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 September 08, 2009
Why Sustainability Is Now the Key Driver of Innovation

 by Ram Nidumolu, C. K. Prahalad, M.R. Rangaswami

September 01, 2009  - The Harvard Business Review has issued a new white paper illustrating that sustainability strategies are not a bottom line drain to business, but the most effective way to create competitive advantage moving forward.

Even so, many companies are convinced that the more environment-friendly they become, the more the effort will erode their competitiveness. They believe it will add to costs and will not deliver immediate financial benefits.

Talk long enough to CEOs, particularly in the United States or Europe, and their concerns will pour out: Making our operations sustainable and developing "green" products places us at a disadvantage vis-à-vis rivals in developing countries that don’t face the same pressures. Suppliers can’t provide green inputs or transparency; sustainable manufacturing will demand new equipment and processes; and customers will not pay more for eco-friendly products during a recession. That’s why most executives treat the need to become sustainable as a corporate social responsibility, divorced from business objectives.

Not surprisingly, the fight to save the planet has turned into a pitched battle between governments and companies, between companies and consumer activists, and sometimes between consumer activists and governments. It resembles a three-legged race, in which you move forward with the two untied legs but the tied third leg holds you back. One solution, mooted by policy experts and environmental activists, is more and increasingly tougher regulation. They argue that voluntary action is unlikely to be enough. Another group suggests educating and organizing consumers so that they will force businesses to become sustainable. Although both legislation and education are necessary, they may not be able to solve the problem quickly or completely.

Executives behave as though they have to choose between the largely social benefits of developing sustainable products or processes and the financial costs of doing so. But that’s simply not true. We’ve been studying the sustainability initiatives of 30 large corporations for some time. Our research shows that sustainability is a mother lode of organizational and technological innovations that yield both bottom-line and top-line returns. Becoming environment-friendly lowers costs because companies end up reducing the inputs they use. In addition, the process generates additional revenues from better products or enables companies to create new businesses. In fact, because those are the goals of corporate innovation, we find that smart companies now treat sustainability as innovation’s new frontier.

Indeed, the quest for sustainability is already starting to transform the competitive landscape, which will force companies to change the way they think about products, technologies, processes, and business models. The key to progress, particularly in times of economic crisis, is innovation. Just as some internet companies survived the bust in 2000 to challenge incumbents, so, too, will sustainable corporations emerge from today’s recession to upset the status quo. By treating sustainability as a goal today, early movers will develop competencies that rivals will be hard-pressed to match. That competitive advantage will stand them in good stead, because sustainability will always be an integral part of development.

  1. The five steps are outlined as:

    Viewing Compliance as Opportunity: While the law is a great place to start, just doing what is required of you by law will not make you an innovator in this space and will not create competitive value.

    Making Value Chains Sustainable: This step can include significant cost savings as businesses explore sustainability measures for every member in its supply and value chains.                              

    Designing Sustainable Products and Services: Developing new products, and modifying existing ones and modifying packaging to reflect commitment to sustainability.

    Developing new Business Models: Rethinking the value proposition of the business and finding new and innovative ways to deliver value to your customers.

    Creating Next-Practice Platforms: By questioning the logic behind all current business practices, businesses can break the mold and truly innovate for sustainability including eliminating water usage and allowing produced energy to be recycled.

It isn’t going to be easy. Enterprises that have started the journey, our study shows, go through five distinct stages of change. They face different challenges at each stage and must develop new capabilities to tackle them, as we will show in the following pages. Mapping the road ahead will save companies time-and that could be critical, because the clock is ticking.

Stage 1: Viewing Compliance as Opportunity

The first steps companies must take on the long march to sustainability usually arise from the law. Compliance is complicated: Environmental regulations vary by country, by state or region, and even by city. (In 2007 San Francisco banned supermarkets from using plastic bags at checkout; San Diego still hasn’t.) In addition to legal standards, enterprises feel pressured to abide by voluntary codes-general ones, such as the Greenhouse Gas Protocol, and sector-specific ones, such as the Forest Stewardship Council code and the Electronic Product Environmental Assessment Tool-that nongovernmental agencies and industry groups have drawn up over the past two decades. These standards are more stringent than most countries’ laws, particularly when they apply to cross-border trade.

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This HBR Spotlight article offers a framework for determining your company’s green opportunities and an overview of what other organizations are doing with clean energy technologies and recycling programs

Source: Harvard Business Publishing