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Sustainability Evolves from Fad To Force

Shelly K. Schwartz|Special to CNBC.com
Tuesday, 30 Jun 2009 | 2:48 PM ET

There’s much ado over going green these days, and to its credit Corporate America has largely embraced the growing call for environmental accountability.

Industry leaders, including Microsoftand Dell, have set voluntary targets to dramatically reduce their carbon footprints.

Others, like Gap and Staples, have appointed top-level executives to spearhead clean energy projects, reduce waste and actively engage employees in the fight against climate change.

In the 21st century, however, sustainability isn’t just about saving the planet. It’s about opportunity—reinventing business models to better compete in the global economy or building shareholder value in ways that help to solve some of the world’s most profound social, economic and environmental challenges.

“The 19th- and 20th-century model of business and capitalism has evolved and the winners are going to be the ones who figure out how to innovate consistent with making money for shareholders, but by helping to solve some of the problems government has not been able to address,” says Jib Ellison, sustainability consultant and founder of Blu Skye consulting in San Francisco.

Take Wal-Mart Stores, for example. Like most big brands, the discount retailer has long maintained a compliance division to enforce environmental and labor standards in its supply chain.

“That will continue to happen, but they are now starting to incentivize these factories [through things like better product placement and exclusive contracts] to innovate, utilize new technologies, and think about processes differently,” says Ellison, noting such incentives will promote change the most in developing countries like China, where laws are strong, but enforcement remains weak.

“It goes beyond compliance so the factories start making more money for their own shareholders by treating people and the environment in ways that are much more benign if not restorative in nature,” he says.

Lodging giant Marriott International , meanwhile, which spends $10 billion a year on products and services, is using its buying power to team with vendors in creating key cards made of recycled material, earth-friendly towels, recycled pens, and pillows filled with material made from recycled bottles—at no extra cost to the company or consumer.

“We’ve been working with our vendors to provide greener products with an eye for a cost-neutral or better value, so it either costs the same—or less—or has more value,” says Mari Snyder, Marriott’s vice president of social responsibility and community engagement. “As an example of better value, the coreless toilet paper we’re using now [sans the cardboard center] actually has more paper per role than regular toilet paper.”

Survival Of The Fittest

The financial market meltdown and collapse of such Wall Street stalwarts as Lehman Brothers and Washington Mutual, of course, is forcing business leaders worldwide to revisit the concept of sustainable growth—and question how best to manage their own business models in the face of change.

But not all companies have made the connection between innovation and survival.

“There are organizations that really grasp the fact that the economy is evolving and what it takes to succeed in the 21st century,” says Langdon Morris, author of “Managing the Evolving Corporation” and a partner with InnovationLabs in Walnut Creek, Calif. “Others, likeGeneral Motors, seem determined to ignore that and will ride that ignorance into the grave.”

They’re not alone. Leadership at many established companies often has trouble moving away from their core lines of business—partly because the performance data it solicits validates the existing strategy and partly because it fails to question whether the business model is near, at, or past its useful life.

“The problem is that change rarely originates in the core,” says Morris. “It originates at what, for them, is the edge. So while they all talk a lot about core competence, what they really need to do to maintain a viable business model is to develop ‘edge competence,’ which is the ability to see change coming and respond to it before it becomes a huge problem.”

Lessons From LeadersSustainable business practices, in which companies adapt their strategies to achieve long-term growth, are hardly a new concept.

History is filled with examples of companies that did so with success. In 1914, for example, auto tycoon Henry Ford revolutionized the industry by paying his workers at Ford Motorastaggering $5 per day wage, more than twice the average rate.

His bold move quickly attracted the nation’s top talent, all but eliminated costly turnover, and boosted productivity dramatically. It also cultivated a new crop of US workers who could suddenly afford to consume the product he was making.

More recently, Southwest Airlines became the first to shed the mindset that they were inherently a differentiated business (high cost, high customization) and reinvent itself as a commodity business, which competes for the mass market through low prices.

“They completely changed the economic structure of the industry to make themselves more successful and they built a structure that enabled them to operate with lower costs,” says Morris. “Once they had that model they went out and built their brand. Every other discount airline has copied that business model.”

Such vision, of course, was also exemplified by Jack Welch, former CEO of General Electric,parent company of CNBC.com, and Louis Gerstner, the one-time head of IBM, who both remain corporate icons.

New Kind Of Capitalism

But where will sustainability take us tomorrow? According to Ellison, it may revolutionize the economy as we know it.

Modern day capitalism, he notes, has long been criticized for perpetuating a “race to the bottom,” in which constant pressure to drive down costs at every level of the supply chain forces manufacturers and producers to cut corners and ignore best practices.

“In the 21st century, my strong belief is that’s what is going to get turned on its head,” says Ellison. “The winners, from logging companies in Indonesia to factories in China to brands in the U.S. and Europe, will be those who figure out how to take costs out by doing the right things."

Indeed, despite belief to the contrary, he says, operating in a sustainable manner does not cost more—and in many cases costs less.

“It doesn’t cost more to produce organic and recycled goods but the people who sell it see it as a higher quality product that consumers are willing to pay more for so they keep prices high,” says Ellison.

“But to solve the sustainability problem, ultimately they’ll have to make these better products available to the mass market so they eclipse the lower quality products and that becomes a race to the top.”

Over time, sustainable business models will also change the way businesses view each other, creating symbiotic partnerships across all levels of industry, predicts Alan Whitson, president of Corporate Realty, Design and Management Institute in Newport Beach, Calif. and vice president of the Center for Corporate Sustainability.

“We’re running out of cheap places to do business so now we have to get back to smart places to do business,” he says. “If you figure out how to get more out of the resources you have, or how to turn your waste into someone else’s feedstock, which is what sustainability is all about, ultimately you will win.”

Huh? In Southern California, for example, a biofuel plant recently set up shop next to a wastewater treatment plant, from which it converts solid waste into a fuel additive to replace coal in cement factories.

“That’s what communities need to look at,” says Whitson. “What other businesses would be a fit with what they already have?”

Tomorrow’s Leaders

While going green has become mainstream, most companies today are still grappling with ways to achieve the dual goal of sustainability—operating lean (doing more with fewer resources) and growing their business in a way that minimizes their global impact.

Those that crack the code will win the competitive advantage award, says Ellison.

“Sustainability is not a fad and it’s not a public relations exercise,” he says. “It’s in the interest of the business community to continue to innovate through technology and increased transparency. The new generation of consumers that is coming online is hyper aware that there are 6.7 billion people on this earth. They are going to demand [through purchasing choices] that we manage our fisheries and forests well, but we have to start building that infrastructure today.”

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