Long-Term Growth, Short-Term Differentiation and Profits from Sustainable Products and Services


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Long-Term Growth, Short-Term Differentiation and Profits from Sustainable Products and Services

  1. 1. Long-Term Growth, Short-TermDifferentiation and Profits fromSustainable Products and ServicesA global survey of business executives
  2. 2. It is clear that sustainability is becoming integral to theway to do business. Many companies are demonstratingthat by placing the stewardship of the environment andsociety at the centre of their strategies and operations,they are better placed to manage or improve theirreputation, comply with regulations and reduce costs.Perhaps more interesting is the fast emerging trend ofsustainability being seen as a source - even the source -of revenue and business growth.Among the explanations for this growing trend is theand permanent constraint on resources combined withthe impact of the emissions debate, which are helpingto establish a platform for entirely new products andservices, such as distributed renewable energy or electricvehicles. Meanwhile, in many emerging markets, there isa growing recognition that alternative, more sustainableprocesses and materials are required to avoid traditionalpractices choking off growth prospects in a range ofindustrial sectors. And weak economic growth in manymature economies today is resulting in an urgent needto identify new sources of revenues and the consequentsearch for new sustainable product and servicescategories. In that respect, the strength of sustainabilitytrends in emerging markets is particularly revealing.Accenture commissioned a survey of 250 seniorexecutives in eight markets around the world to explorethe relationship between sustainable business andcommercial growth. The survey covered the UnitedStates, Japan, Germany, France and the United Kingdom,as well as China, Brazil and India. It explored a numberof questions: which markets are more committed tosustainable business strategies? Do business leaders seesustainability as an opportunity or a risk? Do they see it asa driver of new revenues or costs? Are they able to meetgrowing customer demand and what operational effortsare they implementing to do so?1
  3. 3. To what extent do you agree or disagree that sustainability is vital to the futureSustainability is of significant Figure 1: How important to your business is sustainability? (%) growth of your businessimportance to businessesFor the purposes of the survey, 7 2 12Accenture defined sustainability as acompany’s effort to drive profitable 20growth while achieving a positive 36economic, social and environmental 45impact. As one would expect, based 48on that definition, more than ninein ten business executives believethat sustainability is of significant 48 63importance to their business, accordingto the data in figure 1. 48 percent sayit is very important and 44 percentsay that it is critical to their business. 64The geographic divergence is stark 52and revealing. Almost two thirds of 44decision makers in emerging markets 32say that sustainability is critical to 25business, versus just under a thirdin Japan and only one quarter in thelargest European markets (Germany, Among all US Japan European EmergingFrance and the United Kingdom). We markets marketsalso asked executives how importantthey believed sustainability is to their Critical Very important Somewhat importantcustomers. The responses were more Not very important Not at all importantor less in line, market by market,with the perceived importance of Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=75sustainability to their business.Sustainability is vital to future growth Figure of thewhat extent do you agree or disagree that sustainability is vital to Which 2: To following are your focusing your growth oriented sustainableFigure 2 shows that 78 percent of the future growth of your business? investments?respondents agree that sustainability 1is vital to the future growth of their 5 5 5 10 8business. Emerging market executiveswere most in agreement, while only in 17Japan did that sentiment drop below 70 13 21percent. Just 5 percent of respondents 32overall disagreed with the statement.The figures could help explain why, ina different question, we found thatalmost eight in every ten executivesview sustainability as integral to theirbusiness. The most significant fact 91is that only 21 percent of executives 78 77globally see sustainability as peripheral. 73This is markedly less than the 32 percent 63who saw sustainability as peripheral in asimilar survey we conducted in 2011.1 Among all US Japan European Emerging markets markets Agree Neutral Disagree Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=75 2
  4. 4. Shift to demand driven sustainable investmentsPerhaps the most optimistic finding concern for the environment and society It is interesting to note how sentimentsfrom the survey was the extent to which comes second, capturing 17 percent have shifted since 2010, whenbusinesses now appear to accept that of first votes, closely followed by the Accenture and the United Nationssustainability is a commercial necessity, desire to drive business growth, which Global Compact conducted research ofwhereas in the past, compliance and attracted 16 percent of first choices. CEOs for the New Era of Sustainability2cost considerations were dominant. research report. The leading motivatorConsumer demand is the primary driver Significantly less important are for CEOs to take action on sustainabilityof investment in sustainable initiatives regulatory requirements (with just eight in 2010 was brand and reputation.today, according to figure 3. Sixty percent of respondents identifying this 72 percent of CEOs cited this factor,two percent of respondents see it as as their business’ primary motivation), versus only 39 percent who pointed toa reason for investing in sustainability reducing energy and material costs customer demand.and almost a quarter (23 percent) cite (seven percent) and pressure from staffit as their primary motivation. Genuine and recruits (four percent). Which of the following reasons best describe why your business And what is the single most important motivation to is investing in sustainable initiatives? (%) investing specifically in sustainability related activities? (%) Consumer/customer expectation 62 23 Drive business growth 60 16 Genuine concern for 52 17 environment/society Reputation/brand/trust 51 9 Competitive differentiation 48 10 Regulatory requirements 41 8 Reducing overheads such as energy 29 7 and materials cost Investor pressure 23 7 Staff and recruitment pressure 22 4 Base: Total=224Sustainability investment targets growth more than cost cuttingTo clarify the focus on growth, we this option, versus just 18 percent who but perhaps also demonstrate thepresented respondents with a clear chose efficiency savings, demonstrating degree to which efficiencies havechoice: on balance, is their current their long term commitment to already been achieved in recent years.sustainable investment primarily focused establishing market leadership. This ison driving growth or driving efficiencies consistent with a trend Accenture is It is interesting to note that, when weand cost cutting? As figure 4 shows, seeing with Accenture Sustainability asked the same question of the likelywhile over a third opted for both being Services clients, who are increasingly situation in 2017, there is a slightof equal significance, almost twice as calling upon our services to understand shift towards efficiency savings. Onlymany chose growth over efficiency how and where sustainability can serve decision makers in Europe believe thatsavings (41 percent to 22 percent). as a lens for growth and innovation. their sustainability investments will beOnce again, emerging market companies more geared to growth in 2017 thanappear to be more committed to More generally, these figures not only they are today.sustainability as a lever for growth. reflect the extent to which businessesExactly half of respondents opted for see growth potential in sustainability,3
  5. 5. Figure 4: Onis your current sustainable investment primarily to aid growth orgrowthefficiencies and cost cutting. (%)On balance, balance, is your current sustainable investment primarily to aid to aid or to aid efficiencies and cost cutting? (%)Among all 41 37 22US 36 48 16Japan* 46 27 27European markets 32 37 31Emerging markets 50 32 18 Investing for growth Both equally Investing for efficinecy savings and cost cuttingBase: Total=224; US=56; Japan=26; European markets=68; Emerging markets=74*Note small base size are indicativeMarket expansion now leads the Figure 5: Which of the following are you targeting your sustainable investments to Which of the following are you currently currently targeting your sustainablesustainable growth agenda investments in order to achieve growth? (%) achieve growth? (%)When we asked executives how they planto achieve growth from their sustainable Expanding into new markets 60 US 49investments, almost half (49 percent) Japan 53*cited efforts to develop new revenue Developing new products instreams in existing markets (see figure existing revenue streams 54 European markets 605). This would include the introduction of Emerging markets 70new services. Fifty four percent said they Developing new revenueare currently developing new products streams in existing markets 49in existing markets. Both these point tothe opportunity to enjoy growth while Marketing to sustainability- focused customers 48remaining in their traditional zone ofcommercial comfort. Above all however, Maintain partnerships withmost businesses (sixty percent) appear 46 environmental organisationscommitted to expanding into newmarkets altogether. This reflects a strongrecognition of the potential strength Sustainable supply chains 40of market demand for sustainableproducts to open entirely new doors and Sustainability talent and skillsopportunities, either to new product initiatives 37areas or to new geographical markets.Our recent client experience shows this Sustainability based innovation 29happening not just in emerging industrialeconomies, like China or Indonesia, but innewly emerging economies. Our work with Targeting new customers 28Vodafone3, for example, demonstrateshow the use of mobile technologies canboost incomes and cultivate sustainable Only use Fair Trade suppliers 20markets among smallholder farmers inrural areas of regions such as sub-SaharanAfrica. Accenture’s Convergence Economy4 Base: Total=174; US=47; Japan=19; European markets=47; Emerging markets=61report explores these issues further. *Note small base size are indicative 4
  6. 6. Sustainability is an investment, not Figure 6: Dospending on sustainable sustainable initiatives as anor a cost? or Do you view you view spending on initiatives as an investment investmenta cost a cost?Another way of probing executives on Among all 83 17their commitment to sustainability is onthe question of whether the efforts andfinancial commitments they are makingare seen as an investment or a cost. Theanswer indicates whether businesses arespending to tick boxes on compliance US 88 12and minimal expectations of corporatesocial responsibility, or whether theyare sinking shareholders’ cash togenerate returns in the short or longterm. According to figure 6, 83 percent Japan 42 58of respondents opt for the latter. Theysee spending of sustainable initiativesas an investment, not a cost. There islittle difference between geographical European 87 13markets, with the exception of Japan, marketswhere the need to rebuild basicinfrastructure may be diverting attentionaway from the commercial opportunitiesof sustainable investments. Emerging 97 3 markets An investment A cost Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=75It is more expensive to be sustainable Figure 7: To what you agree or disagree that it is more expensive to be sustainable To what extent do extent do you agree or disagree that it is more expensive toIt is at this point that the survey be a business as a business? as sustainableresults begin to qualify what has,until now, been a good news story. In 10 16 16 15 20figure 7, we asked executives if theyagreed that it’s more expensive tobe a sustainable business. More thanhalf (fifty six percent) agree with the 30proposition. Only 16 percent disagree. 27 25 31And for once, all geographies, including 24Japan, fall into line with each other. Formost businesses, costs will likely riseas sustainable investments are madeand as externalities are internalized.The reality in the long run is that itwill be more expensive to operate anunsustainable business. So the question 58today is whether businesses have made 56 60 54 56any progress on generating a return ontheir sustainable investments. Among all US Japan European Emerging markets markets Agree Neutral Disagree Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=755
  7. 7. Margins are lower on sustainable Many companies have clearly not their core operations, supply chains andproducts and services matched their appetite for ‘sustainable procurement functions up to speed withAccording to figure 8, it appears that growth’ with a capability to achieve their market facing capabilities. Or putmany businesses have apparently it profitably. That suggests that more it another way, perhaps companies havefailed to generate sufficient returns. efforts need to be made to invest in their heart in a future of sustainableForty nine percent say that margins operational skills, infrastructure and products and services, but have yet toare lower on sustainable products and processes that enable business to keep get the rest of their body into shape.services. Less than one fifth (19 percent)dissent from that view. In short, this Figure 8: To what you agree or disagree or disagree that margins are lower on To what extent do extent do you agree that margins are lower on sustainablemeans that, on current measures, the products and services? sustainable products and services?investments of half of businesses arenot commercially viable. 5 19 18 20There are two possible explanations: The 27volume or the respective market shareof sustainable products is insufficient 31 28 60 16to reach similar productivity levels as 33for existing portfolios. Alternatively,the production of sustainable productsis intrinsically more expensive,which is often the case for productsreengineered to be more sustainable, 49 54 58as opposed to sustainably designed 47products and services. In any case, 35continuing in this vein inevitably meansthat companies’ enthusiastic approachto sustainable markets cannot be Among all US Japan European Emergingjustifiable to investors in the long term. markets markets Agree Neutral Disagree Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=75Customers are not willing to pay more Figure 9:extent do extent do or disagree or disagree that your customers are not To what To what you agree you agree that your customers are not willing to pay willing tosustainable for sustainable products and services? more for pay more products and services?While supply side factors may explainlower margins, so too may the perceivedreticence of consumers to pay more 7for sustainable products and services. 25 30 25According to figure 9, 47 percent of 32respondents said that customers are notwilling to dig deeper into their pockets.And this is the same across the board 45in all markets. It is clearly the case thatthere is a limited segment of sustainable 28 28product early adopters who are willing 25 20to pay more for sustainability attributes,attributes that either derive fromadvanced production and supply chaincredentials or from a product’s abilityto improve the consumer’s own energyusage, for instance. It is surprising, 48however, that as many as a quarter of 47 45 47 48executives think consumers are willingto part with more cash for sustainableproducts and services. Among all US Japan European Emerging markets markets Agree Neutral Disagree Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=75 6
  8. 8. Companies defy consumers by Figure 10: To what extent do you agree or disagree charge a price charge a price To what extent do you agree or disagree that you can that you can premium forcharging more premium for sustainable services? and services? sustainable products and productsIt would therefore appear equallysurprising that companies say they 10 10 8 11can charge a premium for sustainable 17products and services despite almosthalf holding the view that customers 21 23are unwilling to accept such prices 29(see figure 10). The findings appear to 27confirm the hypothesis that for many 55market segments, the product andservices offerings are still targeting aminority premium segment and not thefull market. 67 70 60 56 36 Among all US Japan European Emerging markets markets Agree Neutral Disagree Base: Total=250; US=60; Japan=40; European markets=75; Emerging markets=75Charging 19 percent premiums on examples of other sectors, notably demonstrated. Equally, however, theaverage the consumer technology industry. often low margins experienced by many Consumers expect increasingly television manufacturers shows thatAccording to the data in figure 11, advanced products and services competition can soon erode premiumcompanies say they can charge an at the same or ever lower prices. margins on new product categories.average of 19 percent premium prices Innovative and exciting products canfor sustainable products and services. command higher prices, as Apple hasMore than a fifth, (22 percent) claimto be able to charge in excess of 20percent. The figure is marginally higher Figure 11: What price premium can you charge for sustainable products andin both the US and emerging markets services? (%) What price premium can you charge for sustainable products and services? (%)for this top level of pricing. Average %It is reasonable to argue that, with the 19% 24% 14%* 15% 12 19%exception of products and services that 5 7 2 4 10are niche, clearly offering added value 23 17 20or representing genuine innovation,the market for purposely designedsustainable alternatives will not likelycommand premium prices in the long 69 86run. Given that consumer marketsfor sustainable products and services 68 62 68are fast maturing, there is a dangerthat those who adhere to premiumpricing as a core strategy may face therisk of ceding market share to more 17competitive players or hampering the 9 5 7 8rhythm of market transformation. Among all US Japan European Emerging markets marketsWhen considering the mass consumermarket for sustainable products and Less than 5% 5%-20% 20%-50% More than 50%services, companies could look to the Base: Total=149; US=40; Japan=14; European markets=42; Emerging markets=53 *Note small base size are indicative7
  9. 9. Demand for sustainable products and Figure 12: What extent do youdisagree that customers are not currently To what extent do you agree or agree or disagree that customers are notservices set to grow demanding sustainable products as much as we expect in the future? currently demanding sustainable products as much as you expect in the future?When we asked executives in whatdirection companies think demandfor sustainable products and services 17 23 22 23is headed, it is clear they see further 29growth. Figure 12 shows that justover half think that customers arenot currently demanding sustainable 17 25products as much as they will in the 22 11future. Other data from the surveyindicates that, on average, 34 percent 42of the customer base is expected byour respondents to demand moresustainable products and services in fiveyears time. This normalized demand for 62 60sustainable products and services will 56 58accelerate the move away from ad hocsustainable offers. 35 Among all US Japan European Emerging markets markets Agree Neutral Disagree Base: Total=250; US=60; Japn=40; European markets=75; Emerging markets=75Responding to growing demand Which of the following sustainabilitysustainability related activities have you done Figure 13: Which of the following related activities have you done to respond to customerto respond to customer demand? in order demand?Beyond an early recourse to premiumpricing, how are companies responding Have done Have plans to doto growing demand for sustainableproducts and services? Above all, they Promoted existing sustainable credentials 44 43have already begun to promote theirexisting sustainable credentials andlaunched new product lines, accordingto figure 13. They have also checkedtheir supply chain credentials: vendors,storage and transportation. And when Launched new sustainable product lines 43 44asked what plans they have for thefuture, the priorities appear to remainthe same. Checked supply chain sustainability credentials 41 40 Set procurement policies to exclude non-sustaibable suppliers 37 36 Targeted non-sustainable focused consumers 28 32 Base: Total=250 8
  10. 10. Many companies cannot keep up To what extend do you agreeyoudisagree that you cannotyou cannot keep up with Figure 14: What extent do or agree or disagree that keep up with customerwith demand demand for sustainablesustainable products and services? customer demand for products and services?These actions may not be sufficient,however, and may explain why somecompanies are unable to keep up withdemand. Figure 14 shows that over a 25third (37 percent) claim to face this 36 35 36dilemma, while a similar proportion 44appears to be satisfied that they canmeet demand. In emerging markets,however, a substantial 44 percent saythey cannot keep up with demand.This dilemma is likely to be caused by 26 27 27 52 12lower productivity of more sustainableproducts and services, controlledinvestment in the face of lower marginsor the still emerging capacity for thedevelopment of more sustainableproducts. If companies are to improve 37 44 37 38their ability to keep up with demand,they will need to skew their efforts 22away from improving their credentialstowards improving the efficiency andagility of their core operations. Among all US Japan European Emerging markets markets Agree Neutral Disagree Base: Total=250; US=60; Japn=40; European markets=75; Emerging markets=75Social media and digital technology to Figure 15: To what extent are you using social media and digital technology toengage with consumers directly engageare you using social media the sustainability of yourdirectly engage To what extent with your customers on and digital technology to products andAs companies strive to understand their services? customers on the sustainability of your products and service? with yourcustomers better and gain a competitiveadvantage in the realm of developing 8 4 10 18 12and delivering sustainable productsand solutions, the use of social media 20and technology will be important. 26 25 25According to figure 15, well over half ofrespondents say that their companiesare using these technologies to engage 40with consumers about their portfolioof sustainable products and services.Globally, 8 percent claim to be using 60social media and digital technologies 56 60to directly engage with customers on 56all sustainable products and services,though this figure doubles in emerging 43markets, once again demonstrating thepioneering efforts that some of these 16businesses in high growth economies 8 7 7are making. In a separate question, datareveals that 72 percent of respondents Among all US Japan European Emergingsay social media will have a positive markets marketsimpact on sustainability by giving Not all all To a limited extent To a great extentconsumers more influence, with 86 We are using social media to directly engage with your customers on all products and servicespercent of companies in emergingmarkets agreeing with this statement. Base: Total=250; US=60; Japan=40; European Markets=75; Emerging Markets=759
  11. 11. Recommendations forprofitable growthThe survey shows that most companies into different consumer groups, This will require new forms ofare fully committed to sustainability track price elasticity and identify collaboration within and betweenas a source of growth, not merely as new higher margin markets, either organizations, as well as across sectorsa means to enhance their reputation. geographic markets or new product and supply chains. The new ecosystemExecutives appear to agree that and service categories. Although of multiple suppliers, retailers, servicesustainability is not just a license to growth in demand for sustainable providers and manufacturers will helpoperate in markets more sensitive to products and services appears to aggregate efforts and drive larger scaleenvironmental, social and economic be strong, there may be markets production and delivery. It will alsoconcerns, but a key driver of future where competition is less intense. result in more resilient and flexiblerevenues. On the other hand, many The use of data analytics can help supply chains that drive down costs andare facing difficulties keeping up with companies identify opportunities improve responsiveness. The necessaryconsumer demand. Some appear to for rapid entry into these markets investments in advanced operations willbe charging higher prices than they to establish early leadership. also require closer and more creativethink consumers will bear in the longer collaboration with the financial sector 2. Build capabilities, based on socialterm, while others are concerned that, and investors to demonstrate the media platforms, to engage withhaving committed to a future delivering commercial value of investment in consumers. Certain product categoriessustainable products and services, they operations and supply chains. clearly lend themselves more toare unable to generate the returns they social media and online consumer These recommendations are not exclusiveenjoy in the rest of their business. engagement than others, allowing to sustainable products and services.At the heart of the challenge is scale. for more personal interaction and They are common to all fast developingExecutives believe that consumer demand resulting in more relevant products markets and are swiftly becomingfor sustainable products and services and services. Sustainable product and standard for all businesses as they adaptwill grow. But unless that demand service categories – energy efficient to the impact of globalization, newreaches a certain scale, the commercial services, for instance – enjoy this technologies, high growth emergingchallenges faced by companies will advantage, as do some traditional markets and new sources of competition.continue. There is a need to move from categories where proven sustainable The recommendations help to addresstoday’s understandably tentative and ad credentials are now expected, such as the concerns identified in this survey. Byhoc approaches to sustainability towards youth fashion or sportswear. Social putting in place more cost efficient coregenuine mass consumption of sustainable media engagement not only enables operations, more sophisticated customerproducts and services. This requires a companies to protect and enhance engagement and smarter identificationdecoupling of business and economic their standing by having a more direct of lucrative markets, companies will notgrowth from resource intensity and understanding of their customers’ only be able to generate new revenueenvironmental impact. expectations for embedded streams, they will also be able to meet sustainability. It can also provide the customer demand more easily and matchIn our recent report with the World platform on which companies can higher revenues with higher margins.Economic Forum, More with less, scaling suggest and prototype innovationssustainable consumption and resource and new designs that create newefficiency5, we recommended actions revenue streams with fewer resources.for businesses and policy makers that 3. Review operational and supply chainwould permit that decoupling and capabilities with improved financialaccelerate the large scale consumption tracking of return on investmentof sustainable products and services. (ROI) to identify opportunities forDrawing from that research and from lower costs. Sustainable markets arethe findings of this survey, Accenture evolving fast. New technologies aresuggests the following steps that will increasing consumer expectationshelp businesses improve their ability to for rapid product development andmatch demand profitably while scaling delivery. Going beyond improvingconsumer adoption. sustainable supply chain credentials, companies need to ensure their core1. Invest in capabilities, such as operations are agile and flexible analytics, to improve understanding enough to respond to the rapidity of and anticipation of fast changing market developments. They also need consumer expectations for sustainable operations that can meet market products and services. These include demand with ever lower costs. capabilities to segment the market 10
  12. 12. References About Accenture About Accenture1 Decision maker attitudes to Sustainability Services Accenture is a global managementsustainability in business in 2011, consulting, technology services and Accenture Sustainability ServicesAccenture, 2011 outsourcing company, with more than helps organizations achieve substantial 246,000 people serving clients in more2 A new era of sustainability, CEO study, improvement in performance and value than 120 countries. CombiningAccenture and United Nations Global for their stakeholders. We help clients unparalleled experience, comprehensiveCompact, 2010 leverage their assets and capabilities to capabilities across all industries and drive innovation and profitable growth3 Connected Agriculture: The role of mobile business functions, and extensive while striving for a positive economic,in driving efficiency and sustainability research on the world’s most successful environmental and social impact. Wein the food and agriculture value chain, companies, Accenture collaborates with work with clients across industries andAccenture and Vodafone, 2011 clients to help them become high- geographies to integrate sustainability performance businesses and governments.4 Convergence Economy: Rethinking approaches into their business strategies, The company generated net revenues ofinternational development in a converging operating models and critical processes. US$25.5 billion for the fiscal year endedworld, Accenture, 2011 Our holistic approach encompasses Aug. 31, 2011. Its home page is5 More with less, scaling sustainable www.accenture.com. strategy, design and execution to increaseconsumption and resource efficiency, revenue, reduce cost, manage risk andAccenture, 2012 enhance brand, reputation and intangible assets. We also help clients develop deepMethodology insights on sustainability issues based on our ongoing investments in research,The online survey was conducted in including recent studies on consumerMarch 2012 by Penn, Schoen and Berland expectations and global executiveAssociates. It covered Brazil, China, opinion on corporate sustainabilityFrance, Germany, India, Japan, the United and climate change. Find out more atKingdom and the United States. The www.accenture.com/sustainability.survey secured responses from executivelevel /C- Suite individuals, includingVice Presidents or equivalents, who hadfinal decision-making power or significantinput into the business decisions attheir company.Copyright © 2012 AccentureAll rights reserved.Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.This document makes reference to trademarksthat may be owned by others. The use ofsuch trademarks herein is not an assertion ofownership of such trademarks by Accenture 12-1442and is not intended to represent or imply theexistence of an association between Accentureand the lawful owners of such trademarks.