Sustainability as adaptability
Over the past few years, CEOs have been paying increasing attention to corporate social responsibility, sustainability, and ethics. In a recent global survey of business executives conducted by BCG and MIT Sloan Management Review, more than two-thirds of the 4,700 respondents agreed that sustainability is essential to competitiveness.
There is little consensus, however, on just what sustainability, or the many other terms that are used to characterize the relationship between business and its broader context, mean in practice. This confusion is manifest in the multiplicity and limitations of — as well as the inconsistency among — the principles that companies implicitly rely on when making decisions involving “beyond business” issues:
License to operate: Merely following society’s implicit rules and expectations can cause a business to miss opportunities to create a positive advantage.
Business ethics: Doing what is right is laudable, but ethical principles don’t necessarily provide a framework for making tradeoffs. Furthermore, creating social or ecological value is not automatically rewarded.
Reputation: Excessive concern with reputation can mislead a company into making decisions on the basis of shifting perceptions rather than substance and competitive advantage.
Sustainability: A commitment to future generations is admirable but doesn’t necessarily address tradeoffs
between present and future value — and thinking in terms of sustainability tends to be biased in favor of environmental issues.
Shared value: Combining profits with social contributions is desirable, but the shared-value approach doesn’t prescribe practical ways to achieve that desirable union.
Shareholder value: Some executives assert that maximizing shareholder value is the only legitimate goal for business. But the time horizon for maximization is debatable and in practice is often too short to deal adequately with social and ecological feedback loops.
This lack of clarity can have serious consequences. Companies that are uncertain about how to make tradeoffs in a calibrated, holistic, and integrated manner can end up with the following challenges:
A gap between intention and action: Without practical guidelines, intention doesn’t necessarily translate into actions or desired outcomes. Although two-thirds four survey respondents believe that sustainability is essential to competitiveness, only a quarter said that greater competitive advantage had actually been achieved as a result of their company’s sustainability efforts.
Misaligned and insufficient actions: Without a clear framework, managers run the risk of focusing on the wrong issues or not focusing sufficiently on the right ones.
Sustainability issues underweighted: Without clarity and precision, sustainability loses its credibility in the boardroom. Despite proclaiming its importance, only 14 percent of survey respondents perceive sustainability as a top management challenge over the next two years. Approaches to eco-social advantage In an increasingly turbulent world, a company must continuously adapt its business model to changes in the ecological, social, and economic spheres over both short and long time horizons. We call the ability to do this “eco-social
Without adaptation, business models become obsolete. We can think of this process of adaptation as a continual retuning to avoid imbalances and limits in the flows of materials, labor, economic value, and trust in and out of those three spheres of activity.
In the ecological sphere, companies must replenish resources as they extract them and restore the environment as they degrade it. In the social sphere, they must create more trust than mistrust in order to attract talent and maintain their license to operate. In the economic sphere, they must adapt their business models to changing competitive and economic situations.
Creating social and ecological value doesn’t automatically confer economic rewards, but — with the right business model — it can. Although there are many ways of achieving such balanced flows, we have found that there are some common models of success.
A company must manage ecological resources for the sustainability of its business model.
●Minimize consumption by improving resource productivity Finding itself with limited access to low-cost energy, Shree Cement, one of the biggest cement manufacturers in northern India, developed a world-class, energyefficient manufacturing process.
● Substitute resources The rareearth metals are a collection of 17 chemical elements that are used in batteries, magnets, and lasers. China currently produces most of the world’s supply. In 2009, however, China began reducing its export quotas to ensure an adequate supply for its own industry. That led Toyota to back-integrate into mine ownership in order to protect the inputs needed for its motors. Two years later, Toyota announced that it was developing a new electric-motor design with significantly reduced dependency on rare earths.
● Reduce pollution and waste Bottled water is enormously popular in Japan, but the nation’s recycling rate has been lower than that of other developed countries. Coca-Cola attacked this problem by reducing bottle weight by 40 percent, thereby saving 3,800 tons of carbon dioxide per year. The new bottle is also easily crushed, making it more efficient to transport and recycle. Although the source of Coca-Cola’s mineral water is not branded (unlike many of its competitors’ waters), the product has become the fastest-selling water in the Japanese beverage industry.
A company must maintain society’s trust in order to attract customers and talent and maintain the license required to operate and thrive.
● Help customers and employees realize their ethical and ecological aspirations Toyota has turned “conspicuous conservation” into a market-winning strategy. Thanks to the unique design and distinctive look of the Prius, drivers of the car signal to others that they care about the environment. As a result, Prius has a larger share of the market than its competitors’ hybrids.
● Create new markets and access In the Philippines, Manila Water Company decreased its levels of “nonrevenue” water (water that was not reaching customers because of leaks or illegal tapping) from 63 percent in 1997 to just 12 percent at the end of 2010. It accomplished this feat by providing low-income areas with affordable access to water and by turning potential water tappers into partners who help prevent illegal tapping. Economic sphere Economic sustainability is essential in order for a company to survive, flourish, and create social and economic value. Adaptation to the economic and competitive environment is therefore also vital.
● Continuously adapt business model In the early 1990s, profitability in the computer hardware business began to decline as the technology became commoditized. So IBM adapted its business model to focus on software and services. IBM’s income from hardware fell from $2.7 billion to $1.6 billion, whereas its income from software increased from $2.8 billion to $9.1 billion between 2000 and 2010.
Celebrating its one-hundredth birthday in 2011, IBM is one of the longest-surviving technology companies in the world.
Managers can assess their business’s sustainability by examining how effectively it adapts to changes in the ecological, social, and economic spheres. If they discover imbalances in the flows of material, economic value, labor, or trust that impose limits on the current business model, they should develop strategies that will transform these red flags into new sources with ecosocial advantages.
This article was provided by Boston Consulting Group.