, grain, fish and water) and others that are not (fossil fuels); sinks that absorb, neutralise or recycle waste; and services, such as climate regulation. Natural capital is the basis not only of production but of life itself. • Human capital: consists of health, knowledge and motivation (all of which are required for productive work) as well as an individual’s emotional and spiritual capacities. Enhancing human capital (for instance, through investment in education and training) is central to a flourishing economy. • Social capital: takes the form of structures, institutions, networks and relationships which enable individuals to maintain and develop their human capital in partnership with others, and to be more productive when working together than in isolation. It includes families, communities, businesses, trade unions, voluntary organisations, legal/political systems and education and health bodies. • Manufactured capital: comprises material goods – tools, machines, buildings and other forms of infrastructure – which contribute to the production process but do not become embodied in its output. • Financial capital: plays an important role in our economy by reflecting the productive power of other types of capital, and enabling them to be owned and traded. However, unlike the other types, it has no intrinsic value; whether in shares, bonds or banknotes, its value is purely representative of human, social or manufactured capital. Sustainability depends on maintaining and, where possible, increasing the stocks of certain kinds of capitals so that we learn to live off the flows (the ‘income’) without depleting the stock of the capital itself; if consumption is at the expense of investment, or results in net capital depletion so that the capital stock declines, then such consumption is not sustainable and will be reduced in the future. 8
  9. 9. A sustainable company carefully manages its financial capital and manufactured capital. It also enhances the human, social and natural capitals that feed into value creation, because the company knows they are critical for its long-term success. When we work with our partners, the Framework draws out the positive and negative impacts of their activities on the Five Capitals. This allows us to understand the overall implications of the business’s activities for sustainability. Similarly the Leader Business Strategies can have both positive and negative impacts, as described in detail in the next section. making sense of ‘strategy’ Most businesses would claim to be ‘strategic’ but, digging under the surface, ‘strategy’ means several different things. So, it is worth framing what ‘strategy’ means in a business context. Strategy traditionally means a high-level plan 9, a course of action that sets an objective, and describes the means to achieve it10. Once taken, a truly strategic choice is difficult to reverse, unlike a tactical choice11. The strategic plan tends to be set at a senior level through an analysis of the company’s external context and its internal capabilities. The plan often describes a strategic position: having particular products or services in particular markets. But anyone who works in an organisation knows that there is a world of difference between the intended plan and what actually happens. A business’s strategy is also the pattern of activity over time, understood retrospectively. The goal, scope and competitive advantage emerge from the choices people throughout the business make, some matching the intended plan and some not. For this reason, a business’s strategy is an expression of the perspective of the people in the company, their common take on the world. There are strategies for different levels: functional (say, a brand strategy); business (how shall we compete in this business?); corporate (what business should we be in?); and network (what alliances or partnerships should we foster?). Current leading thought in management suggests that successful businesses organise their internal functions so that they complement each other and the external context at the same time12. The link between internal characteristics, sometimes called ‘Core Capabilities’13, and what is happening in the outside world is one of the most important elements of strategy. How a company is set up internally dictates the sort of strategies that it can adopt to respond to the external context, and its subsequent success. The very fact that a business has a combination of capabilities that are currently successful makes it difficult to adapt as circumstances change. Companies find they are dependent on their current customers, investors and capabilities. As the external context moves on, the business remains locked into its configuration of capabilities until a competitor has stolen a march. What was complementary becomes less effective.14 To successfully combine internal strength and external change, a business needs to combine performing its current configuration with exploring for new opportunities. But the skills and mindset for exploring are quite different – and exploring has no certainty of success, which deters people from risking their bonuses and career prospects. The need, and also the difficulty, of exploring the next competitive edge explains the importance of innovation for companies – see our recent publication Breakthrough products and services15 for more on innovation and sustainability. It also explains the importance of entrepreneurs and new entrants, who explore their competitive edge without being dependent on a particular configuration. So strategy is much more than the high level plan. It is a complex mix of the planned and the actual, internal and external. A business’s strategy is the expression of its ends and means in a way that is difficult to reverse. Sustainability is driving the context from which businesses can choose their ends and means. So, sustainability is an issue for business strategy. 9
  10. 10. 3 practical model of Leader Business strategies “More capital is now focused on sustainable business models and the market is rewarding leaders and the new entrants in a way that could scarcely have been predicted even 15 years ago.” Goldman Sachs, Introducing GS SUSTAIN, 2007 Our experiences show that there are businesses exploring how to combine profit with creating a sustainable future. We have brought them together in the model below. New strategies build on existing capabilities and resources, answering questions such as “How can we create value in a global society searching for a sustainable future?”, “How can we create the best future for our business?” and “Are we clear about the consequences of these strategies?” Each strategy contributes to creating a sustainable future in its own way. TECHNOLOGIES MARKETS CONTEXTS these strategies explore these strategies create the these strategies tackle how to improve or replace right sort of demand in both issues beyond the company’s technologies in the supply new and existing markets. boundaries to create a more chain, and in the products successful competitive and services themselves. context for the business. improve technologies in improve transparency to improve inputs, supply current production methods protect brand value chain and infrastructure use closed-loop systems in create and grow new markets seek regulation that production and beyond at the bottom of the pyramid rewards responsibility improve product design as grow the size and form strategic alliances to customer needs evolve sophistication of demand in address business-critical mature markets issues create radical new technology sell services, not products In this section we describe each of the strategies in the model: • What? What does it mean? What are the key actions? • Why? What are the strategic drivers for choosing the strategy? Which sort of companies does it apply to? • Examples What are the key examples? • Five Capitals How does the strategy contribute to a sustainable future, using the Five Capitals Framework? Below is a table that summarises the contribution of each strategy to sustainability, using the Five Capitals Framework. We can see that different strategies have different impacts and a strategy can be strong in some areas and weak in others. No one strategy is enough, either for generating a sustainable future or creating profit. A business needs to develop the right combination of strategies for its context. 10
  11. 11. Manufactured Financial Natural Human Social Capitals TECHNOLOGIES that underpin their offer Improve technologies in current production methods Use closed-loop systems in production and beyond Improve product design as customer needs evolve Create radical new technology MARKETS where they make their offer Improve transparency to protect brands in the market Create and grow new markets at the bottom of the pyramid Grow size and sophistication of demand in mature markets Sell services, not products CONTEXTS that set the rules of competition Improve inputs, supply chain and infrastructure to protect current business Seek regulation that rewards responsibility Strategic alliances to address business-critical issues Key Strong positive impact Some positive impact Mixed impacts, though no strong negative impacts Some negative impacts Strong negative impacts Not relevant, though positive or negative can result in some circumstances 11
  12. 12. TECHNOLOGIES that underpin a business’s offer These strategies are where companies are exploring how to improve or replace the technologies either in their own production methods or in the products and services they sell. improve technologies in current production methods What? Instigate more sustainable production methods to improve resource efficiency, lower costs and mitigate supply risks. Why? A company’s cost position is key in creating value, with customers paying more than it costs the business to serve them. A lower cost position is a common strategy to gain market share or to increase margins. Looking to the future we can see that the costs of inputs, like raw materials and energy, are likely to rise. It is not that we are going to run out of materials in the near future. But the ability of ecosystems to absorb the wastes, including carbon emissions, is limited. These limits will lead to regulation and changing consumer behaviour that will increase input costs. Examples In 1997, BP set a target of reducing greenhouse gas emissions from its operations by 10 per cent compared to 1990 levels. It achieved its target nine years ahead of schedule and gained some $650m from increased efficiencies, technological innovation and improved energy management16. 3M’s Pollution Prevention Pays programme proved exactly that. Staff were encouraged to innovate and they created 6,000 environmental projects, which have saved over £1 billion in their first year and prevented more than 1 billion kilos of pollutants. Environmental consultants have spotted wastes that Wal-Mart’s legendary cost-cutters could not. One example: eliminating excessive packaging on one toy line saved $2.4 million a year, plus 3,800 trees and one million barrels of oil17 Wal-Mart has also begun sending engineers into its supply chain to find ways to reduce . greenhouse gases and profit from doing so. They were staggered at the inefficiencies in the first factory they visited: installing readily available technology cut the electricity bill by 60%18 . the Five Capitals Capital Comments Natural Has positive impacts, but unlikely to overcome fundamental impacts on natural capital. Human Potential for employee motivation and increasing skill sets. Social Not applicable. Manufactured Better prepared for the future. Usually more efficient. Financial Can generate good returns through cost savings. 12
  13. 13. use closed-loop systems in production and beyond What? Transform waste output into an input for further value generating activity, either inside or outside the company. There are a number of ways of trying to enhance product value over its lifetimes19 . Fleet managers – optimise use and extend product life, for durable products like cars or fridges Product life extension and recycling, for instance • Reuse (i.e. glass container) • Repair (i.e. weld a piece back together) • Remanufacture (i.e. tyre) or renovate (i.e. building) • Technical upgrade (to meet new standards) • Remarketing and new products from waste Recycling the molecules • Recycling molecules in product waste (i.e. Industrial Ecology) • Recycling molecules in end-of-product-life waste Why? Benefits include: • addresses increasing prices of raw materials and waste disposal • pre-empts legislation that extends producer responsibility all the way to the end of the product’s life • gets them closer to the consumer and gives them greater control over the supply chain. As the costs of raw materials and energy rise compared to other costs a product’s useful life will be extended through better management, and it will have more than one life as it is reused and recycled. Large companies often struggle to introduce products that disrupt their own earnings. It is likely that many of these sorts of innovations will come from new companies. The opportunity here may well be to act as an intermediary who closes the loops. If we combine the cost pressures on resource use with a web-enabled business environment, we can see the gap for businesses that ensure one company’s waste is another company’s input. More on a closed-loop approach can be found in or publication Sustainable Wealth Creation within Environmental Limits. Examples The Cantonal Hospital in Liestal, Switzerland, has an example of a fleet manager 20. It developed a technique to safely resterilise disposable kidney dialysis machines five times. New dialysers cost €30 each but the resterilisation only costs €3. The reuse saves €4,000 a year per patient. It also removes the need to make five disposable dialysers, with all the environmental impacts. The financial resources saved can be used on other treatments. The reuse of glass bottles is familiar in continental Europe. Vetrum AG 21 is the leading Swiss company, sorting, washing and testing some 7,000 bottles an hour, or 16 million a year. More than 130 municipalities and organisations in eastern Switzerland send wine bottles they collect from consumers to Vetrum for reuse. Turnover tripled between 1998 and 2005. 13
  14. 14. Caterpillar remanufactures its used truck diesel engines22. Used engines are bought back for up to 40 per cent of their original value, depending on condition. The engine is disassembled, each component quality checked and cleaned before being assembled into engines. These remanufactured engines are given the same guarantee as one made from new parts and sold at the same price. Caterpillar offers incentives to its parts distribution network to make sure that the large majority of used parts are returned. The remanufacturing underpins a successful company. Caterpillar is so convinced of the success of this approach that it has a policy of preferred procurement with suppliers who also remanufacture their products. Other companies undertaking remanufacture include GE Medical Systems, Creative, IBM and NEC. ICI, Carillion and Forum for the Future have been funded by the DTI to create a zero emissions paint enterprise: a profitable business which has no waste or emissions from start to end of its supply chain. the Five Capitals Capital Comments Natural Potential to step out of ‘take-make-waste’ and so vastly reduce the strain on renewable resources, the use of non-renewable resources and the strain on sinks for wastes. Human Opportunity for employment and skills enhancement from maintaining the loops. Social Enhances connections within the company, and from the company to its customers, suppliers and other participants in the loop. Manufactured Increases the stock of quality infrastructure. Financial Opportunity for increasing profit through reduced input costs and greater value add per physical unit (‘resource productivity’). improve product design as customer needs evolve What? Improve product design to offer more value from using less, responding to business and consumer demands for improved resource productivity. One approach would be to select current products or technology that can be re-designed to address end-user needs on sustainability. Another would be to direct in-house product innovation process towards sustainability gains. Why? Businesses thrive on innovation and improving their products to maintain their competitive edge. There are also pressures for greater resource productivity and increased energy efficiency. Improving or re-designing current products / technology using a sustainability lens has a number of advantages: • can be easier than wholesale change • often can ride a product upgrade cycle • can use current channel to market and address current customer-base • can head-off or prepare for regulation. 14
  15. 15. Examples The Toyota Prius has been an astonishing success: Car of the Year in North America (2004) and Europe (2005), and selling 750,000 by June 200723. The Toyota brand is benefiting from the halo effect of the Prius, according to the president of Toyota Motor North America24. The Prius is still a car, but redesigned to reduce the amount of pollution and to maximise fuel efficiency by using a gasoline/electric hybrid powertrain, incorporating large batteries that are charged by the gas (petrol) engine directly or by regenerative braking (cannot be plugged in as built). The Prius has defined a category and opened up a new market, defying all expectation. Customers were initially attracted by the fuel-efficiency in a time of high petrol prices, but it has now become a fashionable item to own. Other car companies have been struggling to catch-up. GE’s Ecomagination is another example of improving and growing existing product lines. In 2005 they described it as “a business strategy to help meet customers’ demand for more energy-efficient, less emissive products and to drive growth for GE - growth that will greatly reward investors.” 25 GE has committed to double its investment in clean R&D from $700 million in 2005 to $1.5 billion in 2010. It is trying to increase its revenues from Ecomagination products and services, that provide significant and measurable environmental performance advantages to customers, to at least $20 billion in 2010, with more aggressive targets thereafter. In 2006 GE had launched some 45 products with a revenue of $12 billion26. Much of the Ecomagination product list is made up of more efficient versions of old products. The GEnx aero-engine, for instance, is 15 per cent more fuel-efficient than the one it is replacing. The new Evolution rail engines are four per cent more efficient. Both qualify as Ecomagination products, and are the consequence of product improvement rather than a radical new technology27 . Another example would be Johnson Matthey, the speciality chemicals company. They manufacture particulate traps, catalytic converters and other products which reduce the impact of polluting engines. the Five Capitals Capital Comments Natural Reduced environmental impacts of products. Human Positives: Meeting customer needs and increasing skills of workforce. Negatives: Does not address the ‘lock-in’ which keeps certain technologies in place, even where alternatives have superior characteristics (such as radically better environmental performance). Social May reinforce patterns of consumption that are ultimately unsustainable. Manufactured Improves the quality both in the company and its business customers. Financial Grows revenues from meeting customer needs. 15
  16. 16. create radical new technology What? Create new technologies with radical breakthroughs in resource productivity or in serving social needs. An effective approach is to direct in-house technology R&D processes to focus on meeting unmet needs and resource productivity. In some companies this is directed at particular sustainability challenges. Another approach is to establish a ventures fund to stimulate the market and invest in the best results. CNNMoney recently published a list of nine societal challenges, including hunger and malnutrition, over-fishing and dirty 28 water, which were inspiring the creation of profitable businesses. Potential technology and product solutions come from a wide variety of sectors and are at different stages of development, from near-market applications through to initial laboratory concepts. Life sciences solutions include next generation catalysts and enzymes; innovations in materials science promise lightweight, non-toxic high efficiency materials; while genetic technologies can have immense productivity benefits. Technologies that imitate natural systems using biomimicry principles also potentially offer strong solutions. Why? Over time incremental product improvement will not be enough to keep pace with the changes in market conditions and regulatory and societal contexts. New products based on new technologies will be required. They will meet end users’ needs in a superior way (cost, quality, availability, environmental impact) and make previous products obsolete. There is already a growing demand for low-carbon products. The coming shift in relative costs of inputs (energy, materials and other ecosystem service-related items will increase, while relative cost of labour will decrease) will accelerate a shift to products and technologies that extract the most value out of each atom. Goldman Sachs recently published a report identifying emerging companies that the “believe are well placed to face the structural issues facing major industries”, including alternative energy, environmental technology (resource management, waste management, recycling), biotechnology and nutrition29 . The types of innovations that result from this sort of strategy can alter entire industries. But they often take a long time to incubate and carry significant technology and market risks. The prospect is to create products that produce performance in a way that makes them very valuable. Examples Phillips, the Dutch electronics firm, developed ‘Edore’, an energy saving halogen bulb for the home that offers clear crisp lighting and uses 50 per cent less energy than the ordinary household bulb. Many large companies actively monitor innovation activity in their areas of interest and often have dedicated corporate venture capital funds to invest in promising technology options. Venture arms of oil and gas majors such as Shell Ventures or Chevron Technology Ventures are active investors (around $150 million each annually) in the booming clean technology venture investment space – which attracted a record US$ 3.6 billion in North America and Europe in 200630– and they’re not alone. GE, Siemens, BASF and EDF all have funds seeking strategic clean technology ventures. Then there is the partnership and licensing agreements option. Ceres Power, an AIM listed UK-based fuel cell developer with a market capitalisation of over £140 million has entered into a strategic partnership with British Gas (owned by Centrica). It is a product development and marketing deal to develop domestic combined heat and power using natural gas powered fuel cells. Ceres Power’s stack based fuel cells fit into a domestic central heating boiler instead of a pilot light, and can transform boilers into mini-generators that produce both heat and electricity. 16
  17. 17. This strategic partnership will jointly develop the world’s first mass market fuel cell boiler, combining Ceres Power’s technological ability with British Gas’s market knowledge and customer base. This type of partnership creates new product options, giving British Gas a first mover market advantage and enabling Ceres to enter domestic markets. Opportunities may also arise due to synergies between existing business operations and ‘sunrise’ sectors. In the biofuels space for example, large agri-business monoliths such as Cargill are exploiting their skills in agricultural supply chains, processing and distribution to take strong first mover positions. the Five Capitals Capital Comments Natural Potential to remove strain on environment. Human Potential for people to meet their needs without putting environmental at risk. Social Depends on the technology. Manufactured Increases the quality of physical assets in use. Financial Companies that find the right technology that meets a need will be successful. 17
  18. 18. MARKETS where they make their offer These strategies are about creating the right sort of demand in either a new or an existing market. improve transparency to protect brands in the market What? Protect brands in the market place, through improving transparency and engaging with stakeholders on material issues. Otherwise, brand equity can erode quickly when a gap between expectations and performance is revealed. A great deal of CSR work in the last decade has been about protecting or enhancing the company’s reputation. Typical steps to protect and enhance reputation include product stewardship; stakeholder engagement; CSR / sustainability reporting; cause-related marketing; philanthropic activities, community affairs and sponsorship. Protecting reputation cannot only be about the internal practices of the company. Campaigners will expect companies to use their influence over suppliers and others to change practice throughout the value chain. Why? Fundamentally, companies need a ‘licence to operate’ so they can be in the game to make profit. They are used to complying with the formal regulatory regime enforced by governments. Recent times have seen the rise of the ‘civil regime’31, where the company is also scrutinised by NGOs and other parts of civil society. The civil regime has grown on the back of increased communication and the retreat of the state. A company’s reputation has become more important in a globalised world, and more at risk. In a world where the consumer (or potential employee or prospective investor) has a great deal of choice, a brand or reputation that makes the company more likely to be chosen is critical. Customers and wider society also expect more from companies on sustainability, from fair treatment of workers in the supply chain to addressing climate change. Therefore companies need strategies to protect their reputation and ensure their actions are legitimate. In addition, evidence shows that staff respond to increased environmental / social performance. So a sustainability agenda is part of attracting top talent, retaining them through their career, and increasing their motivation and productivity32. Examples Nike has responded to bad publicity on working practices in its supply chain through a ‘product stewardship’ strategy that improved working conditions and reported transparently on its actions. The threat to the brand has declined. the Five Capitals Capital Comments Natural Transparency can drive better environmental practices through the supply chain. Human Transparency can drive better labour practices through the supply chain. Social Businesses can be better connected with their stakeholders (from customers to influential NGOs), and so have the opportunity for insight into and anticipate of their needs. Transparency can drive better community practices through the supply chain. Manufactured The brand (which is made by the company and so manufactured capital) is enhanced, and able to generate higher returns into the future. Financial Protection of investment and returns on brand and reputation. 18
  19. 19. create and grow new markets at the bottom of the pyramid What? Target new markets where non-consumption is the main ‘competitor’. At the bottom of the economic pyramid, four billion people earn less that US$3,000 in purchasing power parity terms. Here, companies are ‘competing’ against non-consumption, not other companies. Serving that market can create the scale with which to attack ‘top of the pyramid’ mature markets from below. Bottom of pyramid (BOP) strategies require innovation: a new way of looking at customers that leads to new products, new business models and/or new collaborations. This innovation is grounded in a thorough understanding of the customer, the operating context and the core competencies that a company can apply. Mainstream value chains are concentrated in the formal economy and are designed to serve defined market segments. In order to reach BOP consumers, companies are having to look outside their traditional zones to locate potential partners that have expertise and presence at the BOP. These are often non-corporate actors such as NGOs, village level institutions and public agencies. Co-creation strategies leverage the respective strengths of the company and the partner to co-develop and deliver suitable products33. Why? There are billions of people with unmet needs in emerging economies that are ill served by mainstream business. They often rely on inefficient and expensive informal products and services. The bottom of the economic pyramid – 4 billion earning less that US$3,000 in purchasing power parity terms – is gradually being seen as a viable market segment34. Companies that can innovate to meet BOP needs through offering attractive and affordable products will achieve exposure to a $5 trillion market opportunity35. Serving the BOP will bring scale and cost advantages that may also be transferred to mainstream markets and attack companies serving ‘top of the pyramid’ from below. These strategies also have the advantage of competing against non-consumption or informal providers and not an established corporate rival. From a sustainable development point of view, BOP holds the prospect of giving billions of people the means of choosing how they meet their needs. Over time BOP strategies must consider how to integrate environmental limits. But that cannot be a reason for halting the prospect of improving billions of people’s quality of life. Examples Hindustan Lever Limited (HLL) is part of the fast moving consumer goods company Unilever. HLL has explored the market of the rural poor in India by creating affordable soaps and shampoos. The new products were developed out of Unilever’s own core capabilities – top-class science and technology – together with a local NGO. As a result more than half of HLL’s revenues come from customers at the bottom of the pyramid. Unilever has been able to apply the learning from the venture to other parts of the developing world such as Brazil 36. Other examples include: • Vodafone has launched M-PESA - a mobile money transfer service operated in Kenya by Safaricom - that allows customers to move money via SMS • SMART Telecom in the Philippines is pursuing radical innovation BOP strategies by offering micro top-ups of electronic airtime, mobile-based money transfer, cash transaction and banking services delivered through a 1.6 million strong network of BOP micro-entrepreneurs. This contrasts with other mobile operators in developing countries who targeted only the top tier of the population using the same contract-based business model used in mature markets. 19
  20. 20. • Banks with BOP strategies include Citigroup, ABN Amro, Standard Chartered and ICICI Bank (India's second-largest bank - total assets US$ 56.3 billion). the Five Capitals Capital Comments Natural At the moment, most BOP strategies increase consumption of physical resources, and so add to the strain on natural capital. This is not inevitable, particularly if the products and services address environmental needs or are designed to have minimal impact. Human Opportunity to enable people to meet their basic needs and more. If done well, they can also be part of the supply chain and so improve their income. Social Positive: Institutions and cohesion benefit from people who have their basic needs met. Greater connections from company to others in order to create distribution channels. Negative: May reinforce patterns of consumption that are ultimately unsustainable. Manufactured Improve physical assets in use in people’s homes. Improve infrastructures for distribution. Financial Potentially lucrative, and transferable, for the company. Where people are part of the supply chain their enhanced income can add to local financial capital – creating a virtuous circle that promotes local economic growth. grow size and sophistication of demand in mature markets What? Increase the sophistication of consumer demand to shift customers from saying they’d like to buy ethically to actually doing so. Companies that proactively shape demand can respond to changing purchasing habits faster than their competitors. This approach requires a strong marketing led strategy. A marketing campaign or overall brand positioning will inform and raise consumer expectations on what performance to expect. At the same time the company needs to be able to fulfil the market demand it creates. The ‘vertical architect’ of the value chain (the company which controls it, and normally the one with a direct consumer interface) will have good ethical and environmental performance in place down the chain. To do so they will need to work with suppliers, often on a partnership basis, to get the performance needed. They may work with an NGO or other external body for added legitimacy, as part of the brand proposition. Why? Differentiating in mature markets is tough. Brand is critical, particularly in consumer driven industries, and aligning brand to fundamental needs or beliefs is key. There is evidence of people applying ethics in their shopping habits – consumption of ethical goods and services in the UK has grown 22 per cent year on year over the last 5 years reaching £29 billion in 2005, more than the collective retail sales of tobacco and alcohol37. People used to tell pollsters they wanted to shop ethically, increasingly they are doing it. 20
  21. 21. Companies that increase the sophistication of consumer demand can take advantage of, and accelerate, that trend. This strategy has the further advantage of shaping demand in a way that the business is better able to serve than its competitors. It is particularly relevant for: • those firms, new or old, in highly competitive markets with an increasingly savvy customer base that has a growing awareness of ethical issues • a marketing-led and consumer driven firm, not one that is driven by technology • a firm or products where the ethical and/or environmental housekeeping, internally and down the value chain, is already in place • those who have the ability to be ‘first-to-market’ with a specific proposition. A ‘me too’ strategy is unlikely to have the same level of competitive impact • where it isn’t too much of a stretch for an existing brand to re-orientate around these issues. Examples In 2005 Marks & Spencer launched a ground-breaking marketing campaign called ‘Look behind the label’ which informed customers of M&S’s long commitment on social and environmental issues such as fish sourcing, animal welfare, Fairtrade and reducing salt and fat levels in food. A Citigroup report in the middle of 2006 said that the campaign contributed to the ongoing sales recovery and would underpin M&S brand performance going forward. Cafédirect has achieved double-digit growth by making quality and fair treatment of producers (accredited by a fair trade label) central to its offer. Innocent has helped to deliver on its brand values by having high standards across a range of issues that support sustainable development: • they only ever make 100 per cent natural products that are ‘good’ for people’s health • ingredients are all procured ethically, based on strong ‘fair trade’ criteria • they use ecologically sound packaging materials • they reduce and offset carbon emissions across their entire business system • they give 10 per cent of their profits each year to charities in the countries where their fruit comes from. Their success has been applauded and awarded by the industry and media alike. In 2007, they won a European Business Award for their Growth Strategy, and in 2006 won the IGD Award for Supply Chain Excellence, and Brand Campaign of the Year at the Business XL Awards. As one journalist put it “it's no great surprise that Innocent has become one of the biggest zeitgeist brands of the noughties. Pick any right-on issue - food miles, kids' health, ethical trading, environmental awareness, and the smoothie-maker were championing it long before it became a bandwagon.” 38 Many new and old companies have taken this strategic approach: • the John Lewis Partnership has had a strong ethical stance for a long time, which is inherent in its partnership values. In early 2007, Waitrose supermarket was voted the UK's favourite retailer, narrowly beating its sister store John Lewis into 2nd place39 • the Co-operative Bank completes an annual customer value analysis that showed recently that the bank's ethical stance was worth £30m, or up to 24 per cent of its bottom line profit40 • Whole Foods Group – the US company based on providing natural and organic foods under the banner of ‘Whole food, whole people, whole planet’ entered the Fortune 500 last year with sales of over $5.5 billon41 . It is one of the fastest growing retailers operating in the US, Canada and the UK 42 and the world’s largest retailer of organic products 21
  22. 22. • Green and Black’s, the organic (and in part Fairtrade) chocolate company, was launched in 1991 and, after staggering growth, was bought by Cadbury Schweppes in 2005. Sales of the dually branded ‘organic’ and ‘premium’ chocolate were expected to reach £40 million in 2006. It is the fastest growing confectionery brand in the UK with annual growth of 61 per cent (in a sector growing at a rate of 1.8 per cent) and commands a market share of over 7 per cent.43 the Five Capitals Capital Comments Natural Reduced environmental impacts of products and services. Commits the company to a track of improving its (or its products’) environmental impact. Human Customers have more needs met. Often staff are attracted and motivated by public and substantial steps. Social Could be the first step out of unsustainable consumption patterns. Manufactured The flows of benefit from manufactured capital are better harnessed for more sustainable outcomes. Financial Revenue and profit growth for the company. sell services, not products What? Seek competitive advantage by meeting customers’ needs with services rather than products. This strategy brings sustainability benefits by shifting the mix of inputs away from energy or materials towards labour, and matches likely changes in the relative costs of materials and labour. Ultimately, a more sustainable society will be more of a service-flow economy, restructuring the industry and the consumer experience. A number of ways are emerging of selling performance44: • integrated lifecycle management of consumables like chemicals or energy • “Rent-a-molecule” services of catalytic goods • lifecycle management with modular design, standard components for durable goods like washing machines, and infrastructure. Why? Companies are undone when they focus too narrowly on the product or service they offer, rather than the underlying generic need – which may be met in a number of different ways. Rail companies, for example, are not in the business of timetabling and running trains but of transportation and mobility. Many wants and needs currently met through products can be met by services. Having a wider definition of the business that you are in presents opportunities to move from products to services – as long as you have access to the distinctive capabilities to pull off any re-definition. The coming shift in relative costs of inputs will accelerate a shift to services. It will increase pressure to get the most out of each atom and manufactured asset, and selling performance /service, rather than product, is a way of doing this. Ultimately, this sort of strategy is part of creating a service-flow economy, restructuring the industry and the consumer experience. It is a move from ‘take - make - waste’ to loops and extended lifecycles of ‘borrow - use and re-use - restore’. 22
  23. 23. Examples GSH is a facilities management company. They have an energy services business called Energyplus, which guarantees a five per cent reduction in energy costs from genuine reductions in consumption. GSH retain any cost savings beyond the five per cent, making for a profitable service business based on their core competence of engineering expertise. Novo Nordisk is redefining itself from a pharmaceutical company to ‘a leader in diabetes care’. It is exploring ways of selling prevention as a service, not just insulin as a product. This is an example of a service which has a profound, strongly positive benefit for individuals (i.e. human capital). As part of Interface’s drive to increase the inherent level of sustainability of their business, they have introduced the innovative Evergreen Lease™ system. In essence, customers can choose from the complete range of products and, in return for a monthly leasing charge, Interface undertake to supply, install and replace their products. They are not selling the carpet as a product; they are leasing it as a service45. The lease concept allows InterfaceFLOR to take back carpet tiles at the end of their life, for example to recycle them into new products. Streetcar provides a pay-as-you-go car service. Members can book any car in the fleet online or by phone, and then use the Streetcar smartcard to pick up and return the car. The fleet is distributed around London so that each car should only be 5 or 10 minute walk away. The members do not have to own a whole car, with all the expense and manufacturing impacts required. Instead people can meet their need for mobility with much less resource use. the Five Capitals Capital Comments Natural Potential to step out of ‘take-make-waste’ and so vastly reduce the strain on renewable resources, the use of non-renewable resources and the strain on sinks for wastes. Human The services themselves are meeting people’s needs and have very positive impacts. Opportunity for employment and skills enhancement from delivering the services. Social Can be part of the first step out of unsustainable consumption patterns. Greater and stronger connections within the business (in order to deliver) and from the business to the customer. Manufactured The flows of benefit from manufactured capital are better harnessed for more sustainable outcomes. Financial Potential for strong returns. 23
  24. 24. CONTEXTS that set the rules of competition Collaboration as strategy needs a little more explanation than the other categories we have identified. These strategies are positive ways to shape the contexts that set the rules of competition. An effective strategy creates a future in which you will be more successful. Leading firms often work to create a context that suits their needs. There are issues that need tackling that are beyond the firm’s boundaries and require a more collaborative approach. Often this means working with NGOs, competitors or supply chain partners. Classic game theory is at play here. Successful companies know when to compete and when to collaborate. Strategic collaborations offer opportunities to create a new positive sum game where all of the players can gain something from the taking part46. This can either work for a whole industry sector or can deliver differentiation or innovation for a multifaceted group who share the same interests but may well be operating in different markets. improve inputs, supply chain and infrastructure to protect current business What? Respond to threats with strategies that improve access to, and the quality of, inputs, supply chains and infrastructure. The particular activities will depend on the risks a company is exposed to. What to do includes: Human resources • Working with local NGOs to bring long-term unemployed into the workforce (reducing recruitment costs and enhancing retention) • Providing volunteering opportunities to staff (enhancing motivation, skills and retention plus wider reputation) • Providing healthcare for a fitter workforce Natural resources • Strong management systems, to demonstrate to local regulators that natural resources will be well used • Providing physical infrastructure that enables greater access to key resources such as clean water or energy Why? A company’s success relies on access to inputs at a good price, reliability and quality. The inputs cover47: • availability and quality of human resources • access to research institutions and universities • efficient physical infrastructure • efficient administrative infrastructure • availability of scientific and technological infrastructure • sustainable natural resources • efficient access to capital. 24
  25. 25. Sustainability issues pose risks to those inputs. Natural resources may decline, or governments may restrict access to them. The physical infrastructure in developing economies is usually weaker, hampering the performance of the company and the national economy. If staff are not getting the healthcare or education they need from the local authorities then the company’s performance will suffer. Companies exposed to these problems have strategies in place to protect and shape their business-critical inputs. Examples Unilever gets over two thirds of its raw materials from agriculture. Over the last ten years a sustainable agriculture programme has sought to secure the future of supply by implement supply chain standards that are derived by engaging with outside experts and producers and suppliers. The background work paid off when Tesco and Wal-Mart made their sourcing polices more stringent. Unilever was well placed to respond ahead of competitors. Carillion, one of the UK's leading support services and construction companies, addresses social exclusion and staff motivation by providing job centres on sites. Construction is a very fragmented sector, and workers are often looking for the next job. The job centres make for a more effective construction labour market – which is good for Carillion – while helping people find their next job. A further human resources example is Marriott48. They take chronically unemployed job candidates and provide them with paid classroom and on-the-job training. Marriot also support local community service organisations, which identify, screen, and refer the candidates to Marriott. The company benefits from lower costs of recruiting entry-level employees and a substantially higher retention rate than the norm. the Five Capitals Will depend on the particular inputs, supply chain or infrastructure that is being enhanced to protect the business. Capital Comments Natural Although rarely providing a radical breakthrough, does reduce company’s impact on environment. Human Where addressing labour inputs to supply chain. Social Where addressing community-related inputs to supply chain. Manufactured Where addressing infrastructure underlying supply chain. Financial Protection of investment and returns on current business. seek regulation that rewards responsibility What? Form industry clusters, sometimes with unlikely partners, to seek regulation that rewards responsibility and creates a level playing-field. Taking the lead provides an enhanced platform for progressive businesses to innovate and differentiate. Whilst individual firms usually have their own lobbying activities, this strategic approach tends to work in appropriate clusters. Industry voices either come together or are brought together on a particular issue. This might start with a concern of one company, or a concern of a convening NGO. The group then uses the industry voice to demand regulation that creates more win-win situations. 25
  26. 26. What the coalition does will depend on the issue. There are four main approaches to take: • ask for market based interventions that minimise the cost burden on a sector or value chain • highlight outcomes that limit unintended consequences • ask for a clear direction from government to reduce uncertainty to aid investment and planning • request a framework or principles that are stretching over time, to increase the competitive playing field. Importantly, these sorts of approaches need to support innovation, not compliance. Why? Regulation sets the context within which business makes money. Regulation creates a level playing-field for an industry and provides an enhanced platform for progressive business to innovate and differentiate. Therefore, it can be in companies’ interest to seek regulation for sustainability. This is true when there is a significant threat to resources required for production, or to the existence of the industry sector. It is also true when there is a prospect of free riders. Companies can shape regulation in a way that puts them at an advantage compared to their competitors. Examples The Corporate Leaders Group on Climate Change, convened by the University of Cambridge's Programme for Industry, is a group of major UK and international business leaders who come together to push for Government action on Climate Change. The group began with a letter to the UK prime minister asking for a break in the deadlock on tackling climate change in which “governments feel limited in their ability to introduce new climate change policy because they fear business resistance, while companies are unable to scale up investment in low-carbon solutions because of the absence of long-term policies.” Specifically the group asked for investments in low-carbon technologies to be scaled up now to meet long-term targets for emission reductions, and for investment in a low-carbon future to be seen as a strategic investment for their companies and for United Kingdom plc as a whole. The group are now working in partnership with the Government to develop a world-leading policy framework on climate change and to engage the business community more widely. A second letter continues to encourage “bold steps in preventing climate change” to support the next round of negotiations of the EU Emissions Trading Scheme. The Climate Group is another collaborative initiative that combines cities and companies to take action on climate change. the Five Capitals Will depend on the issue. Capital Comments Natural Where regulation provides incentives for improving performance for this capital. Human Where regulation provides incentives for improving performance for this capital. Social Where regulation provides incentives for improving performance for this capital. Manufactured Financial Opportunity for financial returns to line up with sustainable future. 26
  27. 27. strategic alliances to address business-critical issues What? Join forces with a range of organisations, companies, suppliers and sector bodies to tackle strategic and operational challenges that are too big for one business to deal with alone. There are a number of different sorts of strategic partnerships. What they have in common is their desire to find a solution to a specific challenge. They tend to be cross-sector collaborations that bring together companies, NGOs and sometimes government to find a market-based solution to a particular problem. Outputs can be codes of practice, standards and product labels and new approaches and/or markets. Some partnerships sit with specific players within the value chain. Business-wise, there has always been sense in working with suppliers to enhance the value of a product. This sort of approach seeks to stretch the benefits of this to find more creative collaborations. In this sense, practice on sustainability-related partnerships is mirroring the growth of long-term relationship approaches in innovation and supply chains, for instance in outsourcing. For those issues that are fundamental to the continuance of an industry, sectoral cooperation often relies on a trusted organisation, like a trade association, taking a lead. The precise activities are very dependent on the nature of the sector and the risk it faces. Why? There are some issues that have a bearing on strategic and operational effectiveness, that are too big for one business to deal with (sustainable resource use, child labour or climate change are examples). Through partnerships with a range of organisations, companies, suppliers and sector bodies can find different and innovative solutions to sustainable development challenges. There are circumstances where a whole industry is facing a reputational threat or resourcing challenge that does not lend itself to competitive differentiation. Issues like labour standards or corruption are reputational challenges that consumers would expect everyone to be addressing; or resourcing issues that will damage a whole industry’s competitiveness. These are issues business need to address on a sectoral level as a matter of survival. Thematic partnering offers the opportunity to reframe the competitive environment to create something new that changes the marketplace. These sorts of alliances with stakeholders also offer companies insights into up and coming tricky issues and opportunities. Cross-sector partnerships can raise standards, sharing the developmental costs and the risks, but also create the circumstances where a solution will be adopted due to greater buy-in. This strategy is particularly relevant for: • companies facing a long-term, large issue that cannot be addressed by one organisation but where collaboration with other sectors might offer some differentiation • consumer facing brands that are challenged on their key issues in the marketplace, and are able to find a market based solution • companies that have existing relationships with other sectors (such as charities) and are open to their point of view • industries experiencing a reputational threat to a whole industry that requires a collaborative approach to avoid a public backlash, move to alternative products or regulation. 27
  28. 28. Examples The Forest Stewardship Council (FSC) arose from collaboration between NGOs like WWF and a group of timber users and traders, including B&Q. Despite coming from different perspectives, everyone involved appreciated the benefits of an honest and credible system for identifying products from well-managed forests. The FSC now certifies some 12 per cent of the world’s commercially-managed forests, helping safeguard the future of the timber industry. Many strategic alliances go wider than this with companies joining up with NGOs, academic researchers and other players in the sector to create a positive sum game, where all players get some benefit. The Sustainable Food Laboratory focuses on creating a wider cluster to tackle the unsustainability of global food chains. It aims to bring sustainable agricultural practices into the mainstream and was initially convened by Unilever, Oxfam and W.K. Kellogg Foundation. They brought together businesses, NGOs and government to understand the problem, create a shared vision for the future and develop new policies and practices. For Unilever, a business that relies heavily on natural resources for success, this is important strategically. Water shortages and unsustainable food supply chains threaten the future growth of its business. Working with Oxfam, whose goal is to use agriculture to help relieve global poverty, provides fresh thinking and convening power that has led to a powerful coalition unthinkable within corporate boundaries. This project is a work-in-progress but promises innovations in the supply chain, new standards and increased demand for sustainable agriculture. Wal-Mart have used ‘sustainability value networks’ of partnerships to plan what is possible (and necessary) in their forward strategy. Looking to industry survival, the International Council on Mining and Metals49 (or ICMM) was formed in October 2001 to represent leading international mining and metals companies. Its vision is a “viable mining, minerals and metals industry that is widely recognised as essential for modern living and a key contributor to sustainable development.” The ICMM’s members believe that by demonstrating superior business practices they will gain preferential access to land, capital and markets, thus contributing to high equity values and enabling recruitment of talented employees. ICMM was formed following an unprecedented effort by an industry sector to conduct independent outreach and arrive at a frank and comprehensive understanding of the issues it was confronting. The conclusion was that it needed a body like the ICMM to address the risks it faced. the Five Capitals Capital Comments Natural Where regulation provides incentives for improving performance for this capital. Human Where regulation provides incentives for improving performance for this capital. Social Where regulation provides incentives for improving performance for this capital. Manufactured Financial Opportunity for financial returns to line up with sustainable future. 28
  29. 29. 4 key approaches to integrate sustainability into strategy Leader Businesses develop the right combination of strategies by bringing sustainability into their strategy process in different ways. PLAN strategy to include future trends There are any number of strategy planning methods, from Balanced Scorecard to Managing for Value. However, they all have similar stages: identifying issues, diagnosing, finding solutions, and then realising them. Each stage has specific elements. These stages are shown in the diagram below (based on de Wit and Meyer 50 ). Agenda Setting External Assessment DIAGNOSING IDENTIFYING Filter mission through Understand the structure What is the nature What is the problem? worldview & culture & dynamics of context of the problem Internal Assessment Mission Setting The capabilities & functions of Enduring principles & purpose the organisation Performance control Option Generation 1. Realised actions as intended The potential ways forward 2. Consequences as expected Action taking Option selection CONCEIVING REALISING From intended to Evaluate to choose Who should the What action? realised action problem be addressed? Most businesses do not address all the elements each year. For instance, the mission will be set early on and rarely re-written. The worldview and culture through which an organisation identifies problems will be firmly embedded. The regular strategic planning process moves through the right hand side of the diagram: External Assessment; Internal Assessment; Option Generation; and Option Selection. When setting the future direction of their business, companies can incorporate sustainability into their strategic planning cycle in three ways: • introduce material sustainability trends to the external assessment of the structure and dynamics of the business context • use Leader Business strategies as a starting point for generating options about ways forward • pay attention to any unintended biases when selecting options to take forward. 29
  30. 30. Injecting sustainability into the planning process does not take place in isolation. It is usually preceded by work preparing the ground: • awareness raising so that agenda is open to sustainability • building internal capacity to act on sustainability • having sustainability metrics in place for performance control • even, asking whether the mission is compatible with a sustainable future. case study First Choice (now TUI Travel PLC) are a tour operator with a mix of businesses, from the traditional package holiday in Spain to wide-ranging holiday activities that are targeted at different audiences under different brands. First Choice is a leading practitioner and proponent of sustainability in the tourism sector, including being a Forum for the Future partner. The CSR team have a strong champion at board level, a record of delivering useful outcomes and connections across the business. In 2005 they approached Forum for the Future about how to bring sustainability into their strategy. First Choice use a recognised strategic planning framework known as "Managing for Value". The steps are: • Establish the Fact Base (equivalent to External Assessment) • Issues and Alternatives (which has sub-stages for Internal Assessment and Option Generation) • Review and Evaluate (Option Selection) • Implementation (Action Taking). The Fact Base was strong on demographics and market trends, but it did not include issues like climate change or water shortages at resorts. We worked with the Executive Directors and their direct reports to identify what the key sustainability issues are for First Choice. In order to evaluate, First Choice use a Value At Risk (VAR) model, which takes the forecast cash flows of an option and turns them into a Net Present Value. In effect, options are prioritised according to their contribution to shareholder value. With the cooperation of the finance department, we were able to use the VAR to show that issues like climate change were material to the share price and of a similar financial scale to other strategic decisions the business was making. The recommendations at the end of the process were about injecting sustainability further into their core strategy. They included a ‘look behind the label’ type campaign to make customers aware of the sustainability challenges that tourism faced and to convince them that First Choice was the company they could trust to deal with them. First Choice has just launched the World Care fund51 and a marketing campaign that highlights the impacts of tourism and what they are doing about it. Things like incorporating sustainability measures in performance criteria and using sustainability to drive product development and investment decisions were also recommended. MANAGE how opportunities are defined and selected In most organisations there is the plan, and then there is what happens. Putting any strategic plan into action means changing how opportunities are defined at the ‘coalface’ and selected by managers, and then re-allocating resources appropriately52. Leader Businesses can manage sustainability into strategy by: • setting the strategic direction by giving clear signals of intent, including announcements and symbolic actions. People at the ‘coalface’ can now identify and define sustainability-related opportunities. • setting a structural context where opportunities that are on-strategy are favoured. These can be formal, like performance targets, or informal, like promoting people who have pushed commercial sustainability-related activities. 30
  31. 31. case study Many companies have a CSR risk register, but why not an opportunity register? Recently we have been working with a telecoms company as they use the notion of an opportunity register to bring sustainability into strategy formation. The central strategy planning department have a way of recording opportunities. It is a three by three matrix. The vertical dimension asks, “How well does the idea fit with our current capabilities?” The more the idea needs a new technology, a new market, a new channel to market and so on, the less good the fit. The other dimension is, “When will the market demand this?” Historically, the matrix has been filled in two ways. First, by asserting beliefs about the future – “we will live in a wireless world in five years” – and imagining the resulting opportunities. The other way is to fit in the ventures which are bubbling away in the business. The matrix tries to ensure there is a balanced portfolio of ventures by having: some which are a close fit and nearly demanded; some which will need a stretch but are a few years away; and a small number of belief-driven opportunities in the long term. As the company selects which opportunities to pursue it selects particular capabilities to stretch, and lets others wither. Over time, those choices become a strategy as people make sense retrospectively. Telecoms Co is trying to add a sustainability dimension to the process in two ways. First it is drawing out the sustainability implications of a host of near-term opportunities. Taken together, these allow the CSR team to tell a story to senior management that sustainability opportunities are beginning to emerge and deserve support. The second is by using the beliefs to imagine longer-term opportunities. Consider a belief that we will move towards a low-carbon economy in the next five years. The potential opportunities for a telecoms firm are vast: services that substitute for travel; offering a consultancy service which reduces office carbon emissions by enabling home working, and reducing expensive office space. The central strategy planning department has been engaged in the process. They have begun to see the long-term opportunities. A reinforcing loop is being created where people expect there to be opportunities from sustainability and so try to define them. EXPERIMENT to learn and to create options The world changes fast, and so do the commercial opportunities of sustainability. To keep your options open and identify the best approach, it makes sense to initiate a range of deliberate and contained experiments. The experiments could be a new product message, a new product, or a whole new business. Such experiments give you the chance to test different approaches without committing the entire business. Learning is the success factor - even if you lose money, you will know how to do it differently next time. Evolving a portfolio of experiments is loading the dice: make lots of small bets until ready to amplify successful experiments – then make larger bets. Any of them might be a surprise that leads to a strategy. Instead of thinking them out in advance, you can get people on the ground to come up with them.53 case studies A global electronics giant used a staff competition on new sustainable business models in emerging and developing markets. Staff submitted project proposals that met criteria of being profitable, and creating environmental benefits and social value. The aim is to establish a range of innovative commercial possibilities, a few of which will become the successes of the future. Morgan Stanley decided to let one person experiment with microfinance, resulting in $100m bond issue, which provided capital for 100,000 micro-entrepreneurs. Morgan Stanley are now growing a specific business unit. 31
  32. 32. Proctor and Gamble allowed one brand manager a year to investigate sustainability and their brands. They added an energy efficiency message to the Ariel washing powder brand. The result was increased sales of Ariel - plus internal learning that sustainability sells if framed appropriately. Venture capital arms are one way to generate a portfolio of experiments. Above we mentioned a number of companies who are using this approach: Shell Ventures, Chevron Technology Ventures, GE, Siemens, BASF and EDF. bringing it all together Forming and implementing strategy is a continuous process, which often combines all the elements we have described above. The case study below follows the story of Unilever’s approach to sustainable agriculture over the last decade. case study Unilever are one of the world's leading suppliers of fast-moving consumer goods with global brands like Knorr and Flora plus operations around the world. Over two thirds of Unilever's raw materials come from agriculture, from palm oil to tea. Starting in the late nineties, Unilever have undergone a strategic change on how they source their agricultural products. The story shows the interplay between ways of exploring the right combination of strategies on the one hand and the different Leader Business Strategies, especially collaborating to create a more successful context, on the other. In the 1990s Unilever planned strategy to include sustainability trends by bringing in the insights of external agricultural specialists and opinion formers. The Chairman became convinced that sustainable methods in farming were part of securing future raw material supplies from many different countries and climatic zones. This strong signal, combined with the timely external advice on how to develop sustainable agriculture principles and indicators, changed how senior managers defined and selected opportunities on how to source raw materials. It also provided the space to bring in stakeholders to help Unilever develop their sustainable agriculture programme from 1998 onwards. Unilever experimented with a number of pilots working with farmers and key NGOs on specific crops (spinach, vining peas, tomatoes, palm oil and tea) which were significant to Unilever and where they could influence practice. The pilots were a testing ground for the principles and indicators, as well as collaborating with producers and suppliers. Unilever continued to explore sustainability at a group and country level, including setting up the Unilever Sustainable Development Panel (which includes one of Forum for the Future's Founder Directors). Together these provided further support to programmes on sustainability, including agriculture, and influenced how resources were allocated. Unilever also established a specialist panel – the Sustainable Agriculture Advisory Board – that provides top-level advice and strengthens strategy formation on environmental impact of primary production, safeguarding local infrastructure and stakeholder well-being. Unilever have been rolling out standards and protocols that change producer and supplier behaviour across their key crops. The investment of $20m in core expertise has been bearing fruit. First, key marketing staff in Unilever became convinced of the opportunities of working on sustainable agriculture when in 2005 and 2006 two of the world's largest retail chains, Wal-Mart and Tesco, decided to change their sourcing policies to include sustainability criteria. Unilever were wonderfully positioned to immediately meet or exceed the requirements, strengthening their relationship with key distribution channels. Second, Unilever have committed to purchasing all their tea from sustainable ethical sources - a differentiator in the market others will struggle to match in the near-term - again collaborating with a third party (the Rainforest Alliance) for credibility and expertise. The story has Unilever exploring how to improve the inputs, supply chain and infrastructure of their business. The strategic change came combining planning that included sustainability trends, managing how opportunities were defined and selected and experimenting with pilots. Unilever have collaborated with their suppliers, experts and NGOs to address issues that are too big for them to address alone. Finally, the investment to address issues 'hidden' upstream in the supply chain has positioned Unilever to anticipate first their retail channels and then their customers. They have a head start in profiting from the move to more sustainable consumption patterns. 32

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